Web3 Builder’s Guide to Decentralization: Principles, Models, Approaches

Builders of Web3 systems can facilitate the formation of a decentralized economy through careful design decisions that lead their systems to accumulate “value” from a wide range of sources—whether it be information, economic value, voting rights, or other forms— and distribute that value fairly among system stakeholders according to their contributions.

The promise of decentralization has been much discussed and debated, from why it matters to the larger question of who will control the software on the internet. These questions are critical because, as we have seen, when control is in the hands of a very small number of people, violations of individual freedom, choice, and privacy are inherent. When the CEO decides one strategy or the other, “don’t be evil” is very different from “can’t be evil.”

But decentralizing the Internet has always been difficult. Decentralized systems have struggled to keep pace with the proven efficiency and stability of centralized systems. Now, however, emerging cryptography and Web3 technologies—especially programmable blockchains, composable smart contracts, and digital assets—enable decentralized systems to achieve unprecedented levels of coordination and operational functionality. This evolution has given rise to new forms of governance and organization, community-owned and operated networks and services, robust economic systems, and countless other innovations.

We’ve seen certain categories like decentralized finance (“DeFi”) and core infrastructure projects take off, and will soon see decentralized versions of existing web2 categories like social media, video games, music, and marketplaces . The success of these systems will depend on their ability to deliver the practical benefits of decentralization, including fairer ownership among stakeholders, reduced censorship, and greater diversity. However, the more familiar decentralization models used for DeFi are not necessarily applicable to these more complex systems (i.e. systems with more UI features, richer client experiences, centralized products or services, or licensed IP).

Therefore, I thought it would be useful to share specific models and principles of decentralization gathered in close collaboration with crypto project founders over the past few years to guide Web3 builders in addressing what decentralization means in practice in several specific scenarios.

Web3 Decentralized Design Challenges

Decentralization can be thought of as a single design challenge spanning three distinct but interrelated elements: technology, economics, and law. Understanding the differences between these elements is key to designing Web3 systems, because design decisions about one element can affect other elements.

technology decentralization

Technical decentralization mainly involves the security and structural mechanisms of the Web3 system. The core innovation behind programmable blockchains is that they can support technological decentralization by providing a permissionless, trustless and verifiable ecosystem in which value can be transferred and, more importantly, in Web3 products and services are built on it.

This means that products and services can be deployed and run without the need for a trusted centralized intermediary to operate, opening up a vast world of possibilities. For these reasons, technological decentralization is the basis for two types of decentralization, economic and legal.

Economic decentralization

Economic decentralization is related to the economy of the Web3 system. The advent of programmable blockchains (e.g. Ethereum, Solana and Avalanche) and digital assets (e.g. ETH, SOL and AVAX) unlocked the ability for open source and decentralized systems to eventually have their own decentralized economies (i.e. autonomous freedom and market economy).

This is a critical breakthrough. Open source and decentralized protocols of previous generations of technologies (like web1, such as http, smtp, ftp, etc.) have stagnated because they lacked the ability to incentivize continuous development and/or further invest critical resources back into their systems. This leaves fertile ground for the emergence and success of web2 centralized companies, as they are able to leverage their efficiencies and resources to build products and services beyond Web1. But this centralization has also led to countless examples of user rights abuses and aggressive rake rates.

Now, the technologies that support Web3 make it possible to create more complex open source and decentralized systems – and enable a decentralized economy to form around them – which will allow Web3 products and services to compete with and eventually surpass those of web2 and service.

Builders of Web3 systems can facilitate the formation of a decentralized economy through careful design decisions that lead their systems to accumulate “value” from a wide range of sources—whether it be information, economic value, voting rights, or other forms— and distribute that value fairly among system stakeholders according to their contributions. To achieve this, Web3 systems need to delegate meaningful power, control, and ownership to system stakeholders (via airdrops, other token distributions, decentralized governance, etc.). This in turn encourages stakeholders to contribute meaningful value because they have the power to decide how to treat and reward their contributions.

A constant balance of incentives between stakeholders—developers, contributors, and consumers—can further drive value contributions to the overall system and benefit all. In other words: all the benefits of modern network effects, but without avoiding the pitfalls of centralized control and captive economies.

Decentralization of legal power

Legal decentralization is related to the legitimacy of the Web3 system. In this post, I focus primarily on U.S. securities laws, which govern how and whether Web3 systems can use their own native digital assets. While there is no written standard for “decentralization of legal power,” a first-principles analysis of U.S. securities law, case law, and SEC guidance (including the SEC’s April 2019 final guidance) can help us develop practical standards.

First, U.S. securities laws are generally designed to create a “level playing field” for securities trading by limiting the ability of those with more information to take advantage of others with less information. This is the principle of asymmetric information, and U.S. securities laws often eliminate asymmetries in certain securities transactions by applying disclosure requirements.

This principle comes into play in the Howey test, a subjective test for determining whether U.S. securities laws should apply to digital asset transactions, which include (1) currency investments (2) ordinary businesses (3) with reasonable profit expectations (4) based primarily on others management efforts. The fourth aspect is designed to address information asymmetry, as it is believed that the risk of information asymmetry (managers versus outsiders) may be high in reliance on “managerial effort” and the application of securities law may be necessary.

Based on the above and the SEC’s guidance, we can speculate that if a Web3 system can (a) eliminate the possibility of significant information asymmetries, and (b) eliminate the reliance on others’ basic management work to drive the success or failure of the business, then The system is likely to be “sufficiently decentralized,” so the application of U.S. securities laws to its digital assets should be unnecessary. For the purposes of this article, I refer to these systems as legally decentralized. Granted, most businesses cannot meet the statutory threshold of decentralization, but as I outline below, novel components of Web3 systems uniquely enable them to meet such a threshold.

Collectively, these three distinct aspects of decentralization—technical, economic, legal—must be viewed holistically, as a single design challenge, as design decisions about one affect the other.

Generally speaking, the interplay between technology, economy and law is mostly additive, not subtractive – the development of one creates more possibilities in the other, for example: a decentralized economy by prioritizing Consider decentralized ownership among stakeholders, value appreciation from decentralized sources, and distribution of value to decentralized stakeholders to help drive the system toward legal decentralization. All of this reduces the risk of information asymmetry and the need to rely on individual management efforts.

How to use the components of the Web3 system to achieve decentralization

When a Web3 system is well designed, decentralization becomes a virtuous cycle, not a vicious one. Now that we have a framework for the decentralization design challenge, let’s quickly review how builders use the following novel components of the Web3 system in practice to drive decentralization:

Web3 Builder's Guide to Decentralization: Principles, Models, Approaches

Blockchain Network and Smart Contract Protocol

Fundamentally, blockchain networks and smart contract protocols enable technological decentralization. But they can also be designed in ways that promote decentralization of economic and legal power, including:

  • By enabling transparency — for example, anyone can currently see where the most digital assets are deposited in Ethereum’s DeFi ecosystem, and where the most fees are earned;
  • As an open-source public product – anyone can use and test features for free to ensure security, promote a decentralized economy, etc.;
  • By allowing data portability, mobility and interoperability – users retain control over the data, purchases and content of Web3 products and services;
  • By prioritizing composability — elements can be programmed to interact with each other — these programs become building blocks that anyone can use.

Collectively, these properties reduce the risk of information asymmetry, reduce the importance of any Web3 system know-how, and increase the importance of the system’s network of contributors and consumers relative to its developers.

In other words: these capabilities transfer the value of the system from its technology stack to its network. Since the web is more open and decentralized than proprietary systems, this shift highlights why Web3 systems are more suitable for decentralization than Web2 systems.

digital assets

The decentralized economy of the Web3 system is driven by a combination of two incentives:

  • Intrinsic incentives, based on the underlying characteristics of the system, such as user base, network effects, technology, etc., trigger the innate willingness of third parties to participate in such systems.
  • External incentives, such as digital asset allocation, revenue sharing, etc.

Among them, digital assets are the most critical tools that Web3 builders must facilitate the formation and continued operation of their decentralized economy, as they balance the incentives between developers, contributors, and consumers.

So, if properly designed, digital asset distribution has the potential to drive a “flywheel” of network effects, where the entire system becomes more valuable to more users as more people participate in the network. But unlike web2’s network effects, Web3 digital assets enable users to shape their own experiences and benefit from their contributions.

Successful user acquisition and retention can significantly increase the intrinsic motivation of a Web3 system for developers and contributors, thereby bringing greater value to the system, ultimately attracting more users, etc. Ethereum’s growth over the past two years is a case in point: From early 2020 to early 2022, the value of digital assets deposited in Ethereum DeFi protocols grew from just over $600 million to just over $150 billion. But that’s not a narrative about volume and its monetary value – rather, it shows how developer activity can lead to products and services that attract users, which then attract more developers and additional products and services that drive further User growth.

In addition to potentially creating such flywheels, the network effects of Web3 systems could provide builders with a moat to prevent competitors from replicating and redeploying their infrastructure, which is all open source. how so? Because for systems with strong network effects, replication alone is unlikely to incentivize users to switch to the new system.

This re-emphasizes that the real value of a Web3 system will lie in its stakeholder network — not its technology stack, closed or proprietary systems, or other classic moats.

Decentralized Governance

The vast majority of blockchain networks and smart contract-based protocols have decentralized governance governed by a Decentralized Autonomous Organization (“DAO”). Decentralized governance and DAOs offer a number of benefits along each of the three decentralization standards already discussed, including:

  • Web3 systems are made more secure by assigning technical control of such systems to decentralized groups — thereby limiting the ability of any party to control the governance of the system.
  • Provide meaningful representation to stakeholders in decision-making and ensure long-term incentive alignment among stakeholders. This feature, along with enhanced security, helps to make decentralized governance more effective – enabling it to contribute to the overall health and sustainability of the Web3 system’s decentralized economy.
  • Supports the decentralization of legal power by reducing stakeholders’ reliance on the stewardship of any individual or group – thereby reducing the risk of potential information asymmetry.

When designing decentralized governance for any Web3 system, we can draw some insights from several different models that have been developed and implemented in the DeFi space. E.g:

  • subDAO (sub DAO). To simplify decision making, some DAOs empower subDAOs with tailored permissions for certain categories of actions (e.g. legal, financial, development, etc.).
  • Governance is minimized. To improve the reliability of DeFi protocols and overcome the DAO participation rate challenge, some have called for minimizing the number of final decisions a DAO needs to make, or creating a hierarchy where more important decisions require a higher number of votes.
  • Incentivize participation. To ensure effective DAO governance, some DAOs encourage active participation, including remuneration of delegates. Note that while grant programs don’t work well here, retroactive reward programs can be very effective because they defer the evaluation and reward of contributions until after the value has been delivered. They can also help stimulate competition and open up markets if designed properly.
  • Progressive decentralization of power. To prevent malicious attacks, many DAOs use “progressive decentralization,” where greater control is handed over from the development company to the community as protocol/network security improves.

At the end of the day, Web3 builders should be careful not to hand too much power to insiders. Instead, significant control should be handed over to the community. Where there is an imbalance of power, Web3 builders should seek out delegation procedures to help decentralize it.

To strike this balance, Web3 builders should also consider instilling protections against malicious attacks, including potentially manipulating decentralized governance for profit. While the use of off-chain governance mechanisms and multi-signature (control requires multiple multi-signature holders, each with their own key to authorize actions) are common safeguards for this purpose, they have recently been subject to Significant criticism, including their potential to undermine the decentralization of power.

Decentralized Models in Practice

Now let’s see how the techno-economic-legal framework I shared earlier applies to several different decentralization models in practice. These models range from “full” decentralization (every component of the system is decentralized) to “open” decentralization (a decentralized system where independent third parties all participate in a shared system). I also include models for opening up decentralized applications such as NFT projects and tokenized protocols.

Totally Decentralized: How to Decentralize DeFi and Other Simple Applications

Complete decentralization is currently the most common decentralization model in the DeFi field. As shown in the figure below, the transition from a centralized model (such as web2) to a decentralized model (such as Web3) includes:

Web3 Builder's Guide to Decentralization: Principles, Models, Approaches

  • Deploy the open source smart contract protocol to a decentralized and programmable blockchain network to form the core infrastructure layer of the Web3 system – the smart contract protocol provides the execution layer for all backend components that can be deployed on the chain (i.e. payment, messaging, etc.);
  • Run the “client” layer in a decentralized manner – the client represents all the software running off-chain in the system and acts as a gateway to the smart contract protocol (the client can be a simple front-end website or a complex application program);
  • Add distribution of digital assets – this could be an airdrop to contributors and consumers; distribution to insiders (employees of the development company, advisors and shareholders); distribution of digital assets to clear incentive programs (e.g. liquidity mining in DeFi) mines); and the formation of a vault controlled by the DAO for any future incentives;
  • Initiate smart contract protocol and DAO governance of the DAO treasury;
  • Make sure users own and keep their own data (currently a huge controversy in web2 systems).

This fully decentralized model assumes that the Web3 system is a novel smart contract protocol deployed on an existing programmable blockchain network. The “user” here refers to both consumers and contributors.

For Web3 systems using this model, the decentralization of blockchain networks and smart contract protocols is mainly due to the technical decentralization of these layers, as well as control from the development companies that created the system by initiating decentralized governance in the form of DAOs smart contract agreement. Deploying a smart contract protocol to a public blockchain and launching its DAO brings transparency to the system as well as greater security and assurance, meaning no individual or group controls the system.

Decentralization of the client layer then occurs in several different ways. In DeFi, most clients are just simple front-end websites that provide gateways to the underlying smart contract protocols (i.e. they allow users to interact with the protocols), and most development companies open source their clients/websites and host them on a decentralized A modified file system (such as IPFS).

As clients/websites are open sourced, third parties independent of the development company often end up hosting their own clients/websites to provide access to the same underlying protocol. Additionally, independent third parties often build protocol gateways into their own aggregators and dashboards. This means that the gateway to the protocol is always available, whether or not the development company’s client/website is maintained.

The above steps primarily eliminate the possibility of information asymmetry—the driving force behind most securities laws in the United States—because (1) information about protocols and their operations is transparent on a public blockchain distributed ledger, and (2) ) the development company that started the protocol is no longer critical to the success or failure of such a protocol.

And because the blockchain and smart contract layers are operational and not controlled by any group or entity, the system is fully redundant and no longer depends on the development company. DeFi primitives are a good example, as they require little ongoing development to continue providing utility to users. Therefore, even without a fully functioning decentralized economy, a protocol implementing this decentralized model can be considered legitimately decentralized.

Limitations of complete decentralization

While the fully decentralized model has been successfully used in DeFi, its simplicity may make it unsuitable for more complex Web3 systems. Builders should be aware of and plan for these factors, which may introduce complexity:

  • complex client. Given the relative simplicity of DeFi, decentralization of clients in DeFi is somewhat straightforward – there are very few incentives for third parties to build independent and simple gateways (mostly in the form of websites) for such protocols. However, as Web3 products and services become more complex, with computationally expensive/resource-intensive client layers built on top of the underlying smart contract protocols, client decentralization becomes more complex.

    For example, consider the complexity difference protocol for providing clients/websites accessing Uniswap and Compound, compared to hypothetical Web3 social media clients that require the full functionality of web2 applications like Twitter and Instagram. This complexity may reduce third-party programs willing to build and/or host alternative clients, or willing to integrate access to the protocol layer into their own systems without explicit incentives.

  • Major improvements are needed. Likewise, systems that require significant improvements after a digital asset is released may find it difficult to make these improvements in a decentralized manner. In DeFi, for example, many protocols have struggled to successfully use explicit token incentives to drive continued meaningful development of their smart contract protocols.
  • ongoing operation. A development company may intend to conduct significant operations after the release of its digital assets to increase the value of its Web3 system. If the additional value contribution does not come from independent third parties, this may weaken the decentralization of the system. Furthermore, since governance tokens themselves generally do not confer any rights to future products and services that a development company may produce, development companies should be careful not to give token holders the impression that any such relationship exists.
  • Exclusive rights reserved. If the original development company (or someone else) retains exclusive rights to any intellectual property used in the system, it may weaken the complete decentralization of the system. For example, if developers of Web3 social media complex clients want to keep those clients proprietary, full decentralization may not be possible.

Each of these limitations can be overcome by Web3 systems capable of stimulating significant economic decentralization, creating a well-functioning decentralized economy. If a decentralized group of developers, contributors, and consumers builds and captures significant value—thus reducing the importance of the original developers to the system as a whole—it shifts the system from a fully decentralized model to an open one Decentralized model.

Open Decentralization: How to Decentralize Complex Web3 Applications

Like the fully decentralized model, the open decentralized model includes decentralized blockchain and smart contract protocol layers, digital assets, and DAOs.

But unlike a fully decentralized model, an open decentralized model will also let independent developers build and operate multiple (possibly centralized) clients on top of a shared smart contract protocol layer. For example, consider the potentially rich and complex client side of Web3 social media, which functions similarly to Web2 applications like Twitter and Instagram, but all use a shared smart contract protocol rather than separate proprietary backend systems.

Web3 Open Decentralized Model

The model assumes that the Web3 system is a new type of smart contract protocol deployed to an existing programmable blockchain network. The “user” here refers to both consumers and contributors.

In this open decentralized model, all clients will use the digital assets of the underlying smart contract protocol, and their creation and operation will be incentivized as follows:

  • initial incentive. Initial development can be incentivized through explicit and implicit incentives, including the reward of digital assets from the DAO-controlled vault of the smart contract protocol; the network effects of the protocol; and the fact that such developers can retain the intellectual property of their respective clients.
  • Ongoing incentives. Continued maintenance and continuous development can be similarly incentivized, with performance metrics established on the DAO automatically granting digital asset-based incentives. An example in DeFi is liquidity protocols, which reward hosts of independent front-end websites that provide access to the protocol, rewarding the protocol associated with the economic activity driven by such front-end websites.

    In more complex Web3 systems, we expect the prevalence of such rewards to increase significantly. For example, in a decentralized social media ecosystem, customers can be measured and rewarded with tokens for their user engagement. Finally, in addition to the incentives of the agreement, the customer’s operator will be incentivized by any financial return they are able to generate through their own proprietary customer.

Builders seeking to decentralize their Web3 systems through an open decentralization model will need to design their incentives and decentralized governance models to be “client-agnostic” to encourage participation by many participants. Additionally, they will need to ensure that a single client does not experience significant power imbalances in order for it to dominate the entire ecosystem. If this imbalance is prone to occur, the builders of these clients may have an unfavorable view of the Web3 system and be less willing to invest time and resources in it. In some respects, such a system would suffer from centralization and control issues similar to web2 systems.

Builders using open decentralized models should also prioritize transparency, open source technologies, data portability, and composability to further reduce the risk of their systems being concentrated in the hands of developers. These features eliminate information asymmetry, lower barriers to entry for competing developers, and allow users to switch between clients—all of which promote a more open and decentralized ecosystem where users are not isolated from any one client restrictions or burdens imposed by the end. (This is a huge hurdle in current web2 systems, where user data is siloed in every mandatory web2 system.)

Finally, for the system’s decentralized economy to be truly resilient, the success or failure of the entire Web3 system should not depend on any individual or group, including any individual client. If this condition, as well as the economic decentralization condition described above, are met for Web3 systems, the risk of severe information asymmetry in such systems will be greatly reduced, allowing them to be legally decentralized.

At first, it may be counterintuitive to suggest that development companies should prioritize the above design decisions, as they effectively incentivize their own competition. But doing so will help form a functional decentralized economy built on shared infrastructure, which in turn will lead to an ecosystem that is far broader and richer than any one company could have built alone.

In other words, these actions expand the entire pie, rather than prioritizing a portion of it.

Web3 version of Web2

To see how these principles work in practice, let’s apply the open decentralization model to create a simplified Web3 version of a familiar web2 application. The promise of Web3 goes beyond decentralizing known functionality and applications as it enables entirely new things; but for illustration purposes, I’ll focus on a few simple examples.

Web3 games may require a system that encompasses multiple games, implements shared smart contract protocols and governance tokens; has separate in-game currencies and NFTs; and enables both participants and contributors to access digital assets. These assets are also portable across the ecosystem. The games that use the most then receive the largest percentage of governance tokens allocated by the system DAO, causing game creators to in turn fund additional development of their games.

Web3 social media may require a system with multiple iterations of social media services and messaging services, each built on the same open source smart contract protocol as a separate client. Since the protocol will share a native governance token: consumers will earn tokens based on usage, contributors will earn tokens based on the content they create, and clients will earn tokens based on various metrics established by the DAO.

A Web3 marketplace may require a system with a set of smart contracts and clients to coordinate service providers and facilitate their interactions and arrangements with clients. Developers can then build white-label versions of these customers, enabling providers to offer many different levels of customized services or products. Both clients and service providers will receive the same governance tokens based on their contributions to the system. There are a growing number of examples of Web3 businesses already using tokenomics to create and capture long-term value.

Ultimately, the open infrastructure consisting of blockchain networks and smart contract protocols in this model provides a rich environment for various specialized products and services built on top of its layers. By leveraging this shared infrastructure, builders can build Web3 products and services at a fraction of the cost of building centralized Web2 applications from scratch.

progressive open decentralization

One challenge posed by the interplay between economic and legal decentralization in an open decentralization model is that it often leads to a chicken-and-egg paradox: true economic decentralization Decentralization may require the use of digital assets (i.e. legal decentralization), but the use of digital assets requires economic and legal decentralization of power. This problem is especially acute in an open decentralized model, which requires a fully functional decentralized economy (in contrast to DeFi protocols that use a fully decentralized model, which does not necessarily require economic decentralization).

While there are many ways to solve this problem from a technical and practical point of view, Web3 systems can take advantage of the progressive decentralization process and take precautionary measures for digital asset distribution before achieving full decentralization. Among other things, these precautions include restricting transferability and restricting issuance and listing in the U.S. until the system is fully decentralized.

Open Decentralization: How to Use IP (and Third-Party Resources) to Decentralize Projects

An iteration of the open decentralization model that deserves further exploration is the contribution of resources to the Web3 system by third parties in order for the system’s customers to use it for their products and services.

This can take the form of licensed intellectual property (video game engines, data assets, marketplaces, etc.) and a range of services (including regulatory compliance, marketing, and business development) that anyone in the ecosystem can use as or incorporate into their own client. The following models reflect intellectual property contributed to the Web3 system:

Web3 Builder's Guide to Decentralization: Principles, Models, Approaches

The introduction of dedicated intellectual property seems to bring some of the decentralized economy of the system back to an owner-controlled Web2 economy, especially if the developers/operators of the client are unwilling to subject their products and services to the whims and whims of intellectual property Control owner.

However, such risks can be mitigated through the contractual terms of the license (through irrevocable/perpetual terms, rights to amend/improvement, etc.). An important consideration in this regard is what services and ongoing maintenance of intellectual property are required, and whether such services and maintenance, if any, can be provided by independent third parties – as more reliance on intellectual property A single third-party owner of intellectual property could weaken the overall economic decentralization of the system.

Ultimately, if the terms of the Web3 system are structured correctly, its decentralized economy will remain the same. For example, a Web3 system that uses widely available APIs (application programming interfaces) in its clients will not weaken the overall decentralization of the Web3 system, but may enhance it.

From the perspective of decentralization of legal power, the key question to consider is: Are the basic management efforts of the IP provider necessary to drive the success or failure of the Web3 system? Will there be serious information asymmetry? Even if intellectual property is critical to the success of the system, if the owner of the intellectual property cannot revoke it at any time, the answer to both questions is likely to be no — thus supporting the legal decentralization of the system. This also happens if the owner of the intellectual property has to seek approval from the DAO before making any major changes to the intellectual property.

This concept can be extended to other resources beyond intellectual property, which may also be contributed or licensed to the Web3 system. For example, if a third-party regulatory compliance service allows DeFi protocols to confirm that their users are verified Americans, such services should not undermine the decentralization of the Web3 system. Likewise, it is conceivable that third parties provide marketing and business development related services to the agreement – activities independent of the individual client’s business.

While the introduction of third-party resources may compromise the decentralization of the system in a number of ways, such risks can often be mitigated through structural and contractual mechanisms (as described above).

Open Decentralization: How to Decentralize NFT Projects

Non-Fungible Token (NFT) projects and their communities are an emerging and increasingly popular type of Web3 system that provides a great opportunity to discuss some other concepts of open decentralization.

First, it’s important to understand the legal basis why most art NFTs can be excluded from U.S. securities law, namely that they fail the fourth aspect of the Howey test: the value of NFTs is largely intrinsic, Not from the management efforts of others. But as NFT projects become more complex, Howey’s analysis becomes less straightforward. NFT projects now often involve additional content creation/additional NFT placement, implementation of NFTs in video games, community-driven product development, and other activities — all of which can increase NFT holders’ reliance on others to manage their work.

Therefore, NFT projects should consider incorporating the principle of decentralization into their Web3 system, especially if they intend to combine the project with NFTs. What will the decentralized model of NFT projects look like? The image below is an example. It reflects: (1) the collection of NFTs minted on the blockchain and held by various users; (2) the intellectual property that contributes to the NFT community, probably with the (3) Digital asset distribution and incentive mechanism; (4) Initiate DAO governance of community intellectual property and DAO treasury; (5) Launch of derivative projects; (6) Host social gatherings and activities.

Web3 Builder's Guide to Decentralization: Principles, Models, Approaches

In this model, the economic decentralization of NFT projects can be achieved in several steps:

First, DAOs can use their initial resources for community engagement (e.g. Twitter, Discord, etc.) and fund social gatherings and other events – thereby increasing the implicit incentives of the community (i.e. its popularity).

Second, these implicit incentives—as well as explicit incentives (such as fungible token rewards, access to NFT sales, etc.)—can be used to incentivize the creation of derivative projects that leverage the community’s intellectual property. Developers will be rewarded for developing such projects, and consumers will be rewarded for using them.

For example, a DAO could hire a third-party developer to use the community’s characters to create a monetization game with in-game tokenomics featuring the community’s native digital assets. In this regard, derivative projects behave similarly to the clients described in earlier open decentralization models, allowing the entire system to reduce its reliance on any single source to bring value to NFT holders, which helps limit the emergence of significant information Asymmetric risk.

Finally, another important tool that NFT projects can use are royalties on secondary sales of NFTs generated by DAOs, which can drive their decentralized economy. These royalties will provide the DAO with a decentralized revenue stream during times when derivative projects may not generate sufficient returns for the system.

Ultimately, the combination of the value that spinoff projects and secondary sales bring to the ecosystem can drive the creation of a healthy decentralized economy for NFT projects.

From the point of view of decentralization of legal power, the key question is again: Is the basic management effort of any third party necessary to drive the success or failure of a Web3 system? Is it possible that severe information asymmetry occurs? The answers to these two questions will depend on many of the same considerations discussed above.

However, in this case, intellectual property in the NFT scene may facilitate rather than hinder the overall decentralization of the community. Why? Because intellectual property is contributed to the DAO from a decentralized source (NFT holders). Furthermore, if the DAO is to control the distribution of tokens, additional minting of NFTs and decentralized intellectual property — and decentralized revenue streams (from royalties or derivative projects) — the system is unlikely to generate serious information asymmetry.

Most NFT projects are still in their early stages, so we haven’t seen many examples of NFT projects deploying decentralized token economics, but we would like to see various mechanisms.

Open Decentralization: How to Decentralize Tokenized Protocols

Tokenized protocols are another emerging Web3 system. In these systems, assets are loaded onto the blockchain, tokenized through smart contract agreements, and then sold or used for other purposes. Types of tokenization protocols include serial NFT minting projects, digital asset marketplaces, and protocols that tokenize real-world assets.

The following open decentralization model reflects:

  • Bring assets on-chain from multiple suppliers through a shared smart contract agreement;
  • Smart contract agreements to tokenize such assets;
  • The sale or use of such tokenized assets through multiple clients;
  • Native digital asset allocation and incentive mechanism;
  • DAO governance launch on community intellectual property and DAO treasury.

Web3 Builder's Guide to Decentralization: Principles, Models, Approaches

In this model, economic decentralization is decentralization through sufficiently diverse inputs (asset providers) and outputs (asset acquirers) and the layers through which tokenized assets flow (blockchain, smart contracts, and clients). realized by .

The protocol’s DAO can also use explicit incentives (fungible token rewards, no commissions/fees, etc.) to:

  • Incentivize asset providers to provide assets to the system;
  • Incentivize clients to make markets in tokenized assets;
  • Incentivize acquirers to acquire or consume such assets.

While the initial development company may initially play a significant role in any of these roles (asset provider, customer operator, asset acquirer), once the system is decentralized, the development company will end up being just a multitude of participations in any given role one of them. This will limit the risk of any significant information asymmetry it creates and reduce reliance on its management efforts. Additionally, DAOs and/or subDAOs can assume many roles.

Over time, explicit incentives can also be adjusted to address potential shortages on the supply or demand side. For example, in a decentralized marketplace, token incentives for sellers (supply side) can be increased to bring more goods to the platform for sale; and token incentives for buyers (demand side) can be increased to encourage more Buy more.

From the point of view of decentralization of legal power, the key question is again: Is the basic management effort of any third party necessary to drive the success or failure of a Web3 system? Is it possible that severe information asymmetry occurs? The answer to both questions depends on whether the DAO is able to manage its incentives to balance supply and demand as effectively as the example above – but more broadly, it’s actually designed to prevent any single asset provider, asset acquirer, or Customers have become so important that the success of the entire system depends on the efforts of any one entity.

Builders of Web3 systems currently face many challenges in launching, managing, and scaling decentralization. But even though regulatory requirements may change, a framework for decentralization as a single design challenge, encompassing technical, economic, and legal aspects, should provide a strong reference guide to help builders use new components of Web3 systems to overcome these challenges.

Failure to consider all three elements will result in us not being able to achieve the future Web3 enabled by blockchain technology and cryptocurrencies. By building well-designed decentralized systems, builders can create the digital infrastructure and energize the decentralized economy that will underpin the Internet for decades to come. It’s time to build that internet and that future.

Posted by:CoinYuppie,Reprinted with attribution to:https://coinyuppie.com/web3-builders-guide-to-decentralization-principles-models-approaches/
Coinyuppie is an open information publishing platform, all information provided is not related to the views and positions of coinyuppie, and does not constitute any investment and financial advice. Users are expected to carefully screen and prevent risks.

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