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Op-Ed: When an exchange decentralizes, it takes a diverse community to point the way

Paul L.
Opinion

When George Washington took the leadership role of the newly established United States, many thought he would do the natural thing and hang onto power as long as possible.  However, as his term came to an end, he was insistent on resigning and giving the power not to the next leader, but to the people who would choose the leader.  Democracy had been shown in various forms for millenia, but this moment was a strong reminder in a world of monarchs.  Hearing of this voluntary and peaceful transition of power, King George III of England said “If he does that, he will be the greatest man in the world.”

While many countries now enjoy some level of democracy, most businesses do not.  Even those who have gone public and are technically governed by shareholders are not a distributed democracy.  In most cases, very few people have the majority of the power, making decisions profitable for themselves, and sometimes at the expense of the business and smaller shareholders.  Blockchain has been wonderfully disruptive in many ways, but perhaps none more than its ability to truly decentralize.  Granted, some platforms have no intent to decentralize, and this model has shown to work well (with some exceptions).  However, blockchain’s spirit has always been one of decentralization, and removing those potential weak points in the system.  The removal of a government-tied currency.  The removal of any one person controlling your funds.  And with decentralization, the removal of a centralized body dictating how the platform will operate.  

Imagine for a moment, however, what it takes for a founding team to choose decentralization for their platform, their baby.  Years of hard work and the building of a community are at risk, and if the process goes well then the platform takes on a beautiful life of its own.  But if the decentralization is unsuccessful, all the effort is destroyed.

So how can platforms ensure successful decentralization, and what are the best practices for success?  Let’s dig into these to see what makes decentralization a true community-led organization.

Diversity:  Decentralization’s Biggest Ally 

Consider a company that is going public.  Though not always the case, with many companies the founders/owners are either bought out or given a large number of shares, and any VC’s or other investors end up grabbing the vast majority.  For the “average” shareholder, who may have a handful of shares, the voting power is essentially nothing.  Employees who have invested years of work and have a small group of shares do not have the same interests or goals as heavy investors.  The direction of the company quickly goes to maximizing profits, usually focused on the next quarter.  For the average shareholder, who might want to hold shares for decades and see the company thrive, they are out of luck.

With blockchain decentralization this same scenario is entirely possible.  When a platform offers a governance token, there could be major token holders who choose to stake and govern toward short term growth and token value.  However, the tokenomics of a platform have a lot to say about this, and long-view tokenomics use release strategies that help to ensure more benefit if long term growth is emphasized, and the token sales (along with an already strong community) help encourage everyone to participate in acquiring governance tokens.  This is critical from a strong governance standpoint, and also from a validator standpoint when PoS is used for consensus.  More diversity means fewer risks of manipulation, of takeover, and of harming the long term benefit of the platform.

This means that for a given platform, all of its members need to participate wherever possible.  Exchanges, for example, can attract institutional investors, but the more casual investors need to absolutely participate in governance to make their voices heard.  While a single investor with a small number of tokens may not have a large voice, the governance platforms for DAO’s are much more effective at giving everyone a voice for proposals and votes alike, which allows many people with a common interest to work together.

Best Practices

Setting a platform up for decentralized success starts with tokenomics and ensuring the community is well represented.  However, the community needs to know how best to support the platform using their governance.  This is where the founding team can have a massive impact.  dYdX Foundation is a good example of this, as they have created two major milestones that will go a long way toward a healthy community, both as it matures as well as years in the future.

The first is the creation of the foundation itself.  A key goal of the foundation is to guide the decentralization of the dYdX Exchange, and to ensure the process is both smooth and effective.  It has key figures with the expertise and wisdom to set the timing, initiate each step, make corrections when necessary, and communicate progress with the community.  This type of transition team would be beneficial for many decentralizing platforms.  Second, the foundation has set up a comprehensive guide for the decentralized community, which includes both validators and delegators.  There are best practices for each, key behaviors and actions that the community must be on the watch for, and what steps should be taken to root out bad actors.  The best practices are logical and it is obvious that they are written for long term growth in mind.  This type of document—almost a constitution of sorts—can provide strong guidance that the community can own, grow, and use to flourish.

Looking Ahead

Decentralization is a powerful statement for any platform, and is a true testament to the founding team’s confidence in their platform and the community around it.  Those strong enough to pursue it should ensure the process is done right.  This means creating tokenization to create a diverse group of token holders, providing wise guidance for how the governance should work, and considering a transition team to help guide the process.  Successful decentralization shows that a true democracy of those committed to long term growth is an incredibly powerful model to follow.

Disclaimer

This is an op-ed article (opposite the editorial page), which means it is an opinion piece written by the author and is intended to provoke thought and discussion. The views expressed in this content are those of the author and do not necessarily reflect the opinions or beliefs of Finbold. Readers are encouraged to form their own opinions and to critically evaluate the arguments presented in the Op-Ed stories.

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