Letter #24: ShapeShift & Thorchain - Does Decentralization Have A New Meaning?

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Hacking and the theft of information and money are common occurrences in any digital space, and cryptocurrency is, unfortunately, no different. Thorchain, a DeFi (“Decentralized Finance”) protocol for trading cryptocurrencies, was the latest blockchain entity to suffer, having recently lost around ~4,000 Ethereum tokens, around $7.6 million U.S. dollars worth at current prices. In response to the theft, network administrators temporarily paused the protocol, including access to users’ funds, in order to assess the vulnerability and release an update.

But wait….should a truly “decentralized” protocol have network administrators? And should network administrators have the ability to freeze the protocol and restrict access to users’ funds if the protocol is truly decentralized? Thorchain may be on a path to some level of decentralization, but these developments call the current level of decentralization of the protocol into question.

Truth be told, “decentralized” has turned into a frequently-used buzzword that new blockchains, protocols, organizations, and more use to drum up interest and support during launch. Decentralized networks are certainly out there. But as time goes on, it becomes more and more important for the average user to understand what decentralization truly is, and be able to weed out the pretenders as a result.

Decentralization: With Shared Power Comes Shared Responsibility

We are all familiar with centralized organizations. They’re all around us. Your local government is a centralized organization in which elected or hired officials have the power to guide the governed populace and enforce laws against good and bad actors. Your favorite social media app is another example of a centralized organization in that all updates are controlled by the single company that operates it and your ability to participate is dependent on whether or not you follow the company’s rules. Centralized organizations have existed for thousands of years.

Centralized organizations suffer from a few key flaws however. They are subject to the whims of whatever entity controls them, whether that entity is good or bad. They are much more exposed to single points of failure, since power and responsibility are concentrated with just a few participants in the overall governance structure. And they are preferential by design, granting a few individuals at the top enormous influence and control over anyone who by choice or by force interacts with the organization.

Decentralization is certainly not without its flaws; however, many people, including this author, would argue wholeheartedly that decentralized networks are a vast improvement over centralized organizations. In a decentralized network, no one person, company, or government has any more power or authority above any other participant in the network. Your rights are the same as those of everyone else and, most importantly, can’t be taken away from you.

So What’s In It For Me?

Decentralization offers a wide variety of benefits that centralized organizations can only dream of, such as:

No Single Point-of-Failure

Decentralized networks share power and authority one hundred percent among all participants in the network. Because power is shared amongst hundreds or thousands of participants rather than concentrated in a single entity, it is extremely difficult for anyone trying to attack the network to shut it down by taking its participants offline. There are simply too many of them.


Since a decentralized network distributes power equally among all participants, there is no inherent need for participants to trust or even know each other. After all, no matter who you are, you have no more rights within the network than I do. We are both limited or empowered only by the rules established by a blockchain’s software code, and neither of us can change that.

Data Reconciliation

In a decentralized network, any participant can obtain a full copy of the blockchain. This means that any one participant’s ability to alter or destroy the data is effectively eliminated. If you try to change the data in any way, everyone else on the blockchain can compare it to their own copy, identify the alterations, and send you and your faulty data running for the hills.

ShapeShift: An Almost Decentralized Autonomous Organization

Many would argue that decentralization is a “sliding scale”, meaning that any network is on a spectrum ranging from 100% centralized to 100% decentralized. They would also argue that networks can move around the spectrum and eventually become 100% decentralized. While networks can certainly become more decentralized in their functioning, whether a network that previously had some level of centralization can ever become truly decentralized is up for debate.

Take ShapeShift for example. The company behind the cryptocurrency exchange recently announced plans to essentially cease operations completely and turn control of the exchange over to a DAO (decentralized autonomous organization) made up of holders of ShapeShift’s FOX token. Sounds decentralized right?

It is to a point, but there’s a rather glaring problem keeping ShapeShift from ever being 100% decentralized: token distribution. The entire supply of just over 1 billion FOX tokens will be airdropped as follows:

  • 34% to the ShapeShift community and a handful of other DeFi communities (including Thorchain coincidentally)

  • 32% to the ShapeShift company’s employees and management team

  • 24% to the ShapeShift DAO (which is controlled by FOX holders)

  • 8% to the ShapeShift Foundation

  • 2% to the ShapeShift company for it to finance operations until it closes down completely.

As we discussed previously, a truly decentralized network is open to anyone who wants to participate and does not grant more power or benefits to any specific participants. There are several problems with the above distribution model, not least of which is the fact that over 40% of the governance token’s supply will be distributed to individuals affiliated with the ShapeShift company. However, perhaps the most glaring problem is that the distribution model essentially creates two classes of participants: those who receive the airdrop and get to participate in network governance for free, and those who have to pay to purchase the FOX token in order to participate in network governance.

Many will argue that anyone could have participated in the ShapeShift community and, as a result, could have made themselves eligible to participate in the airdrop. That is true, but only to a point. As an example, when ShapeShift originally launched in 2014, anyone could use its service without needing to identify themselves through “Know Your Customer” (KYC) processes. However, that changed in late 2018 when ShapeShift implemented KYC checks while under pressure from regulators. For a time, users were only able to participate in the network if they agreed to identify themselves. Anyone who chose not to do so, and who didn’t have the good fortune of knowing about and using ShapeShift prior to the KYC implementation, is ineligible to receive FOX tokens from the airdrop.

Similarly, not everyone has the possibility of working for ShapeShift. ShapeShift has a few dozen employees and those individuals were chosen based on employment decisions made by ShapeShift’s management team and others. The other 7.9 billion people on the planet understandably had very limited ability to become eligible to receive the 40%+ of FOX tokens that are being distributed to the ShapeShift company and its employees.

It is true that you are able to participate in the future governance of ShapeShift and its DAO. You just have to be willing to pay to buy FOX tokens from the first-class participants created by the token airdrop.

True Decentralization is Just a Step Away

As discussed above, it’s important for any participant in the cryptocurrency space, veterans and newbies alike, to be able discern between decentralized and quasi-decentralized networks. To that end, it’s insightful to review an example of a truly decentralized network: the Bitcoin blockchain.

Bitcoin has been a decentralized network since day one of its operation. Satoshi Nakamoto, the cryptocurrency’s pseudonymous creator, shared the blockchain’s code openly with anyone who would listen. There was no premine or airdrop with which Satoshi gathered any amount of Bitcoin. Anyone could have joined her/him/them on day one. Moreover, there is no evidence that Satoshi ever sold or even interacted with the Bitcoin in her/his/their wallet, other than to participate in Bitcoin transactions to prove the blockchain worked.

Additionally, there are no first- or second-class citizens. Do you want to mine some Bitcoin? Feel free to plug your computer or ASIC into the network at any time. Do you want to have a copy of the blockchain? Set up a node and access it around the clock. Do you want to participate in improving Bitcoin’s code? Put your development skills to the test and submit a BIP (Bitcoin Improvement Proposal) for the network to vote on.

A lot of self-proclaimed “decentralized” organizations provide value. But while there may be a sliding scale of decentralization, not all organizations on that scale are or will ever be 100% decentralized. It’s on each of us to learn and understand the difference.

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