Letter #68: Decentralized In Name Only - Rise of the DINOs
Read now to learn what "decentralized" actually means, and why it is much more than just a crypto buzzword.
“Decentralization” is all the rage these days and will likely go down as the biggest buzzword of the decade, and with good reason: centralized systems have extracted massive amounts of data and value from societies, and when they go down, the world notices. Who can forget when most of the U.S. government was shut down in late 2018 over a funding dispute between a handful of congressional leaders and the President? Certainly not the hundreds of thousands of government employees who went without paychecks for weeks on end. Even more recent examples are available, such as Facebook’s outage across its suite of apps in October of this year and the Amazon Web Services outage last week. Both outages resulted in billions of users and millions of businesses being unable to access the services on which they’ve come to rely.
Each of the above incidents demonstrates the primary weaknesses of centralized organizations. First and foremost, they are always controlled by small groups of people, politicians in the case of governments and executives in the case of corporations, who make decisions that impact billions of people who had no say in the matter. Secondly, they are reliant on single points of failure that all go down eventually and leave users high and dry. No wonder humanity is abandoning centralized structures as quickly as possible.
True decentralized networks show a lot of promise:
Power lies in the hands of users, not in a group of elites.
Single points of failure are eliminated and all participants directly support the network.
Access is open to all since no biased entity sits at the center of the network as a gatekeeper.
The internet and the Bitcoin blockchain are the two most prominent examples of truly decentralized networks, and they incorporate the above strengths to provide astounding value. The internet enables the free exchange of all human knowledge, while the Bitcoin blockchain enables the free exchange of money, the most influential invention in human history.
The quest for true decentralization isn’t easy though. Unfortunately, many who attempt to build decentralized networks fail outright or end up settling for hybrid models that don’t necessarily combine the best parts of decentralization and centralization. It’s this latter group that’s making a big splash in the crypto space recently, and not in a good way.
Decentralization is a State of Being, not a Destination
The appearance of decentralization can be almost as powerful as actual decentralization in today’s world, because truly decentralized networks are a relatively new phenomenon. In other words, it’s rather easy for newbies and veterans alike to get lost in the glamour of a self-proclaimed decentralized network without peeking behind the curtain to see who’s actually in charge.
As we learned a few weeks ago, a Decentralized Autonomous Organization is typically built to allow a group’s governance to be disseminated among all participants rather than hoarded by a select few at the top. But calling your organization a DAO does not make it decentralized.
Such is the case for the Index Cooperative DAO, a self-styled “digital asset manager” that creates baskets of cryptocurrencies as investment vehicles in a similar fashion to traditional asset managers that combine baskets of stocks to create indexes. The key difference for Index Coop, and likely the main reason it’s able to get away with calling itself a DAO, is that the structure of its investment vehicles is purportedly determined by members of the network who cast votes using the native $INDEX governance token. That would certainly seem to imply some level of decentralization.
Index Coop falls well short of true decentralization however, and it doesn’t take much digging to discover the truth either. It was revealed just last week that Index Coop underwent its second funding round of the year, bringing in over $2 million in investments by venture capitalist firms. But the intended use of the funds is perhaps the most telling. As reported by Decrypt.com:
[The DAO’s] core team tasked with daily operations…is around 100. The money raised will go toward expanding its full-time team and making certain the protocol remains financially stable.
And what does the full-time team do? Look no further than the front page of Index Coop’s website:
Alarms should be going off in your head right now. After all, true decentralized networks don’t have “core teams” who can hire employees and accept venture capital funds. Think about it: are there teams who hire employees for the internet or dictate who is allowed to develop on the Bitcoin blockchain? Indeed, there are not. Anyone who supports or builds on top of a truly decentralized network does so of their own accord without asking permission from anyone. The entire network then decides whether it values what has been created.
Simply put, the Index Cooperative DAO is decentralized in name only (DINO). While I believe that the governance model it and other similar organizations follow, that of disseminating at least some governance to end users, can certainly be an improvement over the centralized systems humanity has labored with for centuries, it is of utmost importance that participants in the crypto space aren’t put in a position to be confused by incorrect uses of key concepts like decentralization. The healthy growth of the space depends on a high level of clarity.
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