Will Decentralization deliver on its promise?
John Kenneth Galbraith’s interesting book The Anatomy of Power looked closely at how Power is exercised:
By Force or Punishment.
By Currency or Compensation.
By Collective Belief. Convincing others to accept one’s will in the belief that it is Right.
Galbraith’s conception of Power is a useful framework to understand Web 3.0 and the Decentralization Movement.
Galbraithian Power Model: Invaders’ Land-and-Expand Strategy
Invaders initially used Force or Punishment in their land-and-expand strategy. They then realized that using Force alone was a difficult and costly pursuit, and so evolved to a combination of Pilferage/Treasury Hoarding/Taxes to adopt Currency or Compensation as a means of exercising Power. With time came the realization that the last method— appealing to collective Belief — proved to be most useful in maintaining and exercising power. As humankind evolved, we came to realize that a combination of all three instruments of Power was needed for proper functioning of a civilized society. Force or Punishment, for those that break the Law. Currency or Compensation, for economic organization. And lastly, Central Institutions (emerging from collective Belief) that maintain ‘order’.
This pursuit of Power model allows us to think about social and economic dynamics through the lens of Fragmentation and Centralization. Once we grasp this dynamic, we can begin appreciating the nuances behind the the Decentralization Wave currently underway in the Web 3.0 movement.
Centralization as a Path of Least Resistance
In Galbraith’s Power Model,
We notice an initial state of Fragmentation; which gives way to Centralization over time.
A system is chaotic in the initial state (Fragmentation). Actions are then directed to reduce Chaos (Fragmentation) and create Order (Centralization). Why? Fragmentation represents Friction, a cost that is borne collectively by society. In our need to reduce Fragmentation, we end up creating Centralization as an inevitable consequence.
From Barter and fief relationships of money (Fragmentation), emerged Banking Institutions (Centralization) that have reduced collective friction. From high interest rates in centuries past, we now have the lowest interest rates in history. Whatever the flaws of this system, it is hard to argue that cheap capital makes society worse off. Centralization has been an inevitable consequence. Masses of anonymous people band together, joined by a collective common Belief system (preference for lower, rather than, higher cost of capital).
From Anarchy (Fragmentation), emerged the Military-Industrial Complex and (mostly democratic) Political Institutions (Centralization) that have reduced collective friction. A constant state of war has been replaced by a constant state of armchair ‘war’ of ideas. Whatever the flaws of this system, it is hard to foresee anyone preferring actual warfare. Centralization has been an inevitable consequence. Masses of anonymous people band together, joined by a collective common Belief system (preference for Peace over War).
From unit-level belief systems (Fragmentation), emerged Religious Institutions (Centralization) that have reduced collective friction. Centralization has been an inevitable consequence. Masses of anonymous people band together, joined by a collective common Belief system (in their own versions of God).
From local village Jury/Elders justice (Fragmentation), emerged Judicial Institutions (Centralization) that have reduced collective friction. Centralization has been an inevitable consequence. Masses of anonymous people band together, joined by a collective common Belief system (versions of Justice).
From invaders (Fragmentation) emerged Corporate Institutions (Centralization) that have reduced collective friction. Centralization has been an inevitable consequence. The Corporation is a distinctive monolith composed of masses of anonymous people that band together, joined by a collective common Belief system (profit motive).
In each of these instances, a common pattern becomes apparent.
An initial state of Fragmentation, gives way to Centralization as an inevitable consequence.
Masses of anonymous people band together of their own free will.
Collective friction (cost) is reduced in the system as a result.
The Game Theory of Trust
Each of the above pursuits to reduce friction has reduced collective Cost to society. But it has not been a Utopian universal problem solver.
To understand why, a simplified mental model is useful.
A simplified mental model for Web 1.0/2.0 involves the Internet as an omnipresent being; on top of which our present world is built.
The first wave of value capture happened at the Infrastructure Layers (Telecommunication providers, Internet Service Providers) that built the information highways to enable Access to Web 1.0/2.0.
The Email ID became the gateway enabling access.
Once the access gateways were in place, this set the stage for the emergence of the ubiquitous Centralized Platforms that we are familiar with (and reviled!) today.
Costs of Web 1.0/2.0 access fell dramatically over the past two decades. This reduced friction and created a consumer surplus. The other side of this dynamic was the creation of mega-platforms that capture value whilst reducing friction.
When Access is cheap, and consumers have greater choice than the pre-Web era, what is it about Centralization that irks us?
While we welcome the friction minimization, we seem to have ceded user Control and Trust to the Centralized entities. That this has happened willfully is lost on us, but it irks us enough that we seek an alternative mechanism.
- When a SWIFT payment transfer is initiated from one country to another, there is no actual movement of cash. Under the hood, one bank account is debited, another credited, after an elaborate system of checks are performed to ensure transaction integrity. This Checks layer involves multiple entities with one objective: to prevent nefarious uses of the money transfer. However, this objective creates an incentive mechanism where no entity wants to be seen holding the pail in the event of a spill. The end result is friction in the form of costs, and time delays, due to lack of systemic Trust in the internal machinations. The vast majority of genuine transactions effectively pay a subsidy tax to cover for the minority nefarious transactions.
- When a Google or Facebook offers free-to-user services, and monetizes this with beneficiaries of this customer attention, an algorithm (controlled by the Central Entity) seems to be in full control. When Users look at this Power (thou-shalt-be-shut-out-if-you-behave-differently-from-what-we-deem-to-be-right), we are looking at the Galbraithain Power dynamic at work.
The corporations are using neither Force (they don’t force us to use them), nor Compensation (they don’t pay us), but Belief (we all collectively believe that using them is Right for our objectives compared to the alternatives. For e.g., Google/Apple Maps better than physical maps, Microsoft Word better than pen-and-paper, Instagram/TikTok status seek better than in-person status seek, SWIFT payments better than barter…).
So we have a paradoxical world, where there is little Trust but we all Believe in the collective Right!
What alternative does Web 3.0 offer?
Web 3.0 can be imagined as a series of Layer 1 Blockchains, on top of which the new world is being built.
At each blockchain, there is transparency (block explorers that can be accessed by anyone), with anonymity (effective identity is an Address and not ‘a human person’), but most importantly it has a Galbraithian Belief dynamic at work (growing masses of anonymous people collectively believe that this is Right for our objectives compared to the present alternative).
The present Centralized system has Lots of Belief and Little Trust.
Decentralized Web 3.0 has Lots of Belief, and Lots of Trust.
This warrants a closer inspection.
In the Web 3.0 world — much like Web 1.0/2.0 — the first wave of value capture will likely happen in the Infrastructure Layers. Exchanges that enable Access, and Wallets that enable gateways, will then set the stage for the creation of Asset Marketplaces (e.g., DeFi, NFT).
We now have several Blockchains vying for user attention, and the older blockchains (Bitcoin, Ethereum) — which were built with a Decentralization/Security-first objective — running into Scalability issues and higher Cost. They are not fast enough, and cheap enough, to keep up with user demand.
This has caused rising clamor for faster transaction processing speeds, leading to new alternatives (Solana, Algorand, Avalanche) that seek to reduce this friction.
Over time, as user base increases, it is reasonable to postulate that there will be alignment along low-latency solutions that maximize transaction processing speeds.
We want things done fast, we want them done cheaply. If security is a trade-off to achieve this, it is reasonable to expect masses of anonymous people will band together, joined by a collective common Belief system (faster transaction speeds with full transparency of history).
As we move to the Exchanges layer, we can envision a tussle between the Centralized Exchanges (CEX, e.g., Coinbase, Binance) and Decentralized Exchanges (DEX). CEX may likely subsume, or handshake with, DEX eventually. All driven by the anonymous herd’s demand for lower friction. As this trend intensifies, will these entities attain a Centralized character?
A similar trajectory can be envisioned for the Wallets layer. Today there are multiple Wallets (one for Ethereum, one for Solana ecosystems and so on). Cross-communications between ecosystems has friction (slower, and/or costlier). Cross-operability creates speed breakers but presents an opportunity. The solution to this is a One-Wallet that also facilitates frictionless gateway to the blockchain ecosystems. So, a Centralized solution?
At Asset Marketplaces, a similar move may pan out. Across application verticals, a few winners will emerge, and a long tail of suboptimal alternatives.
Eventually, systems settle into an optimal (not ‘best’) state of lowest friction.
As Web 3.0 solutions attain critical mass and become ubiquitous, will they attain a Centralized character? Will Decentralized ideals eventually lead to the same Centralization endgame in the present system?
However, even in an endgame of some form of Centralization, Web 3.0 holds the prospect of a a better system of organization relative to the status quo.
The present Centralized system has Lots of Belief and Little Trust.
Decentralized Web 3.0 has Lots of Belief, and (will hopefully have) Lots of Trust.
Game Theory and Council DAO (Decentralized Autonomous Organization)
Constitution DAO was a truly interesting experiment. It was the first time when masses of anonymous people banded together, joined by a collective common Belief system (collective (tokenized) ownership of the US Constitution).
The instance served as an example for how Councils, States, perhaps even Central Governments of tomorrow could resemble a DAO.
Will a Government DAO be a Decentralized solution?
Let us run a thought experiment.
At an atomic unit level, assume a local Town DAO.
This Town DAO exists so all town dwellers have a vote on the governance of the town. This could lead to a series of questions that demand DAO voting.
From the serious…
- Should taxes be paid in TOWNCOIN?
- Should we do a TOWNCOIN issue to fund frontline workers? Police?
- Should we abolish capital punishment?
To the mundane…
- Should we have a central park?
- Do we need 20 Signals at intersections, when 10 may suffice?
- Should we have more garbage bin collection?
To the scary…
- Should we vote to go to war with the neighbor?
- Should we vote to press the N-button?
- Should we reinstate capital punishment?
As the list of questions increase in length, complexity and nuance, most DAO members would find themselves overwhelmed and would likely look for ways to reduce friction.
They could reduce Decision Friction by delegating their voting rights to a Council.
…which would bring us right back to the present system of Parliamentary Governance!
For most use cases, Decentralization at scale may add to friction and costs. Web 3.0 may eventually lead to a Decentralized Central alternative: an anonymous but transparent system of Trust, with Decentralized monoliths resembling Centralized entities in many respects.
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