Blockchain Technology and Decentralization: Core Features of Web3 Protocol

Decentralization is an important innovation brought by Blockchain technology and is one of the key features of Web3 protocols. In order to more accurately assess and compare the degree of decentralization of various Web3 protocols, industry insiders, policymakers, and regulatory agencies need to form a more unified and detailed understanding of decentralization. This not only helps in formulating regulatory policies that are more suitable for decentralized characteristics but also encourages developers to pursue decentralization, maximizing the public interest of Web3.

This article will define the types of Decentralization from three aspects and propose relevant elements for each type, applicable to tokenized Blockchain protocols and tokenized smart contract protocols. We provide two tables, one for each type of protocol, to enumerate the components of Decentralization and provide more specific and standardized definitions.

When analyzing the degree of decentralization of blockchain protocols or smart contract protocols, it is essential to consider all circumstances related to the protocol. The factors we propose aim to provide direction for this analysis.

The Importance of Decentralization

Web3 has ushered in a new era of "reading, writing, and owning" on the internet. The technology supporting Web3 has achieved "trustless computation," no longer relying on centralized entities to browse the internet and databases. This allows us to develop more complex and advanced protocols that provide the functionalities of the modern internet while being genuinely owned by the users. For example, decentralized social media protocols can support the building of multiple applications and distribute ownership and control of the protocol to a wide range of developers and users through token ownership.

Decentralization, as the core feature of Web3 protocol, drives this paradigm shift. It will create a more democratized internet, achieving three significant transformations: promoting competition, protecting freedom, and rewarding stakeholders.

First, decentralization enables Web3 systems to have reliable neutrality and composability. These systems are more like public infrastructure rather than proprietary technology platforms. Unlike the closed software of Web2, Web3 protocols provide distributed internet infrastructure, where anyone can build and create internet businesses without the permission of the original protocol deployer or the use of centralized control interfaces.

Secondly, decentralization requires the broad distribution of control and participation rights in Web3 protocols, ensuring that the development and use of the network reflect the opinions of various stakeholders. This limits the concentration of power in the hands of a few companies and ensures that any changes to the protocol are consistent with the broader user ecosystem that holds tokens and ultimately manages the network.

Thirdly, decentralization enables the design of systems that focus more on stakeholder capitalism, which aim to more fairly meet the interests of all participants. Web3 protocols and networks have become a diverse design space that can more equitably satisfy the interests of all stakeholders, providing a more stable internet infrastructure.

Decentralization Types

We can look at Decentralization from three interrelated perspectives: technology, economy, and law:

technology Decentralization (T)

Technological decentralization mainly involves the security and structural mechanisms of Web3 systems. Programmable Blockchains and autonomous smart contract protocols support technological decentralization by providing a self-governing, permissionless, trustless, and verifiable ecosystem for value transfer. For Blockchain protocols, technological decentralization is a complex issue that requires balancing multiple competing forces. For smart contract protocols, this type of decentralization can be relatively easily achieved by making contracts immutable.

Economic Decentralization (E)

Blockchain and smart contract protocols utilize local tokens to unlock the potential of these open-source and decentralized systems to have autonomous free market economies. Through careful design decisions, builders of Web3 systems can facilitate the formation of a decentralized economy that exchanges and accumulates value from various sources. If built properly, decentralized ecosystems can use token incentives to encourage participants to contribute value and more fairly distribute value to the stakeholders of the system based on their contributions.

Legal Decentralization (L)

Legal decentralization depends on whether the decentralization of a system eliminates the risks that specific regulations are meant to address. Technical and economic decentralization can eliminate risks associated with the tokens of Web3 systems and their potential value. According to regulatory guidance, we can define legal decentralization as the extent to which a Web3 system can mitigate the potential risks of significant information asymmetry, without relying on the critical management efforts of others to drive the success or failure of the enterprise.

Decentralization Factors

In a Web3 system using local tokens, it is essential to comprehensively consider the three types of Decentralization: technical, economic, and legal. These types influence each other, and changing one may affect the other two. For example, Decentralized economy can drive the system towards legal Decentralization by prioritizing stakeholders' decentralized ownership, value accumulation, and distribution.

We break down Decentralization into many factors that may influence it, categorized by type (technical, economic, and legal) and category (computing, development, governance, value accumulation, as well as usage and accessibility). Decentralization is an assessment process that is not based on absolute standards, but rather on a range of circumstances that include the entirety of any Web3 system.

I hope the tools provided in this article can help Web3 participants build more decentralized projects, while enabling decision-makers and regulatory bodies to design regulatory frameworks that recognize the power of decentralization to reduce and eliminate risks.