Three modern decentralization drivers
How the diffusion of responsibility and efficiency of blockchain tech drive the market toward more decentralization
As it turns out there are strong, natural economic incentives driving systems and products toward decentralization today. In this short piece, I’ll cover just three: regulatory arbitrage, liability protection, and public governance.
Regulatory arbitrage: the SEC and broker-dealer custody
Regulation, broadly, applies laws and rules to centralized actors in an effort to protect customers, create transparency, and make markets safer and fairer. But when regulation that is geared toward centralized actors meets decentralization-oriented products, a curious effect occurs: those products tend toward more decentralization.
A great example that demonstrates this is today’s SEC’s pronouncement regarding “broker-dealer custody of digital asset securities”. Not only does this guidance suggest that compliance may be much cheaper for “noncustodial” (read: “decentralized”) systems, it goes much further:
[…] a broker-dealer may face challenges in determining that it, or its third-party custodian, maintains custody of digital asset securities. […T]he fact that a broker-dealer (or its third party custodian) maintains the private key [to a digital asset] may not be sufficient evidence by itself that the broker-dealer has exclusive control of the digital asset security […]
In other words, if exclusive custody is a regulatory requirement for broker-dealers, it may be impossible to satisfy the existing rules with digital asset systems. Such circumstances of slow, inflexible frameworks coupled with the exorbitant costs of regulatory uncertainty create strong economic selection for noncustodial systems and, therefore, decentralization.
Liability protection: 3Box and the decentralized cloud
Between the hegemony of social media and the proliferation of Internet-powered devices, we are generating more sensitive user data than ever before. Traditionally, private user data is stored and secured on private company servers. But with the rise of malevolent data hackers one on side, and privacy-minded regulators on the other, storing sensitive user data is evermore a dangerous liability for companies.
As it turns out, a good solution comes from decentralized storage networks like IPFS and StorJ. Not only can users now increase and control the security of their data, they can own and monetize it without requiring the private hardware (and centralization risk) of a monolithic third-party provider.
Decentralization of user data is also why I am extremely excited about CoinFund’s investment in 3Box, and I expect that more and more companies will be removing data custody and security from their list of costs and liabilities in the coming year. Once again, decentralization has created a mechanism for lowering costs and giving the responsibility for data back to the user.
Public governance: the plight of Facebook and other public utilities
When I look at Facebook over the last fifteen years, I am more convinced than ever that we are seeing the dramatic trajectory of private company’s struggle to manage a gargantuan public good. Digital communication technology has become so ubiquitous that it is on the same playing field as water and electricity public utilities. Yet, any private company single-handedly making decisions about mass content distribution that impacts half the planet is going to run into impossible tradeoffs: you can please the Democrats, but then the Republicans rebel.
Other companies, such as YouTube, are happy to take sides in the tradeoff to the detriment of its users and content creators using a set of inconsistent methodologies which can only be described as, well, fascist. YouTube regularly makes unilateral decisions about what content and creator can operate on its platform.
But Facebook’s “Supreme Court” is perhaps the strongest validation for the decentralized governance space that is today embodied in blockchain projects like Aragon Network, MolochDAO, DAOstack, and dxDAO. It’s an inevitable realization (or admission) that the 20th Century’s centralized model of private governance is coming to a close — and doing so for strongly-economic reasons.
As it turns out, the governance of public goods probably belongs in the hands of the users of those goods, not in the hardware and software platforms upon which they are implemented. Up until now, our best technology for public goods has been government. But decentralization technologies such as DAOs, voting systems, dispute resolution systems, on-chain cooperatives, and much more stand as a promising avenue toward effective governance of our modern public utilities.
As private companies increasingly shed the liabilities of governance, they will be looking toward decentralization technologies to make those solutions effective and robust. Even the great monolith that is Facebook sees the economic value in that.
Disclaimer: I touch upon some blockchain regulation matters above but, as always, this post should not be considered legal advice. For that, consult a legal professional.