The Compliant Arc of Decentralization
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July 5th, 2022

The Decentralization Series: Part Four (Read parts One, Two and Three)

Review Decentralization

Defining blockchain protocol decentralization is difficult, but its consequences are easy to identify and understand. The first post of this series concluded that a protocol is sufficiently decentralized if it permits self-sovereignty, which means that a person or entity could engage with the protocol directly and do so freely without any undue external influence or control. 

The second post stipulated that achieving sufficient decentralization and maintaining it is challenging. However, if a protocol keeps this level of self-sovereignty, it is considered optimally decentralized.

The third post covered how a protocol could attain optimal decentralization by introducing a mental model. Then, two general routes were presented demonstrating how a protocol could forge a path or arc of decentralization. This fourth and final post will cover the last element and augment the mental model to introduce the compliant arc of decentralization.

Protocols from A Regulatory Point of View

To figure out how to apply regulation to a protocol, you must understand that an optimally decentralized protocol is a public utility. Whether a permissionless public blockchain or a decentralized application built on top of one, it is a platform and a public good accessible by anyone.

Imagine a decentralized protocol as the ocean. Nobody controls the body of water. You cannot dictate the ocean's tides, waves, and currents. But, you can control how ports, harbors, ships, and boats use the ocean. 

Image courtesy of MIS
Image courtesy of MIS

Similarly, decentralized protocols are non-jurisdictional open-source public utilities, ubiquitous, and consequently not controlled. Therefore, enforcing regulation on these protocols is equivalent to dictating the body of water that makes up the Pacific Ocean - futile. But, the value derived from these protocols is in how they are used and how that use is regulated - in the same way, we create and control ships and shipping lanes to help drive commerce.

Approaching a protocol in this manner helps one understand how to apply the current tooling of public policy and regulation to protect consumers and investors. In addition, it becomes clear that an activity-based framework informs public policy on using existing regulations and identifying new tooling required to address potential gaps.

Compliance and the Arc of Decentralization

Public policies and regulations are inherently bound to the jurisdictions that produce them. Protocols are not, but using them is an activity bound within a jurisdiction. Linux is a non-jurisdictional open-source operating system available to anyone. Still, a product or service created using Linux is regulated within its jurisdiction of creation or use.

The same thinking applies to protocols, especially concerning their development, deployment, and decentralization. 

Recall the Triangular mental model for a protocol's path to become decentralized. The path is comprised of four steps: 1) the start, called the Control point, 2) the Launch, then 3) Growth, and finally 4) Decentralization. Each step strengthens the protocol's resilience and robustness through decentralization. 

Implicit in that path is the protocol becoming sufficiently decentralized during the Launch step, developing sustainability through Growth, and building an ecosystem into Decentralization, the final step. 

The intent of developing a protocol is to make it a public good. During the Launch, to remain compliant means fulfilling that intent. The Growth step adds utility, making it more valuable to its community. Creating front-ends (website applications) during the Growth step allows users to engage with the protocol, demonstrating how the spectrum from open source communities to compliant regulated businesses can create access and proofs-of-concept by integrating with the protocol, creating commercial value. The final step, Decentralization, is where the protocol sustains itself through a critical mass of compliant products and services. It generates an ecosystem on top of it, reinforcing, growing, and contributing value to the broader economy.

The arc of decentralization becomes compliant when two things are satisfied. First, the protocol is, or will soon become, a public good offering self-sovereignty. Second, the ecosystem developing on top of it provides a sufficient level of policy and regulatory compliance to protect the users of and investors in the goods and services making up that ecosystem.

Applying an activity-based compliance framework to a protocol ensures that the objective of decentralization to create a public good is clear and not a ploy to try and escape regulation. Furthermore, by considering protocols as public utilities, they can also be seen as primitives or composable tools that could give rise to novel and innovative ideas that push the industry forward in a compliant-positive, socially, and commercially valuable direction.

Wrapping Up

Decentralization is a chameleon. Definitions will be different, always fitting the current environment, but ultimately remaining the same animal. Defining, understanding, and achieving decentralization in the context of blockchain protocols, is what this series was all about. 

In this context, decentralization is about creating fault tolerant, attack-, and collusion-resistant protocols. Protocols that are accessible, transparent, robust, and sustainable. Efficiency is not the primary purpose, security is. Security imbues the users with confidence that they can engage with it directly. A decentralized protocol establishes itself as a public utility, a tool that can be used directly or in combination with other tools. The point is that the user - a large corporation or individual - has access to it on their own terms, the point is for the protocol to allow for self-sovereignty, and then it can be considered sufficiently decentralized.

Keeping a protocol sufficiently decentralized is in itself a challenge – once achieved it needs to be sustained. Unlike a switch or line in the sand, a protocol needs to reinforce its own ability to maintain sufficient decentralization through design, operations and community. If that is possible then it has become optimally decentralized

All protocols start from more or less the same point of control. The arc of decentralization was introduced as a mental model where a combination of control, community, and funding determined the path it took to achieve the objective. Still, no matter the path, protocols engage with people who are governed by law. Consequently, understanding protocols as public tools, allows for the application of current laws and regulation to steer the path of this new technology. To ultimately realize the economic and societal value of protocols that follow their compliant arc of decentralization.

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