Innovate against products that suck. There are no shortage of them in this world. You’ll win if—and only if—decentralization is a genuine advantage.
But is it really decentralized?
It’s vacuous to ask whether something is “really decentralized.” I wish this question would go away.
Let me give you two examples that illustrate why invoking the D-word is so unenlightening.
Decentralized Finance (DeFi) is commonly claimed to be more secure because it’s “decentralized.” By this they mean its code is implemented in smart contracts directly on a public blockchain.
Any normal programmer would retort: wait, why would it be secure just because it’s written in code?
And of course, nothing about DeFi inherently provides security! In fact, a single bug in these programs could wipe out all of the money inside. Just look at the 0x hack, where an attacker could have stolen all of the money in the system! Then of course there is the DAO hack, the Bancor hack, the bZx attacks—history is littered with examples like this. There is nothing at all inherent about DeFi that makes it secure.
Security starts with audited, open-sourced code that is written with best practices and, ideally, formally verified. But the number one thing that makes something secure is just being battle-tested with a lot of value at stake for a long time. Just the same as with centralized systems.
Or let’s take another problem that is close to my heart: the oracle problem. People lose their common sense when it comes to the oracle problem, so it’s a good place to reality-test.
Put simply, the oracle problem asks: how can a blockchain learn about things that happened outside of it? By definition, someone has to report that information to the blockchain, but who do we trust to report that data, and how do we know the data is correct? Framed this way, the “oracle problem” is a question even a child can understand: how do we know someone is telling us the truth?
Let’s take Maker’s V1 oracle system. It essentially consisted of 20 addresses, most of which were anonymous, pushing prices on-chain. The oracle reported the median of all of these 20 prices. You might be tempted to ask “is that decentralized?”
This is the wrong question. The right question to ask is: what are the risks of believing what this oracle tells us? What is the cost to manipulate the oracle? Whose reputations are involved? What has been the value at stake so far, and how long has the system functioned correctly? Whether it is decentralized or not is irrelevant to what we actually care about, especially if censorship is not the principal risk to the system.
Take a step back for a second. How is the oracle problem solved in the normal world? When someone wants to know the result of a sports game, what do they do?
They probably check ESPN. How centralized of them! And why do they trust ESPN’s scores? What complex crypto-economic game is ESPN playing such that we are comfortable trusting them?
One answer might be: well, if ESPN publishes an incorrect score, someone can sue them for damages. ESPN’s bank account can be appropriated by the legal system, so that’s the incentive for ESPN to behave honestly. Thus, we have good oracles thanks to the threat of litigation against ESPN.
This analysis is tempting, but it’s not quite right.
What do you think people would do for on-chain oracles if ESPN started publishing game results onto Ethereum? I’ll tell you: people would just use the ESPN scores. They’d use them instead of Chainlink or Augur or any of these other supposedly decentralized oracles, because they’d trust ESPN’s scores. This would be true even if ESPN expressly disavowed any legal liability for those scores!
Why? Why would people trust ESPN even though it’s not decentralized? (Saying it out loud, it suddenly sounds like a stupid question.)
Everyone knows why we trust ESPN’s scores: because of reputation. The value of ESPN’s reputation is so great that we understand ESPN wouldn’t jeopardize it. It transcends anything as simple as “they have X dollars at stake, but if they corrupt the oracle they could make Y.” In some sense, ESPN’s reputation backs every score they ever post. They have the same X dollars at stake for the entire lifetime of their business. You could think of this as somehow cross-margining all of their claims with all of the money they will ever make! You can’t do that with staking or bonds or any of the other craziness that people demand in crypto-economic games. Reputations are precisely how iterated games enable long-term value creation. Without reputations, there wouldn’t be enough capital in the world for us all to trust each other.
So what of Maker’s oracle system? Why do so many products in DeFi use it? I don’t think it’s because it’s the “most decentralized.” I think the real answer is simple: reputation. People trust Maker’s reputation.
Of course, they also all know that technically, 15 individuals could collude and run off with the money! (And just as true, a single developer at ESPN could probably post a fabricated game score.) But I think people deep down intuitively understand that Maker—the brand, the DAO—has a reputation to keep up, no differently than ESPN does. And that reputation, in some way that’s hard to quantify, backs every price it ever posts on-chain. In some abstract sense, the Maker system has much more economic value behind its oracle than a naive system that requires bonds and slashing.
If we accept the notion that DAOs can be like companies, why wouldn’t we be willing to consider that DAOs can have reputations worth protecting?
Now, were MakerDAO a monopolist, we intuitively understand that its reputation would carry less weight. But MakerDAO leaves its front doors open to exit through global settlement. If MakerDAO messes up or is manipulated, its users won’t come back.
Many DeFi projects have chosen the Maker oracles despite their flaws. And to be clear, I don’t think Maker’s oracles are anywhere near the optimal oracle design. But they work! And developers intuitively understand why the Maker oracles are trustworthy.
Many researchers would consider it anathema to make such an imprecise security claim. If it’s not quantitative, if it’s not “X times Y = Z,” then it’s not proper cryptoeconomics.
I’ll say this: I don’t give a damn if your oracle is decentralized. I care if your oracle works under the threat model I care about. Both Chainlink and Augur have failed pretty badly in the past, despite being more decentralized than Maker’s oracle. I don’t think the Maker oracle is perfect. But it’s a lot better than most of what we see today.
Decentralization is not a binary
But here’s another problem with asking whether something is “truly decentralized”: decentralization is not a yes-or-no question. If you need a network that will survive targeted attacks by three-letter agencies, then probably even Bitcoin isn’t good enough. But most people don’t need that. Only you know how much decentralization you need, and any more decentralization than that probably isn’t doing anything.
Understand, at the margin, decentralization does not linearly reduce risk. It’s more like an S-curve. The first little bit of decentralization doesn’t really accomplish anything. Take Napster for example—Napster was kind of decentralized, in that it didn’t store files on their own servers. But Napster acted as the search index that let people discover other people’s files. So if someone shut down the Napster servers (as happened in 2001), they basically shut down everything. All the little P2P elements of the Napster design were basically window dressing, because the whole system could be trivially foreclosed from the top.
Your early attempts to decentralize don’t accomplish anything until you’re decentralized enough to not be censored. It’s like trying to make a barrel waterproof—the first little bit of sealant doesn’t do anything until you actually plug every hole. At that point, you hit the elbow of the decentralization curve, where suddenly all the work you’re putting in makes a big observable difference to your shutdown risk.
Then, after you climb up the S, decentralizing the governance, the token ownership, the admin hooks, you hit a plateau where the system is basically censorship-resistant. You can invest more into distributing the hash rate further, or adding more nodes to the P2P system, or mitigating selfish mining or whatever, but for the most part, any change at the margin doesn’t actually change the properties of the system that much, for anyone. None of those systems can be taken down by script kiddies, and probably all of them can be taken down by a motivated nation state. Most of the arguments about decentralization at this end of the spectrum are just point-scoring.
Where do you think your favorite project is on this S-curve? I’d argue that most of the large decentralized networks are closer to the plateau than most people like to admit. Bitcoin is more decentralized today than Ethereum, certainly! Unlike Bitcoin, Ethereum’s inventor is still around to steward the project, and it has frequent planned upgrades. But on the spectrum of risk, Bitcoin is actually not that much further along. Both Bitcoin and Ethereum can be destroyed by nation states, and neither can be destroyed by organized actors on the Internet.
All I’m saying here is that there are diminishing returns to decentralization. This is obvious marginal analysis, but people seldom apply this to the concept of decentralization itself. Hence why we get neverending series of papers and blog posts sneering at how blockchains’ P2P networks and governance aren’t truly decentralized.
It’s also possible that protocol risks don’t always decrease with decentralization! Decentralizing too fast also can introduce new risks that didn’t previously exist. I’ve never seen a centralized server that had a 51% attack, or a frontrunning vulnerability, or a fee sniping attack. And of course, you should not underestimate the power of responding quickly to a bug by shutting off your system. Centralized systems can much more effectively respond to threats and organize around technical leaders.
I’m reminded of how the computing industry rallied around its leadership in the wake of the Spectre and Meltdown bugs. In the face of industry-shaking vulnerabilities, swat teams across Intel, Microsoft, and Linux worked on patches while carrying out an industry-wide disclosure embargo. And in retrospect, it worked pretty well! This would have been much harder in a truly decentralized regime. Angela Walch, a law professor at St. Mary’s University, argues in Deconstructing Decentralization that a “genuinely decentralized” project could not have secrets like this. In her words: “secrets reveal centralization.”
“The bug fixes, secret developer meetings, and mining pool concentration […] all reveal sites of concentrated—rather than diffuse—power. Yet in uncritically describing blockchain systems as decentralized, we skip over all of that.”
She’s absolutely right on her premises! (Although I reject the binary centralized-decentralized distinction.) But I arrive at a different conclusion: what this tells us is that the optimal equilibrium for a project is not currently “100% decentralized.” Climbing further up that S-curve yields diminishing returns, and the juice isn’t worth the squeeze yet.
That all having been said, there are many networks that failed to make it all the way through the decentralization S-curve. IOTA comes to mind for me; I’m sure you have your own favorite shitcoin. If you need to cross this chasm but fail, then decentralization really does matter.
But the biggest risk to many of these networks is not that their governance is too centralized; it’s that their governance is too incompetent. Sure, I want the governance of my blockchain to eventually be decentralized! But if you give me the choice, I’ll take world-class centralized governance over crappy decentralized governance any day of the week.
Beyond decentralized purity culture
Despite all this, crypto communities love to point at each other and claim their competitors are “not really decentralized.” In a way it’s a perfect attack, because anything can always be more decentralized. It’s the original sin that every project carries. It transmutes decentralization into a virtue of purity, a universal moral failing, a ritual of self-flagellation.
But this decentralization purity culture is not just exhausting—it’s counterproductive.
I know I’m poking a bit of a hornet’s nest here. So let me be clear. Bitcoin would never have become what it is today, were it not decentralized. There is no other path to creating Internet-native digital gold.
But I don’t want to see the best minds of my generation obsessing over this single dimension and lose sight of the most important problems to solve.
Before we worry about decentralization, let’s worry about building things worth decentralizing in the first place. Let’s not forget, no one actually wants this stuff yet! No one knows what problems it will actually solve! It’s all still weird and complicated and impossible to use!
I agree with Jesse Walden on this point: projects ought to progressively decentralize as they figure out product market fit—that is, once they figure out what’s actually valuable to build. But for most everything in this space, product market fit is still a long way away. Until then, I think we can obsess a little less about being perfectly decentralized. Our focus should be on innovating and building better infrastructure for the digital economy.
That’s the real goal, if you ask me. Decentralization is merely, at times, the means to that end.