• Any time a subgroup defines the values for an entire blockchain community, value alignment turns into compliance.

• This is the case, for example, when an informal elite ends up defining the ‘objective’ values of its community.

• Only decentralised communities can be truly aligned.

Introduction

The invention of decentralised public ledgers enabled the rise of crypto coins, NFTs and publicly verifiable digital identities. With it, communities emerged around their production, accumulation and distribution: from managing stablecoins to distributing grants. In each case, people from all over the globe coalesced into communities that pivoted around one or more on-chain asset: helping to build infrastructure, create applications or speculate on the market. The resulting blockchain space is exceedingly complex, blockchain communities are internally immensely diverse and the challenges they face ever harder to navigate.

Increasingly, communities face decisions that are value based. ‘How do we interact with legacy state organisations’ and ‘what are “good” projects to fund?’ are two basic examples. In these cases, their diversity can frustrate the ability for collective action as debates grind to a standstill. This begs the question: How do we get members of such internally diverse communities to work toward a common good?

Enter the notion of value alignment.

Value Alignment

Vitalik (no surname or introduction needed) discussed community alignment in a recent blog post titled Making Ethereum Alignment Legible. In it, he argued for decomposing alignment ‘into specific properties, which can be represented by specific metrics’ in order to make them more legible. He proposed values such as ‘open source’, ‘open standards’, ‘decentralization and security’ as community values around which members of the Ethereum community could align. Rendering these values legible and measurable, Vitalik hopes, allows for the objective assessment of individual alignment and protects the coherence of a community around (in this case) the Ethereum blockchain.

Earlier, Balaji Srinivasan, former CTO of Coinbase, argued that blockchains enable the rise of a deterritorialized, global, Network State: ‘a highly aligned online community with a capacity for collective action that crowdfunds territory around the world and eventually gains diplomatic recognition from pre-existing states.’ To make alignment and collective action possible, he introduces the ‘One Commandment’, an ideological center of these communities. It is a ‘moral innovation, where everyone within the society thinks some principle X is good’. Examples he gives are ‘sugar bad’, ‘24/7 internet bad’ and ‘this traditional religion is good’ that can each serve as the ideological center of a distinct blockchain community.

Both Vitalik and Balaji are not only visionary thinkers but also builders that transformed our world. I often agree with the points they put forward. But in this case I am more sceptical.

The key issues is that they assume community values are fixed and objective. Vitalik gives examples of specific values that could be central to Ethereum’s community and expresses the hope that these can be measured somehow in the future. Balaji does something similar with the One Commandment. In practice it is impossible to approach social values as either fixed or objective. Worse, such an approach carries the risk of centralising power around an informal elite that has the power to define ‘objective’ community values.

The Impossibility of Objective Values

Let us discuss two reasons why it is impossible to approach social values as either fixed or objective.

Progressive insight. What happens when we realise a value we thought was positive has unintended negative implications or edge cases? It requires updating or changing our values. In reality, this happens all the time: our individual values shift as we get older, live through political events (or start to pay taxes!). Does this mean that a person at time point X - 1 held objectively ‘wrong’ values? Or, worse, how do we know our values at time X will not prove to be objectively wrong at time point X + 1? The issue is that objective values require complete knowledge about a social issue, something that is impossible when it relates to time. We cannot see into the future. As a result, values change across time in unpredictable ways.

Contextual differences. The world is immensely diverse and, with it, values differ from one place to another. There is a famous research project that has surveyed world values since 1983, aptly called the World Values Survey, or WVS. The WVS has consistently shown divergent values across the globe. We can visualise these divergent values along two principal axes that run from traditional to secular-rational values on the one axis and from survival to self-expression values on the other. When we do so, we see, unsurprisingly, that values differ between regions. Interestingly, they also change over time:

The Inglehart-Welzel World Cultural Map – World Values Survey 7 (2023). Source: http://www.worldvaluessurvey.org/

We are again faced with an issue of incomplete knowledge. As people live in particular economic, religious, political or family contexts they each acquire distinct values. But there are far too many contexts and each one is far too complex to create any kind of meaningful prediction of how a context will shape the values of an individual. Our lack of knowledge means it is impossible to know how contextual differences influence individual values.

To summarise, we now know that values are not fixed, but change over time and differ between people. In addition, we also established that there is no way to know how they change and differ. The only viable option is to treat social values as subjective in practice: unique to an individual at a specific time and place.

It is the irony of blockchain communities. Distributed public ledgers allow for the creation of a global consensus: an objective truth that spans the globe. But the concrete applications they allow, for example globalised assets and identity verification, give rise to a host of issues around governance and identity that are subjective. It creates a situation where age-old questions are revisited about who we are, how we produce value and how we ought to distribute it, but this time in the truly global communities that blockchains created. It makes these questions immensely hard to solve, but their answers also potentially revolutionary.

How to Align Blockchain communities

This brings us back to the predicament that on-chain communities currently face. How to align members of blockchain communities around a common set of values, if these values are subjective in practice?

Option 1. Asset holders update values and enforce alignment. This can be done through updating community values through select committees, token voting or prediction market type mechanisms. Enforcement, in turn, can be through negative measure (revoking membership in case of breach) or through positive measures (incentive structures, tokenomics). Using this approach, it is possible to create a community around a set of values, update these values and act collectively in their name. The drawback is that members with fewer tokens rarely have sufficient power to adjust community values. In the meantime, they do have an incentive to act aligned. As a result, it is very difficult, if not impossible, to assess the extent that an individual is truly aligned to community values. A reasonable assumption is that many members just act as if, and go with the flow, to ensure you get that airdrop or do not face expulsion.

This approach might seem like a good option as it enables collective action. It is also an approach that many communities use today. But to make very clear: The result has little to do with alignment, and everything to do with compliance. Individual members comply with values set by powerful members in the community. In effect, on-chain centralisation translates to articulating and enforcing community values. The values of an informal elite are taken as the values of the entire community in order to make collective action possible.

Option 2. Another approach is to have every member decide on updating values of their community. We can be brief about this. It ensures true alignment of community members, but in return gives every single member an effective veto. As values are subjective in practice, it will be impossible to articulate or update a community’s values. This approach provides true alignment but destroys the potential for collective action. Nothing will get done.

Option 3. Have a continuous process through which individual members propose changes to community values and other members can collectively adopt them. Allowing members to always propose changes to community values enables us to read silence as alignment. If a member feels communities values do not represent their own, they can propose a change. Community values will be adjusted as a result, or the member will leave. Even though only a small fraction of members will be involved at any one time in adjusting values; past, current and potential future engagement provide proof of alignment. This option seems the only viable one for creating aligned communities.

The key challenge is to ensure that each member of a community has access to this process, at any one time. Only if all members have access can we assume that their silence reflects alignment. Only then do we know for certain that members are truly working collectively toward realising their shared values.

Centralisation Destroys Alignment

The above has an important implication for how value alignment relates an individual to a community. Instead of approaching alignment as the overlap of individual characteristics to a set of fixed collective criteria; alignment turns into an individual’s engagement in articulating them. The extent that an individual member is aligned to a community’s values is directly related to their ability to change them. Any tendency toward centralisation of a community, which empowers an informal elite to the detriment of other community members, renders alignment more improbable. Non-elite members will find it increasingly difficult to meaningfully adjust community values. Alignment will turn into compliance. Effective voice and value alignment are inseparable.

Both Vitalik and Balaji are defenders of individual freedom, while supporting the rise of blockchain communities. In their attempt to forge a collective from free individuals, they treat community values as fixed and objective: applicable to all and blissfully free from power dynamics. Problem is, as we saw above, fixed and objective values do not exist in practice. More importantly, be aware what treating them as such can do to the freedom of community members. Any centralisation of power in name of defining ‘objective values’ impedes the freedom and continuity of community participation in their articulation. It turns value alignment into compliance – and freedom into serfdom.

Nov 2024, 7Cedars

Also, what do I have to gain, with a background as an academic in political science and sociology, from engaging with the utter madness of crypto? It is a scene that has become is infamous for its ICO craze of 2017 and the NFT bubble of 2021. The meme coin bull run of ‘24 will likely rise in public infamy soon. It is clearly a world driven by speculation and greed, that lacks a moral compass. Why is someone, who has spend much of the last two decades researching Islamist movements in the Arab world, interested in the world of crypto?

And, finally, why now? Fifteen years since Satoshi Nakamoto invented bitcoin, and more than a decade since Vitalik Buterin published the original Ethereum white paper, I go into crypto. After all these years, what can a person like me add to the web3?

As a way of introducing myself, let me answer these three questions.

About the value of blockchains to society. Blockchains provide an immutable, distributed, ledger of transactions that anyone can access anywhere at anytime. As a result, they provide a global consensus. They detach the maintenance of such a consensus – required for utilities such as transferring assets and verifying identities – from existing, mostly national, institutions and move it to a distributed ledger. As a result, blockchains widen access to financial services to anyone in the world; they provide alternative stores of value and means of exchange to those caught in national economic meltdowns; they level the playing field when it comes to identity verification; and create online economies that seamlessly integrate into existing online gaming and artistic experiences.

It results in the rise of completely new economies. Economies that currently have a combined market cap of around two and half trillion dollars. For comparison, the market cap of the largest company in the world, Microsoft, is three trillion. Number two, Apple, is 2.6 trillion. With the rise in value, communities emerged around value creation, distribution and the governance of layer-2 blockchains. Examples are NounsDAO, Gitcoin and the Optimism Collective, respectively. Blockchains have not taken over the world, but they have shown their value.

Just to be clear, I am not oblivious to the problems of web3 and crypto. The largest crypto exploit amounts to 624 million dollars. According to Chainalysis, a security firm, addresses involved in illicit activities received 24,5 billion dollars of crypto in 2023, down from 39,6 billion in 2022. The current meme coins craze thrives on coins with sometimes outright racist and anti-Semitic references. According to CoinGecko data there is not just one $HITLER coin: there are six. It got so bad that long time investors asked for the space to follow some kind of common ethical principles; vocal participants rage quit from the entire space, and even Vitalik Buterin begged for a return of Ethereum to its ‘cypherpunk’ days.

But, despite all these problems, the value of blockchains is undeniable: distributed ledgers provide a new way of maintaining a global consensus. As a result, they globalise access to assets and identities and create entirely new global economies and communities.

So why would a political sociologist want to get into this space? Blockchains enable online communities to verify identities, accumulate assets and govern asset distribution. It is the start of a truly new world and brings up all kinds of subjective, social and political, issues. Currently, the lack of enforceable laws turns web3 into something akin to a 21st century global wild-west. Early settlers try to establish communities that, under the constant threat of bandits, are forced to turn to vigilantes for protection. It is a space where it is every person for themselves and where many argue that anything goes as long as smart contract code permits it. Conflicts about institutionalisation, centralisation and control are constant.

These culture wars reflect in a distinct language that is developing, with the web3 buidlers [sic] ridiculing the crypto degens [sic], while together fighting against the outsider normies [sic] that try to regulate them. Age-old social phenomena – racism, sexism, exploitation and inequality – resurface, but this time infused with a spirit of capitalist speculation. It turns out that enabling online communities to accumulate and distribute assets is a political act with huge social implications.

It is amazing to observe the governance experimentation that takes place in this context. There is an abundance of dreams about how blockchain technology can foster a more decentralised, democratic, space that would foster individual freedom, expression and development. Practically, most initiatives revolve around so-called DAOs, or Decentralised Autonomous Organisations, that have been described as an organisation that uses smart contracts, deployed on a public blockchain, to facilitate and enforce decisions voted on by its members. But what the best ways is to link smart contract functions to votes, relate votes to members and define membership is still unclear. Members of web3 communities have come up with many ways to do so. See, for instance, quadratic voting, multi-signature voting, token based (quorum) voting, liquid democracy – and these are just examples of voting mechanisms. Blockchain governance is in constant flux.

So, what can someone like me bring to this space? Despite these innovations, web3 governance has progressed little beyond the basic DAO approach of members voting on proposals. With it, they keep on running into the same issues: power is often centralised among a small set of members (especially when assets define voting power), there are recurrent problems with spam voting (especially when assets do not define voting power), identification and verification of community membership has proven challenging and, last but not least, voter fatigue is a recurring issue.

It has proven incredibly hard to solve some fundamental governance issues that come with managing distributed ledgers and their assets. How do we relate an identity on a distributed ledger, an address, to an individual member of a community? How do we avoid centralisation of power in a community, when the accumulation of assets, knowledge and reputation are inherently centralising forces? How do we foster open and decentralised communities without being crippled by a gazillion bad actors and free riders? And how do we deal with off-chain regulation of existing states? These are just four questions that blockchain governance brought up and that DAOs have had difficulty answering.

Political science and sociology can provide new insights in these discussions and help build proof-of-concepts for innovative web3 governance solutions. The time might be right for such interventions. At the moment, Bitcoin, Ethereum, Solana and many other chains are again at a high. Money is flowing in through renewed speculation. Meanwhile, recent changes to Ethereum have lowered gas costs and the proliferation of layer-2 chains is quickly increasing block space. Together, they have widened the use case for many web3 utilities and social projects. All these changes take place in a context where web3 communities increasingly acknowledge the importance of some type of institutionalisation in blockchain governance. Hopefully, it is a context that gives space for newcomers to add something to these communities.

So, what to expect in this blog? Social and political observations from a newcomer to this space, but one with experience in political science and sociology. Expect mistakes (please point them out), opinions (please disagree) and solutions (please critique!). I will also discuss solidity contracts and proof-of-concepts related to web3 governance and utilities. I don't know where the turn to blockchains will lead. But one thing is for sure: it will not be boring.

seven cedars

A word that you keep on running into when getting into the web3 space is 'decentralisation'. Web3 educators, like Patrick Collins, emphasise decentralisation as the unique property of blockchains that enable the emergence of ‘Defi’, or decentralised finance, as alternative to the traditional banking system. Aragon and DecentDAO, organisation that provide solutions for on-chain governance, offer apps to help founders ‘progressively decentralise’ their on-chain organisation. Arbitrum, one of the largest layer-2 chains, is actively working toward decentralisation with governance moving from its foundation to its Arbitrum DAO. Decentralisation emerges as the defining feature of blockchain applications: they are designated as dApps and DAOs, or decentralised Applications and Decentralised Autonomous Organisations.

I've been around the web3 space for a little bit now and…  I have questions.

First, not to add to an already confusing situation, let me clarify what I see as centralisation and decentralisation. I take centralisation to mean, simply, the process through which communities become more centralised. It implies an increasing division between a centre and periphery, expressed in some kind of inequality. A centralised community is one where a small elite holds all political or economic power; where one institution has so much power, that it leaves its members without means to challenge its decisions. Decentralisation, then, is the opposite to the above. It is the process of decreasing division between a centre and periphery. It implies decreasing economic, social, political or institutional inequality.

The first reason for the confusion is that blockchains are highly centralised entities. There is a classic blog-post by Balaji S. Srinivasan, published in 2017, that lays out two different approaches to measure centralisation on bitcoin and  Ethereum. It shows that Ethereum is highly centralised at every subsystem (mining, clients, developers, exchanges, nodes and ownership) and with each measure the authors used. Of course a lot has changed in the last seven years. Not least Ethereum's move to a Proof-of-Stake method to secure consensus on its distributed ledger. Although figures are improving, the market share of the two largest staking pools - Lido and Coinbase - is still dangerously close to fifty percent. Even after it’s move to proof-of-stake, centralisation remains an issue.

But the likes of Patrick Collins, Arbitrum and Aragon are not talking about the state of blockchains as such. Rather, they are referring to the communities and decentralised autonomous organisations that blockchains facilitate and enable. Fair enough. So I went down the rabbit hole of web3 communities.

I still ended up confused.

Do blockchains really enable decentralised organisations and communities? Decentralisation is possible on a distributed ledger, but it is also possible without a distributed ledger. The decentralised uprisings that rocked the Arab world in 2011 are an example, as are many, many, other decentralised social movements.  The distributed properties of blockchains are not a necessary condition for decentralisation. They do not, as such, enable decentralisation. It is also possible without a distributed chain. Blockchains bring nothing new here.

Ok, then blockchains surely facilitate decentralisation. Right? If this were the case, blockchain communities would end up, on average, less centralised then their non-blockchain counterparts. There is some data that can be used to assess if this is indeed the case. Increased centralisation will reflect in unequal wealth distribution. Let us take the Arbitrum chain mentioned above, and map out wealth distribution in its community. The following is a chart of the 200 top owners of the $ARB token [1]. It excludes the two largest accounts, as they relate to the Arbitrum foundation itself.

It just looks like wealth is very much centralised around a few addresses. To drive home this point: The smallest account in this case (number 200) still holds almost five million ARB tokens, worth almost six million dollars at the time of writing (end of April 2024).

It is quite a damning first assessment, but let’s be a bit more systematic. The standard way to quantify inequality is through the Gini-coefficient. I’ll let others explain how to calculate it, for now it suffices to state that a Gini of zero is a community that is completely equal; and a community with a Gini of one is completely unequal. With wealth inequality IRL, Brunei has the highest Gini with 0.889; Slovakia the lowest with 0.55. Let’s take five of the most active DAOs from tally.xyz, a website for on-chain voting. These DAOs are Arbitrum, Uniswap, GitCoin, Nouns DAO and Lil Nouns [2]. Doing a bit of back-of-your-napkin-maths [3], their Gini-coefficients are as of writing (April 25, 2024) [4]:

None can be called equal, but the larger DAOs are just insanely unequal with wealth centralised around a tiny economic elite. Worse, in this case economic and political power are directly related: you vote with your tokens. Whereas in democracies one person has one vote, in DAOs that use coin voting, as is the case with these DAOs, it is more like one dollar is one vote. Economic centralisation directly translates to political centralisation. Attempts to mitigate the power of economic elites, for instance through advanced voting mechanisms such as quadratic-voting, reduce the effect of economic power on voting power, but do not mitigate it. It leaves most members of these communities powerless.

This has some serious repercussions for the extent that community members engage in these communities. Most proposals in the Arbitrum, Uniswap and Gitcoin DAOs passed with huge majorities. Majorities that are reminiscent of parliaments in autocratic countries that are controlled by a single party that rubber-stamps any proposal brought in by the executive. To an outsider this is a clear sign of highly centralised political power. Another sign is voter apathy. And sure enough, on Arbitrum most proposals had a voter participation of less than three percent. At Uniswap the highest voter participation almost reached ten percent, with most far below this. These numbers would bring any established democracy directly into a tailspin. Among DAOs, it is actually not all that bad. At Gitcoin DAO around fifty addresses voted. Out of 18.680 registered ones. It is a voter participation of less than 0.3 percent.

So, after all this I am still confused.

All this talk about decentralisation implies that it is very important to many in the web3 space. Meanwhile, in practice, it seems that blockchains do not enable decentralisation, did not facilitate decentralisation and are not decentralised in their day-to-day governance. So why, after a decade, has there not been an effective solution to this problem?

seven cedars

• [1] Data downloaded from Arbiscan, on April 24, 2024. Contract address: 0x912CE59144191C1204E64559FE8253a0e49E6548

• [2] Note that this list changes from day to day. This list was create at the end of April 2024. I excluded OpenDollar as it had only one proposal at the time. These organisations are ranked by number of votes. DAOs with no new proposals in 2024 are excluded.

• [4] Data from etherscan.io and Arbiscan; based on addresses provided at tally.xyz.

• [5] The largest five addresses were skipped to excluded addresses that belong to the DAO. Additionally, data downloaded from Arbiscan was incomplete. The first 500 addresses were reinserted; many addresses after these first 500 are missing. This Gini coefficient is an approximation.

• [6] The largest five addresses were skipped to excluded addresses that belong to the DAO.

• [7]

  The largest five addresses were skipped to excluded addresses that belong to the DAO.

I have been around the web3 and crypto space for a while now, and the relationship between blockchains and decentralisation is far from straightforward. Let me discuss some of the ways I have seen people link blockchains to the decentralisation of DAOs and dApps; the actual practice of decentralisation at the application level; and its enduring relevance to the web3 and crypto space. I'll aim to provide some context to its importance and stake out my own position when it comes to defending decentralisation.

Blockchains & decentralisation

There are several ways in which people draw a link between blockchains and decentralisation. I will observe three here:

• Decentralisation as an intrinsic property of on-chain application and organisations.

• Decentralisation as a necessary condition for the security of dApps and DAOs.

• Decentralisation as a moral principle to be pursued in the creation of blockchain based applications.

Decentralisation as an intrinsic property

This argument generally unfold as follows:

1. Communities consist of individuals. For a community to thrive, individuals need to coordinate their actions effectively toward a collective aim.

2. In real life, such coordination is impossible without the mediation of a central authority. See for instance the functioning of money, deeds or private property that consist of coordinated actions between individuals that are impossible without the mediation of banks and bureaucracies.

3. It implies that people place their trust in these central authorities to do a proper job and represent their collective and individual interests. This trust element is a weak point in how communities coordinate their actions. See the banking crisis of 2008.

4. Enter the blockchain. Very simply put, a public distributed ledger provides immutable and transparent proof that address A owns asset B. It removes the necessity for a centralised authority to provide the social trust necessary for individuals to coordinate their collective action.

5. As we cut out the centralised banks and bureaucracies, we have individuals interacting with each other through trustless - and hence decentralised - blockchain contracts.

Examples of this line of thought can be found all over the web3 and crypto space. A telltale sign is when minimising human intervention is equated with decentralisation. A beautiful example from the wikipedia page on decentralised applications:

A decentralised application is an application that can operate autonomously, typically through the use of smart contracts, that run on a [...] distributed ledger system. DApps operate without human intervention and are not owned by any one entity, rather DApps distribute tokens that represent ownership. These tokens are distributed according to a programmed algorithm to the users of the system, diluting ownership and control of the DApp. Without any one entity controlling the system, the application is therefore decentralised.

Because applications run autonomously on a distributed ledger, and ownership is distributed through a programmed algorithm, it bypasses a centralised authority and hence ends up being decentralised. A classic example of this approach is the ‘Code is Law’ mantra: arguing that the way in which code of smart contracts can be used, defines how it ought to be used. It minimises human intervention in name of avoiding the centralising tendencies of authority by maximising the autonomy of smart contracts. Although less extreme, a similar approach can be seen more recently in the assessment of layer-2 zk rollups that argue more developed rollups minimise human intervention and are, therefore, more decentralised.

Decentralisation as a necessary condition

Here the argument goes somewhat like this:

1. Distributed ledgers do not enforce a set of laws or regulations onto the applications and organisations that are active on them. In the absence of a fallback legal system, each application and organisation needs to police bad behaviour autonomously.

2. Giving a single entity the right to define and sanction bad behaviour in a dApp or DAO will result in a centralised authority having unchecked power. The entity will never sanction itself and hence stand above its own laws.

3. The only alternative is to sanction bad behaviour through coordinated action by community members. By giving voting power to those who own assets, asset holders will vote against actions that are detrimental to their interests. Collectively, this will safe guard the community from malicious actors.

4. Crucially, this coordinated action only works if no single entity represents more than 51% of a community asset. If this does happen, the actor holding the majority of tokens can always vote through any of their actions, in effect acting with impunity. This actor turns into a de facto centralised authority.

5. In short, without decentralisation, applications on a distributed ledger cannot replace the trust that legacy centralised authorities provided.

Sybil attacks are the obvious example of this approach: a single actor takes control of sufficient community assets to allow full control of its governance system. An infamous example is the Beanstalk governance hack of April 2022, where a single actor used flash loans to take control of its governance system and pass a decision to drain its funds. But there does not need to be one actor or an intentional attack for centralisation to become a security risk. In most DAOs tokens are extremely unequally distributed, giving a limited set of actors outsize voting power. Sometimes, as few was three are needed to reach a majority 'consensus'. It leaves possibilities for collusion wide open, frustrating the ability of the community to police its collective interests.

Decentralisation as a moral principle

There are several ways in which this argument can be made. A common one goes something along the following lines:

1. The invention of public ledgers was meant as a challenge to centralised authorities. Its aim was to replace centralised trust - necessary for coordinating actions in social communities - with the immutability and transparency of public distributed ledgers.

2. But blockchains can only represent interactions based on assets that have been encoded on the blockchain. Many interactions in a social community do not fall within that scope. Examples are interaction based on a subjective assessment (what project is ‘good’ and receive funding?) or interactions based that rely on data that is only available off chain (for instance exchange rates to fiat currencies and random values).

3. In each and every case, the move beyond the boundaries of a blockchain invites for the reentry of centralised authorities. The data they provide - either a subjective assessment or off-chain data - needs to be trustworthy. An entity is needed to provide this trust. If not a blockchain, then this has to be some kind of publicly recognised central authority.

4. Following the founding idea and intention of blockchains, we ought to enlarge the scope of social interactions that can be represented on-chain in order to avoid this introduction of centralised authorities through the proverbial backdoor.

5. From intrinsic property, to necessary condition, we now have decentralisation as a moral principle in governing blockchain communities.

Examples of this type of approach can be observed across the crypto space. A blockchain based court does not draw on law but on economic incentives (see the Kleros court); a funding scheme forces projects to self-assess through a combination of self-created quantifiable indicators and assessments (see banklessDAO funding scheme); or individuals stake assets to attest theirs, and others, social identities (Gitcoin’s identity staking). Last but not least, there are services - such as chainlink - that have alternative blockchains to provide decentralised trust to information not included in the basic blockchain: randomised values and exchange rates are two examples. More recently EigenLayer emerged as a solution where the trust embedded in Ethereum as blockchain can be shared (or ‘taken’ might be a more apt description) to other types of data.

The state of decentralisation

How do these relationships appear in practice? When it comes to decentralisation as an intrinsic property of distributed ledgers, in reality blockchain communities turn out to be highly centralised. The voting tokens of some of the largest DAOs around - such as Arbitrum, Uniswap and Gitcoin - have a Gini-coefficient of more than 0.98. A Gini of zero is a community that is completely equal; and a community with a Gini of one is completely unequal. With wealth inequality in real life, Brunei has the highest Gini in the world with 0.889 - not even coming close to some of the largest DAOs in the web3 space. Other ways of measuring decentralisation, such as the Nakamoto coefficient, result in similar observations.

Additionally, following the definition of decentralisation mentioned above, minimising human intervention in smart contracts does not lead - in my opinion - to decentralisation, it just leads to automation. In reality, automation places full power at the smart contract, rendering it, technically, fully centralised. This might seem unproblematic (‘a smart contract is pure code, hence will never turn evil!’) as long as we assume code has been created in a social vacuum, by a being of full and complete knowledge, and is devoid of any bugs or security risks. Placing such faith in code, is like treating software developers as Gods whose offspring is by definition immaculate. Needless to say, the assumption is rather unrealistic in reality.

When it comes to decentralisation as a necessary condition for the security of blockchain applications things also look rather problematic: increasingly, DAOs turn more centralised in response to security risks. Following the earlier mentioned Beanstalk governance hack, for example, the foundation behind the DAO decided to abandon direct governance by the community and always implement votes indirectly: the community can vote on proposals, but it is the foundation that will implement them. It had to fallback on a trusted centralised authority because it could not guarantee the decentralised character of its community.

Intentional centralisation of governance not only happens in response to security risks, it also happens in response to economic risk. Decentralisation slows down governance and scales very poorly. It is as if a country or company holds a referendum on every individual decision, rendering it unable to react quickly enough to changing circumstances - creating a risk to its own survival. Recently SushiSwap decided it would transfer to a Labs system, streamlining its governance system to be able to react more quickly to changing market conditions. Ironically the decision was voted through their legacy - decentralised - governance process without problem, even though many community members vehemently opposed the move.

So, now what?

Despite, or maybe because, all of the above, decentralisation as a moral principle still seems very much alive. When SushiSwap passed its reforms their was an outcry from its community. The fact that Aragon, DecentDAO and layer-2s such as Optimism continue to place decentralisation at the centre of their public statements is testament to its importance in the web3 and crypto space.

But it is not just the extent that decentralisation is mentioned that is important. It is also the symbolic weight it carries. The notion of decentralisation in web3 emerged from an attempt to avoid centralised authorities such as banks and bureaucracies. As a result, it has very strong anti-institutional undertones. In many other contexts, decentralisation has a more structural meaning: It is seen as the equal distribution of power in a community. It is expressed in equal access to institutions, but also equal access to money, knowledge, social networks, voice and physical movement - to name a few.

In the case of blockchains, the symbolic baggage of equating decentralisation to a rejection of legacy institutions shapes the kind of solutions people find for problems around centralisation. By and large, they opt for individual incentives over public enforcement to guide community behaviour; devolution of powers over separation of powers to streamline governance; and incentivised games over enforced checks to balance powers within DAOs.

IRL, the closest thing to a decentralised governance system is a democracy. Unsurprisingly, it is often mentioned when discussing ideals of blockchain governance. But the realisation still seems to be absent that democracy is not just about free and fair elections, but also about the institutional separation of powers, usually between a legislature, judiciary and executive. Democracy uses institutions to facilitate instead of frustrate decentralisation. Laws do not only exist to guide behaviour of members of a community, or manage their conflicts - they also exist to manage who has power, when and how. They separate powers and create the checks and balances between them in an effort to avoid it's centralisation around an informal community elite.

I might be missing something here. But if this is indeed the case, there is still a world to win in creating modular and composable frameworks of checks and balances that ensure decentralisation in the web3 and crypto space. What is needed, in my opinion, is an open discussion on how to separate powers and create effective checks and balances in DAOs, dApps and blockchain communities. Can we use multisig wallets to separate powers in existing governance systems and build checks between them? Or is it possible to combine access control protocols (such as OpenZeppelin’s AccessManager) with governance protocols (such as its Governor protocol)? These are two examples of the many applied questions that can be explored. In short, a focus on checks and balances enables a discussion around decentralisation as an institutional framework for DAOs and dApps.

To be continued.

seven cedars