Blockchain
a16z crypto: Exploring key frameworks for decentralization in Web3 startups
Decentralization has become a fundamental concept for Web3 startups, offering paths to build more resilient, reliable, and autonomous systems. According to a16z crypto, a venture capital fund that has been investing in crypto and Web3 startups since 2013, understanding the different aspects of decentralization is crucial for founders moving into this space.
Technical decentralization
Technical decentralization refers to the ability of blockchains and smart contract protocols to operate without intermediaries, ensuring that the system remains trustless and autonomous. For example, the Ethereum blockchain faces significant challenges in achieving technical decentralization due to the need to protect itself from various attacks by validators and node operators. In contrast, a simple smart contract that becomes immutable upon implementation can be considered technically decentralized immediately since no entity can modify it after implementation.
Economic decentralization
Economic decentralization involves the introduction of digital assets into Web3 ecosystems, creating complex economic systems. Ethereum, for example, uses its native digital assets to reward service providers and facilitate transactions, thus forming a decentralized economy. However, maintaining this economic decentralization is challenging; excessive accumulation of value by a single entity or manipulation of token prices can compromise the security and utility of the system.
Legal decentralization
Legal decentralization addresses the risks associated with asset transactions by eliminating the need for intermediaries. Traditional finance relies heavily on intermediaries and stringent regulations to protect consumers from conflicts of interest. In a decentralized peer-to-peer system, such as those enabled by blockchain technology, these intermediary-based legal regimes become largely unnecessary.
For example, decentralized exchanges enable direct peer-to-peer trading of digital assets, making broker-dealer rules redundant. Similarly, securities laws, designed to mitigate risk through disclosure requirements, become less relevant if a Web3 system can eliminate significant information asymmetries and reliance on managerial efforts.
An example of this concept is the difference between Apple shares and oil. Apple shares are treated like securities because they are subject to management efforts and inside information, which requires issuer-based disclosures. Oil, as a commodity, does not face the same information asymmetries, making asset-based disclosures sufficient. If Web3 systems can achieve similar transparency and autonomy, they can be considered sufficiently decentralized, thus bypassing some securities regulations.
For more comprehensive insights into decentralization frameworks for Web3 developers, please visit original article by a16z crypto.
Image source: Shutterstock