Category: Decentralization

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How Decentralized is Web3?

The term “decentralization” has become a significant and reiterated buzzword throughout the Web3 space as it is immediately paired with being favourable. Often, blockchain protocols, applications, and networks utilize the term to establish successful marketing tactics. This helps to attract capital and users to an ecosystem.

The problem here is that many of web3’s top projects are not fully decentralized. To investigate this, decentralization must be defined and separated from a distributed system. Many cryptocurrency protocols and Web3 projects are distributed – but not all are decentralized.

Defining Decentralization 

Decentralization refers to a form of organizational structure in which decision-making power is delegated from top management to middle or lower-sitting parties. In the case of Web3 protocols, decision-making power is given from founders and developers to the protocol’s supporters, users, node operators, and/or liquidity providers.

This differs from a distributed system. In a distributed system, the system itself is not concentrated but rather spread out across multiple locations and entities – most commonly nodes securing a network. This has nothing to do with decision-making, it just relates to the network infrastructure itself.

This is a very common misconception in many different projects’ functioning tokenomics and governance models. To achieve decentralization, it is not enough to simply distribute a portion of the tokens to the community or public. Those tokens must also carry an equivalent voting power to sufficiently give the community a respected voice within the Web3 project.

Investigating Core Web3 Protocols

To investigate which Web3 protocols are the most decentralized, it is necessary to measure the level of decentralization versus the level of distribution. 

Organizations/protocols can be rated in the following matrix:  

There are four key quadrants that emerge from the above matrix. They are:

  • Concentrated & Centralized
  • Distributed but Centralized
  • Concentrated but Decentralized
  • Distributed & Decentralized

Factors & Variables

It is important to acknowledge that the amount of variables necessary to accurately classify protocols is extremely high. Distribution relates to how accessible & widespread a project’s base asset is – generally its cryptocurrency or token. In this study, any entities that are not tokenized and rely on shares or privatization are classified separately as concentrated & centralized.

The more valuable a protocol’s market cap and the number of unique holders, the higher the reward level of distribution on the matrix.

Decentralization is much trickier as it combines multiple dynamic elements of a protocol, including:

  • Token Distribution – This relates not just to the number of unique wallets for a protocol but the number of unique, real-life holders of a project. Keep in mind that a single entity can control multiple wallets. So for example, Web3 projects that launched with pre-mined tokens for a group of seed investors, token distribution is naturally lower.
  • Governance & Decision-Making – True decentralization lies with the amount of decision-making power the average user has over a Web3 protocol. A key point to emphasize here – participation in governance is not sufficient enough by itself to make a protocol decentralized. For most protocols, token ownership is directly related to voting power. An unequal distribution makes for a centralized governance model.
  • Protocol Functionality – For many protocols, governance isn’t necessarily immensely important to functionality and the average user’s ownership of a token. If a protocol is immutable, meaning the core functionality cannot be changed through governance, it has a higher degree of decentralization versus a project that can be controlled entirely through a token.
Token Allocations for Web3 Projects – Messari

Classifying Web3 Projects by Decentralization

Web3 protocols can be broken down into one of three core categories. Those categories are:

  • Centralized
  • Decentralized
  • In the Middle

Centralized

Projects that fall here are generally lacking adoption and protocol governance is typically highly skewed towards large holders (generally early backers). Many projects, such as a number of Layer 1 smart contract platforms, were initially funded through privatized token sales. This allowed venture capitalist firms, hedge funds, and institutional investors to obtain a significant share of the outstanding tokens of these projects prior to public launch.

Additionally, limits in governance typically go along with these private token sales. A popular form of Proof-of-Stake (PoS) consensus is that of Delegated-PoS. This means that users holding a token can choose to be delegated through validators on the blockchain, generally being the largest token holders running nodes. This allows the majority of users to “participate” in governance but gives them little direct influence over the protocol.

This is similar to direct governance models that delegate voting power based on the number of tokens staked. So, the holders with the greatest amount of tokens (generally early backers, developers, etc.) have considerably more voting power than the average user.

There are quite a few Web3 protocols that fall into this category, including:

  • Solana (SOL)
  • NEAR Protocol (NEAR)
  • Algorand (ALGO)
  • MakerDAO (MKR)
  • Internet Computer (ICP)

Within the centralized category also falls centralized exchanges (CEXs) for obvious reasons. There is separation between Coinbase and other exchanges like Binance solely due to Coinbase not offering an actual token. 

Along with Coinbase are other corporations *& companies that utilize tall (centralized) organizational structures such as:

  • Coinbase
  • Apple
  • Intel
  • IBM
  • Meta
Example of a Tall Organizational Structure – ResearchGate

Decentralized

Web3 protocols that are more decentralized give the users more control over how they utilize the protocol and to what decision-making power they have over its functionality. The two assets here that are the most obvious are Bitcoin and Ethereum. Bitcoin is the world’s first peer-to-peer electronic payment network and is secured through Proof-of-Work consensus requiring computational power to mine new bitcoins.

Ethereum is the world’s most highly distributed and decentralized blockchain smart contract network – the original Layer 1. With thousands of nodes participating in securing the network and thousands more applications already built on top of its blockchain, Ethereum is the best example within the crypto economy of a decentralized Web3 protocol.

Other projects that function with a high degree of decentralization – regardless of overall adoption – are the following:

  • Chainlink (LINK)
  • The Graph (GRT)
  • THORChain (RUNE)
  • Aave (AAVE)
  • Ampleforth (AMPL)
  • Uniswap (UNI)
  • Polygon (MATIC)

In the Middle

There are a number of projects that fall right into the middle in terms of their level of decentralization. There are a large number of variables that come into play, making it more difficult to classify these projects wholeheartedly one way or the other.

The majority of these projects utilized private funding to get started but are building out decentralized functionality or assisting ecosystem development catering to decentralized functions for everyday users. Project age, overall adoption, and market dynamics all play a role in these projects.

Examples of projects in the middle include:

  • Polkadot (DOT)
  • Cardano (ADA)
  • Avalanche (AVAX)
  • Axie Infinity (AXS)
  • Decentraland (MANA)

Final Analysis

Web3 projects have been placed on the original matrix above in relation to the following discussed factors:

  • Accessibility
  • Adoption
  • Token Distribution
  • Protocol Functionality
  • Governance Mechanisms

The following represents the Web3 matrix in terms of distribution versus decentralization:

Keep in mind that due to the extreme amount of variables, it is difficult to accurately gauge each and every project from the same lens. Also, the above matrix is not accurate to scale. Consider projects grouped together to be similar in terms of distribution and/or decentralization.

Overall, the majority of web3 protocols are working towards or actively contributing to the greater Web3/cryptoeconomic space. Some protocols are doing this in a much more decentralized way than others, such as Ethereum’s high rate of node participation versus Algorand’s more centralized governance mechanism. 

Web3 as a whole has a substantial number of actively contributing projects that hold appropriate levels of decentralization over the previous web2 iteration of the internet.

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Metaverse Weekly: The Vulnerability & Bottleneck of Centralized ISPs to Metaverse Expansion

Billions of individuals around the world access the internet each and every day through internet service providers (ISPs). These ISPs have created partnerships and developed the infrastructure to power access to the internet around the world.

To access the internet, regardless of what equipment an individual may have, it requires a connection through an ISP. The ISP provides the necessary connectivity and bandwidth in which to interact with the internet. Without it, even a fully decentralized Web3 internet would be inaccessible.

How Do ISPs Work?

At a fundamental level, ISPs serve as major data movers by offering access through different connections (DSL or Dial-up, for instance) that come with different speeds, services, and accessibility. 

Some key examples of ISPs include:

  • AT&T
  • Comcast
  • Verizon
  • Cox
  • NetZero

All of these providers have one particularly key feature in common – they are massive, centralized entities with considerable power over the internet. This directly coincides with the concentration of cellular accessibility between the giants of AT&T, Verizon, and TMobile. 

Internet – tutorialspoint.com

This is due to the massive barrier to entry that has formulated due to the required infrastructure necessary to create a competitor. Many ISPs have concrete contracts in place with both major data centres (typically run by tech giants like Google or Amazon) and cities themselves to build out infrastructure like fibre optic cable lines.

In fact, there are thousands and thousands of miles of fibre optic cable that transfers data across the world on just the east coast of the United States alone. This centralized infrastructure also has secondary risks such as overload due to damaged infrastructure resulting in a massive amount of rerouted internet and telecommunications traffic.

Hyper-growth in Internet Demand & Technological Development

There are two separate laws famous in the technological development of computing & internet. The first of these is Moore’s Law which states that computing power grows at an annualized rate of 60% or 100x compounded growth over just ten years.

The other side of this coin is Nielsen’s Law which states that internet bandwidth roughly doubles each year, residing in a 57x increase in growth over ten years. However, bandwidth overall grows at a noticeably slower rate. 

For example, someone paying more for a bandwidth upgrade will only see improvements up to a certain point. Bandwidth doesn’t just rely on higher-level access but is limited by the speed of centralized ISPs in the upgrading of equipment and necessary infrastructure. Upgrading existing infrastructure for a 50% boost in bandwidth speed can cost upwards of billions of dollars and take considerable time to implement.

Additionally, as the technology improves, there is a higher demand for high-level internet access including a rise in things like streaming. The COVID-19 pandemic coincided with a growth in internet demand of roughly 70%. Per AT&T Labs, internet traffic is approximately doubling each year. When considering the building out of a metaverse, this demand could skyrocket and further outpace the expansion of ISP infrastructure and capabilities for the average user. 

Development of Decentralized ISPs

For the metaverse to truly function and remain as decentralized as possible, there must be unrestricted access available to it. This raises the question of how feasible decentralized ISPs could really be.

Distributed internet access has been sought after and researched for some time now. This has led to the development of different concepts, two of which have been highlighted below:

Microgrids for Distributed Internet Data Centers

Part of the systemic centralization issue falls directly on data centres themselves. With centralized ISPs creating strategic partnerships with centralized data storage providers, a decentralized ISP would still have to rely on those very same data centres and thus only partially solves the problem.

Diagram of a Microgrid – Dr. Leonard W. White / NC State University

There have been multiple proposals to plan and develop a microgrid to power distributed internet data centres. A microgrid is a concept for distributing the power grid itself. It works as a localized energy grid that can function in par or autonomously from the main power grid. These microgrids would have the durability and capacity to host localized data centres, ensuring that the stress of traffic overall on the local system is lower due to the smaller sample size.

Mesh Networks

Another working concept is that of mesh networks –  a way of distributing WiFi connectivity more efficiently. Mesh networks have models that work from the individual household up to entire cities. The network is formed through distributed nodes that are interoperable, meaning that they can communicate to share a wireless connection with each other. This covers larger areas with coverage.

Signal Boosters

This is a truly wireless distribution of internet connectivity. When considering this concept for smart cities, it would vastly cut down on the necessary infrastructure required to distribute internet access across a city among many thousands of residents. Fewer infrastructure requirements mean all of the following:

  • Lower upgrade costs
  • More distributed access
  • Smaller barrier to entry for new participants
  • Less systemic risk due to environmental factors

Wireless mesh networks are projected to have steady growth through 2026 based on a research report released in February 2022.

Blockchain-based Solutions

There are a handful of different cryptocurrency-powered projects that are working on the idea of decentralized ISPs. With bootstrapped crypto-powered funding rounds, it can assist the project in being funded through community building and would also help distribute ownership over the ISP.

One such example is Nexus (NXS). The Nexus Protocol aims to provide decentralized routing services for users to bypass traditional ISPs and is “driven by a security-focused operating system (LX-OS), utilizing the immutability of Nexus to verify its internal states, making it resistant to most known operating system level exploits”.  To achieve this, Nexus Protocol aims to establish a robust network built up from a combination of tokenized micro-satellites and ground stations in which to interact with said satellites, similar to Elon Musk’s Starlink (but decentralized).

The micro-satellites are to be launched into low Earth orbit and run the Nexus Protocol operating system.  The ground stations are established through phased array antennas, which are “electrically steered and are capable of realizing high gains and mobility“.  These antennas may be installed on top of buildings or vehicles, and “connect to transceivers on the 5.8 GHz ISM (Industrial, Scientific, Medical) band, commonly used in Wi-Fi routers”, per the Nexus Protocol website.

The successful launch and implementation of such a technology, should it work appropriately, would take the concept of Starlink and distribute ownership of it throughout Web3. Other examples of decentralized ISP development include Blockstream (Bitcoin) and Althea.

Summary

Accessibility to the internet will remain a major challenge for the development of a global, decentralized metaverse and Web3 in general. Censorship through ISPs obviously has some workarounds (take the explosion in popularity of VPNs for example), but a large percentage of the global population lives with at least some restrictions to internet access.

Decentralized internet access puts the power of the internet fully into the hands of the users themselves. While development is sluggish for decentralized ISP technology, concepts and ideas are emerging that have adequate examples of how to potentially do it. Should Web3 and the metaverse ever reach their full adoption and developmental potential, unrestricted access to both is vital.

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Overcoming the Ethereum Blockchain Trilemma

As the use cases of blockchain technology have ballooned in recent times (with everything from NFTs to oracles), a significant problem has emerged with protocols such as Ethereum. The high demand for making transactions on the blockchain has led to the gas fees which are necessary to power them becoming increasingly expensive. At the same time, the algorithms that must be performed to add to the blockchain are proving wasteful and slow. In short, blockchains have a major throughput problem – one that could even scupper the arrival of Web3. So just what is being done about it?

The Blockchain Trilemma

Vitalik Buterin, co-founder of the Ethereum blockchain, has postulated a so-called “blockchain trilemma” that means developers have to make trade-offs between decentralization, scalability and security – without being able to deliver all three at the same time. In its current incarnation, Ethereum is arguably prioritizing the latter two.

The long-awaited Ethereum 2.0 is a response to these concerns but has been in gestation for so long (since 2014!) that even its name has been deprecated. The ideas behind the upgrade are to make Ethereum simultaneously more scalable (with an ambition of supporting thousands of transactions per second), secure, and sustainable – all while still remaining decentralized.

As it currently stands, Ethereum nodes (the computers powering the blockchain) struggle to handle the transactions per second required. It may surprise you to learn that Ethereum can only handle somewhere between 15-45 transactions per second – severely limiting what decentralized applications are capable of. To remedy that, Ethereum wants to increase the number of nodes rather than increasing the size of nodes (which would restrict access to only those with the most powerful and expensive computers).

Vitalik Buterin - Ethereum
Vitalik Buterin – Ethereum

Proof-of-Stake

Let’s take a closer look at the technology behind the Ethereum upgrades. One of its major innovations is moving the way it validates transactions from proof-of-work to proof-of-stake. The former involves miners solving complex mathematical problems in order to add new blocks onto the chain – which as we mentioned before is slow and expensive. Proof-of-stake instead sees users staking cryptocurrency to become validators. They are then randomly chosen to create new blocks as well as check and confirm blocks created by others.

You’ll remember that Buterin’s trilemma means that decentralization should suffer at the expense of security and scalability. But Ethereum is betting on the power of proof-of-stake to allow it to overcome that problem. That’s because proof-of-stake ensures that the barriers to entry are low. Users are able to stake the ETH token to become validators who process transactions and create new blocks on the chain – something far easier to get into versus the mining that currently secures the network.

Shard Chains and Rollups

Along with the proof-of-stake upgrades is another crucial feature for scalability: shard chains. The idea is to help Ethereum process more transactions and store data more efficiently by creating new chains known as shards. 

Those shards are part of efforts to simultaneously preserve the golden goose of Web3 – decentralization. Stakers will be randomly assigned to validate the shard chains, which are planned to number 64 in total. The shard chains will only require validators to store and run data for the shard they are validating, rather than the whole network – making becoming a validator more accessible and less hardware-intensive.

The initial plan is to have the shard chains only provide data to the network, being incapable of handling transactions. The key to using them to boost throughput is via technology known as rollups. These allow transactions to be executed outside the main Ethereum chain, before being resubmitted alongside cryptographic proof – essentially taking computation off-chain while the data stays on.

All upgrades combined, Ethereum is targeting 100,000 transactions per second – an exponential increase on what it currently achieves. In terms of delivering these upgrades, however, Ethereum is taking a slow approach – opting to roll out improvements over time. The proof-of-stake element, in the form of the Beacon Chain, shipped in December 2020. Actually merging it with the main Ethereum Network is scheduled for 2022, while shard chains are targeted for release in 2023.

Outside of Ethereum

Despite its popularity, Ethereum is of course far from the only blockchain, and others are attempting to solve the problem of throughput and scalability in different ways. Sidechains are one prominent example, a practice whereby a blockchain is linked to another, allowing tokens to move between the two. Liquid Network, for instance, pairs with Bitcoin as the main chain. It works by enabling users to send coins to an output address on the main chain, at which point coins will show up in Liquid Network instead. After their business is done, assets can be moved back onto the main chain.

Solving the blockchain trilemma is continuing to prove a very difficult task – but only once it is achieved does the full potential of Web3 have any chance of being unlocked. What is clear is that no one approach will suffice – and even in combination, estimated speeds remain a tiny fraction of what we are used to in traditional computing.

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Regulating Web3

The regulation of the web as it currently stands is in a state of flux. The big beasts of Web 2.0, the likes of Google, Amazon and Facebook, have repeatedly locked horns with governmental organizations around the world in recent times – usually coming off the worst. The platforms’ poor record on disinformation and misuse of data has led to crackdowns ranging from huge fines being levied in the EU to burgeoning antitrust cases in the United States.

As Web 2.0 gives way to Web3, are we doomed to experience an intensification of the problems that plague the web today, or is this an opportunity to reset the status quo? Just what are the priorities when it comes to safety, privacy and antitrust, and who is leading the way?

Web3 - Metaverse
Image credit – Shutterstock

The Problem with Decentralization

With efforts to regulate disinformation on centralized platforms having proved hard enough, a whole new spanner is thrown in the works when one considers the inherently decentralized nature of Web3. The growth of blockchain and cryptocurrency technology which has made a move away from centralized platforms possible precisely what is fuelling the question of who the task of regulating Web3 should fall too.

On today’s internet, we can be relatively assured that our activity is private(ish), that illegal and unsavoury content will (eventually) be removed and that miscreants can be banned from platforms. But the decentralized nature of the blockchain removes all those safety nets by making all transactions public and unchangeable. By moving wholesale to Web3, not only will existing approaches to safety be rendered unusable, but whole new problematic worlds could emerge – imagine governments or even companies being able to scan blockchain transactions to discriminate against certain users.

There’s another wrinkle associated with Web3 too in the form of the Metaverse – a bevvy of platforms offering virtual land populated by anonymous users who are free to make of their spaces what they will. That decentralized creator economy means that users can enjoy the fruits of their creations, but what sort of behaviour can be expected in these anonymous virtual spaces? Virtual groping is just one unsavoury example – with the mooted solution, in that case, being a deployable “safety bubble” in which no one can touch, talk or interact until it is suspended.

Existing Approaches

Despite decentralization perhaps being the holiest of holies for Web3, workable answers to these issues all seem to fall back on incorporating some sort of centralized regulatory body. But there are attempts to address all these issues in the spirit of Web3.

On the privacy side of the equation, privacy-centric blockchain platforms are emerging such as Aleo, which is using a cryptographic technique known as zero-knowledge proofs (ZKPs) to enable the development of private applications on blockchain. That technology allows transactions to be executed off-chain while remaining verifiable by allowing a statement or fact to be proved true without revealing what makes it so. Similarly, Zcash offers a digital currency with shielded transactions to keep financial information private using similar technology which makes use of viewing keys to selectively disclose data.

Potential Regulatory Bodies

Despite such initiatives, off-chain organisations from investment groups to nations states are already outlining ways of approaching these issues – for good or for ill, depending on your viewpoint. Look no further than the U.S. Securities and Exchange Commission (SEC) is making a concerted push into regulating cryptocurrencies with litigation against Ripple Labs and its digital currency XRP, for instance.

Meanwhile, venture capital firm Andreessen Horowitz (a16z), one of the largest Web3 investors, has outlined its vision of Web3 regulation and its eagerness to work with policymakers to make it a reality. Among its suggestions are bringing in legislation to make decentralized autonomous organizations (DAOs) an official mode of organization as a potential successor to corporations. Similarly, they advocate not treating the whole of Web3 as a monolith, saying “policymakers should focus on calibrating regulatory activities to the specific applications and their associated risks.”

Another approach is that of the OASIS Consortium, which is advocating building safety procedures into the infrastructure of next-generation internet platforms at their core. The consortium is formed of members from metaverse builders, industry organizations, academia and non-profits, government agencies, and advertisers, with the group having just released a set of standards for ethical online behaviours in Web3 prioritising openness, accountability, security, innovation and sustainability.

Its standards were developed with input from existing gaming, dating and social applications in an effort to get platforms to self-regulate via pledges to user safety standards. While the full extent of the adoption of such standards is yet to be seen, the consortium has secured the pledges of luminaries such as advertising and PR giant Dentsu, as well as The Meet Group, Fandom, Pandora and others.

Ultimately, successfully regulating the metaverse may require collaboration between all of the approaches mentioned so far – whether platforms, users, governments, or decentralized tools. What seems clear is that Web3 platforms will have to consider the best approaches to operating ethically early, learning the lessons of Web 2.0 in order to avoid the fallout that is currently engulfing the giants of today.