Finding the Right Incentives - How Protocols Can Make Decentralization Lucrative

I was invited to participate in this panel by my friends at Staking Rewards. For a number of years now, Staking Rewards has provided me with an opportunity to discuss topics related to decentralization. These topics are often difficult to talk about and at times unpopular. I thank Staking Rewards for their commitment to supporting these important discussions throughout the years.

I feel quite disappointed I'm not able to attend in person this year. However, my hope is that by writing some thoughts down here, I can add to the discussion.

Core Values

To begin, the title itself is quite interesting and layered. Decentralization is supposed to be one of the core values that underlie everything we do in crypto. The first step in the discussion is to remind ourselves of this fact. Next we need to check-in with ourselves to honestly assess our motivations for participating in what can be a crypto revolution.

If we're here to truly help realize a decentralized future, the promise of a future in which power is decentralized may be lucrative enough. It's in this future that we can gain financial freedom, while enabling it for others. We do this by creating an economy and corresponding power structure that's more fair, equitable and inclusive that today's legacy economy and the power structure enabled by it.

If, however, we're here only because crypto, or "web3", is the simply the next market from which to extract disproportionate value from, before moving on to AI, for example, the answer becomes more difficult to compose. Because the usual Silicon Valley, VC-funded playbook is fundamentally at odds with crypto's core value of decentralization.

Why? That playbook's end goal is to maximize the return of its investors. To do so requires growth and limitless growth at that. This then requires capturing market share. Capturing market share requires centralizing, not decentralizating, the distribution of capital, revenue and power.

The Middle Ground

Now let's turn to the middle ground, for the purposes of this conversation, recognizing this is likely the most practical route.

Making decentralization lucrative also requires making centralization less lucrative. To me, having observed the dynamics of power accumulation in the staking economy, firsthand, over the past five+ years, I'm convinced relying on human and now corporate, altruism is a losing proposition. What we need instead are in-protocol incentives and disincentives to encourage decentralization and discourage centralization.

The Pushback

This tends to be an unpopular position. It's important to question the motives of those who push back against it.

The pushback usually take one of two forms. The first is put forth by those with an engineering mindset. The lack of very clear, binary and deterministic solutions often prevents us from taking a first step in the direction of making stake centralization more difficult to achieve.

The "but sybils" argument is one that I most often here in this category. Sure, sybil resistance is hard. However, I don't think this should prevent us from taking steps to limit stake accumulation. If these steps then force a validator operator to begin running multiple validators, this both increases their cost, while exposing their true intentions to the network's community. So while imperfect, I believe steps like this will eventually lead us to more decentralized stake distribution.

The second form of resistance often comes from those who stand to lose to most from having to truly decentralize stake. This resistance is typically more passive, as those resisting want to talk the decentralized talk, however don't walk the walk. So they may either vote down proposals that take steps toward limiting stake accumulation, for example. Or, they may adopt the cover of the engineering-focused argument described above.

It's the second form of resistance that can be most difficult to overcome. That's because many of those resisting already control a large percentage of voting power. As such, getting a vote to pass that limits the power of the already powerful may seem like a fool's errand. However, I would suggest that at least proposing such a vote could have two benefits.

One is that it might actually work, because many of the largest and most centralized entities on staking networks are hesitant to participate in governance processes. The other is that by voting down these types of proposals, again, the true intentions of these entities become clearer.

The Time is Now

To conclude, the time to make decentralization lucrative or attractive is now. The longer we wait the exponentially harder it becomes to affect these changes, given the compounding effects of power in staking networks. Small imperfect steps in the right direction are much less hazardous than doing nothing at all, if we believe that decentralization is one of crypto's core values.