Why decentralization matters, and needs incentives

Editor’s note: This op-ed is part of a bigger package of crypto policy views. Find the rest here: “Making the U.S. the crypto capital: What it would take.”

“Decentralization” sounds like an ideology that only some kinds of people care about, but it actually impacts every one of us every day. Decentralization is actually at the heart of many issues dominating our conversations — whether it’s about who controls social media networks that influence our public discourse; who financial institutions choose to bank; who controls the AI tools that help us, but that can also generate bots and deepfakes; and other concerns.

How does “decentralization” come in? Because a handful of big corporations and platforms — all centralized — have monopoly-like power over the digital products and services we use. And despite contributing to the very value those platforms provide to all their users (aka “network effects”), those users don’t have a vote, choice, or other ways to control their destiny. This is especially concerning for the creators and small businesses whose livelihoods depend on those platforms. All the value is extracted by big corporations; little value is left for users. Arbitrary decisions those corporate leaders unilaterally make impact lives, and livelihoods.

The fact is that centralization, the opposite of decentralization, works: It allows companies to coordinate resources efficiently. It allows a single leader — or a couple of visionaries inside the same organization (like Steve Jobs and Jony Ive at Apple) — to more efficiently make decisions, sometimes resulting in better products. When an organization is centralized, it can move fast, take unilateral action, and reap the rewards. The same can be said of governments. This is why centralization and consolidation are the norm today: See Big Government, Big Banks, Big Tech, and so on.

Much like gravity, centralization is a force that’s hard to resist. By comparison, decentralization — transferring control and power to distributed groups — is inefficient. It’s like a rocketship: Decentralization requires immense energy, effort, and engineering to overcome the natural order.

So why fight this force of gravity?

Because centralization has led us to countless services that leave users in the clutches of monopolies, capricious gatekeepers, unreliable platforms and extractive rent-seekers. But breaking up Big Everything through traditional regulations like anti-trust alone is just as fraught an approach. Those methods often stifle innovation — going after the wrong actors or leading to regulations that actually favor the incumbents who can afford to comply — and squashing the smaller players in the process.

The best approach is decentralization; it’s the opposite force to centralization.

But people have been talking about decentralizing companies, governments, schools, and other organizations for decades. It’s been hard to pull off in practice, however, because the technologies to coordinate at scale haven’t been possible (or available to all). Decentralization has therefore cost more, produced less, moved slower — not to mention also adding more complexity, redundancy, and messiness.

When going up against the well-established efficiency and stability of centralized systems, decentralized options didn’t stand a chance… Until now.

Today, we have over a decade of proven technologies and techniques for decentralization to work at scale, through blockchains/ crypto — and we’ve already seen the results. The total crypto market cap is more than $3 trillion. There are an estimated 30-60 million real (non-bot) users, transacting monthly. Thousands of protocols — not just one or two — hold billions of dollars, while decentralized blockchains like Bitcoin, Ethereum, and Solana (to name a few) have provided platforms for services, applications, businesses, and users to build on — much like the early internet once did.

More importantly, blockchain users and communities — enabled by decentralized blockchain networks and digital assets to defy gravity — have been able to own and operate all those services, generating that value in a decentralized manner. Ethereum (just to name one example) has pulled off a number of massive engineering feats, with its distributed community coordinating to change the tracks on the railroad while the trains were running — without interrupting the trillions of dollars value flowing through it.

Even if you’re not interested in crypto, or are tired of hearing about blockchains, decentralization matters: Whether it’s these specific technologies or some different form in the future, we are clearly starting to defy the gravity of centralization. We know how to build the rockets. Decentralized systems can achieve unprecedented levels of coordination and operational functionality. It is now possible to have new forms of governance and organizations; community-owned-and-operated networks and services; robust, decentralized economies; and countless other innovations. We now know how to decentralize at scale.

This doesn’t mean that centralized businesses will go away. Centralized businesses can also build on top of decentralized networks. That means more choice, more voice, more competition… all of which benefit consumers.

Decentralization inherently embraces all these qualities, the same ones that have historically been the source of U.S. innovation. It’s also the force behind the United States itself; “federation” is just decentralization by another name. Yes, we have a centralized government, but each state also has power to make decisions democratically — unlike in dictatorships. Decentralization is responsible not only for the greatness of our country, but for the greatness of our cities too. Just think of the dynamism and opportunity of New York City as compared to the centrally-planned, entirely closed, experience of Disneyland.

Decentralization is necessary for our society and economy, because it:

• Fosters competition, by leveling the playing field between incumbents and upstarts;
• Promotes creativity, offering a platform to build with or on top of (as though with Lego bricks, or “composability” in software terms), in a way that entices builders and offers more options to users;
• Secures freedom, in a “credibly neutral” way — because there is no central authority to infringe on individual liberties, discriminate against any individual, or suddenly and unilaterally change terms and rights suddenly;
• Rewards participation, because there are fewer middlemen who can extract value without offering much in return;
• Shares value, providing ways for participants to be rewarded more equitably (in proportion to their contributions, for instance), rather than having all the value accrue to just a few.

We have reached a point where decentralization works, and can be applied to many areas of digital life. The challenge now?  It’s incentivizing decentralization.

Incentivizing decentralization

As with gravity, the natural order “pushes down” against newer, more distributed ways of building a business. Decentralization means asking entrepreneurs and developers to give up control of their projects and proceed by consensus, rather than by singular command-and-control. Decentralization means builders, creators, and investors  distribute ownership to other network participants, thereby diluting their own economic interest. Decentralization means actively inviting third-parties to build out a given network, thereby reducing the founders’ own importance, standing, and singular vision. All of these forces push against decentralization.

Unfortunately, the easiest and cheapest path to building with blockchain technology is to take shortcuts — or skip decentralization altogether. This is understandable — with regulatory uncertainty pervasive, projects are incentivized to remain centralized while pretending to be decentralized, exposing users to significant risks, but giving projects a competitive advantage over those that pursue decentralization in good faith. Ultimately, just because something uses a blockchain doesn’t mean it’s automatically tapping into the value of decentralization.

So how do we give people — businesses, users, builders, creators, community leaders — more incentives, pathways, and frameworks to decentralize? Decentralization isn’t a light switch that can be flipped on or off; it is a process, which takes place in steps. A project often starts centralized (or somewhat centralized), before decentralizing. The trick is to lower regulatory burdens for projects as they decentralize. And to do it in a way that’s a powerful enough incentive for projects to undertake the work required to decentralize.

So, we need laws that not only promote, preserve, and protect decentralization (just as we need to do for privacy) — but that also incentivize it. For example:

• For decentralized finance (DeFi) applications, we shouldn’t apply regulations designed for intermediaries to DeFi systems that don’t have intermediaries. Instead, we need tailored regulations that target intermediary-related risks where they appear, and that address other risks unique to DeFi (like code audit requirements).
• For digital assets, “fit-for-purpose” regulations should apply lighter-touch disclosure obligations, fewer selling restrictions, and greater access to secondary markets where projects broadly disseminate ownership and control. These recommendations would essentially treat these systems’ digital assets more like commodities, and less like securities.
• Tax reporting and other compliance regimes should similarly be clarified to remove intermediary-based obligations where there are no intermediaries to exert control over the system.

Not only would this approach lead to the benefits of decentralization outlined above, but it also aligns with existing regulatory models: Decentralization removes the risks to users that result from centralization — the extractive and capricious gatekeeping intermediaries that regulations aim to guard against — thereby eliminating the need to apply such regulations. Furthermore, decentralization can remove these risks far more effectively than any regulation ever could; systems that depend on a regulated intermediary are inherently more risky than systems that don’t require an intermediary at all.

The U.S. Securities and Exchange Commission acknowledged this in their 2019 framework, as did the recent FIT21 bill passed by the House of Representatives last year: If a project legitimately removes intermediaries and gives up control, then it doesn’t make sense to subject it to the same responsibilities, disclosure rules, and other requirements that centralized entities and securities must abide by. But these frameworks also led to unintended consequences, and must be improved.

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The bottom line: We don’t need loopholes making exceptions for anything labeled “crypto”; we just need good guiderails. Because decentralization matters. Control matters. If we value freedom, fairness, and resilience, then we should all care about the topic.

We finally know how to make decentralization work at scale, and many are already doing so — despite the many obstacles in the way — these builders and community leaders just need a clearer path forward and a level playing field on which to compete. The first wave has gone through the American frontier opening up the paths; let’s now pave those paths and make a better road for future builders to travel.

Editors: Sonal Chokshi and Robert Hackett

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