Decentralized applications (dApps) are often praised for their open-source, permissionless nature, but it is essential to understand that decentralization exists on a spectrum. While the code underlying a protocol might be decentralized, the way users interact with it can vary widely. This article will explore the different layers of interaction with decentralized protocols and the implications for user experience and decentralization.
It is crucial to distinguish between protocols and applications, even though for many users, the experience of using them may seem similar. Protocols consist of smart contracts deployed on a public network, while applications are the interfaces through which users interact with these protocols. A decentralized protocol can have a highly centralized application.
The way users interact with protocols is a critical aspect of decentralization. This article will delve into the three layers of protocol interaction, highlighting their characteristics and implications for user experience.
At Layer 1, there are no websites or wallets—just code linked to a private node. This level of interaction embodies the truest form of decentralization, permissionlessness, and censorship-resilience. However, it is also the least user-friendly and accessible option for the majority of people.
At this layer, users interact directly with the smart contracts of a protocol. Their actions are equally censorship-resilient, permissionless, and decentralized as the protocol itself.
Layer 2 is where wallets come into play. Users begin to lose some of the benefits of decentralization as they opt for convenience over direct interaction with the protocol.
At the lower end of Layer 2, users interact with tools like Etherscan and custom private Remote Procedure Calls (RPCs). Users must trust Etherscan to index the contract and the wallet to relay transactions.
In the mid-range of Layer 2, users utilize local front-ends to interact with protocols. By doing so, they must trust other people's code, reducing their censorship-resilience.
In the upper range of Layer 2, users access public front-ends (like app.aave.com) to interact with protocols. While the code for some platforms, like Aave, is entirely open-source and can be checked for censorship mechanisms, this is not always the case. At this level, users' IP addresses can be collected, matched with government databases, and potentially used to block access to dApps.
When using DeFi legos, users' censorship resilience becomes equal to that of the least censorship-resilient component.
As we move through Layer 2 interactions, we can see a gradual loss of permissionlessness and censorship resilience in exchange for increased convenience.
Layer 3 is where users interact with protocols by proxy, rather than directly. This realm includes custodial services, permissioned platforms, and platforms requiring Know Your Customer (KYC) procedures. At this layer, many of the core benefits of decentralized protocols can be lost.
Users may interact with protocols via custodial services like Celsius, or permissioned platforms that impose restrictions based on factors such as citizenship or investor accreditation. At this level, the decentralized and permissionless aspects of the underlying protocol become largely irrelevant.
At the highest level of Layer 3, CASPs, which are regulated entities, take custody of users' funds, report to governments, charge fees, and can impose restrictions on access. The decentralized protocol feels very distant in this scenario.
In light of the previous article, readers are now aware of the importance of assessing both the protocol itself and the stage of decentralization it is at, as well as their own interaction with the protocol and at what layer they are operating.
Only Stage 4 protocols with low Layer 1 interactions (layer 0”) are truly decentralized, permissionless, and censorship-resistant. All other interactions compromise, to some extent, at least one of these three core values of the blockchain ecosystem ethos.
As blockchain technology matures and regulatory scrutiny increases, more users are operating at Layer 3, and both Layer 2 and Layer 3 interactions are becoming more regulated. Blockchain communities need to remain vigilant and ensure that the adoption of Layer 3 solutions and increased regulatory actions at Layer 2 do not compromise the core ethos of decentralization, permissionlessness, and censorship-resistance that underpins the blockchain ecosystem.
Additionally, any regulator action at Layer 1 should be adamantly and unanimously rejected by the blockchains communities, are they would simply kill any potential benefits of the technology.