It seems there is a lot of confusion as to what needs to be decentralized. Of late, we discussed companies such as Disney and Deutsche Telekom entering the cryptocurrency space. They are not going to be the last to do so.
Make no mistake, there will come a point where every Fortune 1000 company will be involved. These companies are not going to suddenly decentralize. Nor are they going to immediately disappear. In fact, the majority of them probably have decades before them.
For this reason, we have to be clear where we are applying decentralization and the power it wields.
Decentralized Base Layer
This is vital.
Much of the cryptocurrency discussion, especially post-Ethereum merge, is about centralization of block production. Here is where an immediate issue can arise. If the base layer is centralized, everything built upon it can be compromised. The attacks from regulators, money, and simple greed are all possible.
When looking over the blockchain landscape, we see few that can be called "decentralized". They might promote themselves as such yet, as Ethereum showed, this is not the case. Even with Bitcoin there is a situation where most block production comes from a handful of mining pools. That said, there is enough hash rate spread around we can put that in the decentralized category.
Hive also would fit. Unlike Ethereum, where the staking of block validators is overwhelmingly in a couple wallets, we can see how Hive has a coin distribution of only a few percent in the hands of the largest holder. At the same time, the Delegated Proof-of-Stake consensus mechanism has a rotation schedule on block validation. Ultimately, this means the majority of the consensus witnesses produce the same number of blocks. Another way of phrasing this is nobody has an overwhelming majority of control of the blockchain.
One of the challenges now facing Ethereum, since the base layer is proving to be centralized, is for features such as Decentralized Finance (DeFi). How decentralized can the second layer be if the base is under the control of a couple entities?
Logic tells us there is a problem.
Second Layer Mixture
When we move our discussion up to Layer 2, here is where we see a mixture of centralized and decentralized entities. In reality, we are going to see a majority of centralization at this level.
Here is where companies operate. The structure is the same whether we talk about Disney or Splinterlands. Both are companies that have individual owners, forgoing the idea of decentralization. Decisions are made by only a few people, following a hierarchical structure. Of course, in Splinterlands case, many of the operations are tied to Hive, thus utilizing its decentralized features.
The key is what is the make up of their digital assets. Are those controlled via a centralized system or can they reside outside, tied to a decentralized blockchain? Even with Splinterlands, assets staked on their website reside on their servers. If the server goes down, one is cut off from the assets. Fortunately, Splinterlands uses Hive's account management system meaning the account cannot be closed.
We also have the situation with infrastructure. Through the work of SpkNetwork and DLUX with the Honeycomb technology, we can see how they are building decentralized, layer 2 infrastructure. This effectively moves whatever is built on top of it to layer 3. Here is where layer 2 decentralization will add another level to what exists at Hive's base layer.
Then we have Decentralized Autonomous Organizations (DAOs). These are rare in actual use case but some are popping up. The challenge thus far is that many are trying to apply the concept to something that is not autonomous. Over the next few years, we will likely see innovation in this area where the structure becomes more prevalent.
That said, companies that operate within the cryptocurrency industry do not have to be decentralized. Everything is not going to fall into that category. There are advantages to centralization as long as it is built on the proper base layer.
Again, it is the challenge that Ethereum is now facing.
Decentralized Components
We need to understand some of the components that are required for all of this to be effective. It gets summed up rather well under the moniker of Web 3.0.
To start, account ownership is imperative. If the account can be closed, there is an issue. This leads into the loss of assets since, if the account is controlled, so is the wallet.
Data is another crucial factor. When something is written to Hive, nobody owns what it is. It is open to the public. This is much different as compared to Twitter, where the data is on their servers. People access it only with permission from the company.
Decentralized data means that access can take place through numerous front ends. These can be centralized; in fact are likely to be. However, there are options.
We also need digital assets to be decentralized in their control. At present, we see many assets and tokens in games. The challenge is they are resident there. With the rare exception, close out the game and all assets disappear.
Web 3.0 enables asset to reside in individual wallets. This means that one is able to buy, sell, and trade them. Secondary markets is crucial to the concept. It is why adding a token to a traditional social media application does not make it Web 3.0. The data is still controlled and the account can be shut down.
Ultimately, it comes to the infrastructure that is built. The goal is to decentralize as much of this as possible. This includes servers and where the data is actually housed. If a blockchain has 500 nodes but they all run on Amazon Web Services, then we see how there is little decentralization. The node system is actually very much centralized in terms of where it is housed.
Going back to the Honeycomb system, we see that decentralized layer 2 node systems can further expand the variables involved. Thus, we have a situation where an application built on that could be centralized, yet the data written by the node system will be decentralized. This is tied to Hive through, perhaps, the account management system. Tokens can be developed on the second layer, accessible through the Hive account. If desired, HIVE or HBD can be integrated into the application.
Here we see how multiple layers are being utilized, both with decentralized infrastructure. While there might be varying degrees at the second layer, it is backed up by the base layer. It is a situation whereby the layer 2 could move further towards decentralization over time.
Centralized Companies
Where does a company like Disney fit into all this?
At this moment, that is hard to say. When they get into digital assets, the question is where are they? Will these companies built upon a blockchain that has some degree of decentralization? In the near term, probably not. Even if they do go for a public blockchain, most are likely to opt for Ethereum which is revealing a point of vulnerability. Nevertheless, that is a step in the right direction as compared to simply establishing its own server based system.
If Apple, Amazon, Tesla, and companies like that start to enter the space, we can foresee them establishing systems they control. In the long run, this might hinder their success. As people realize what account and asset ownership means, the idea of having one's holdings exposed is not going to sit well. We already see this taking place with entities such as Coinbase. Not your keys, not your crypto is ringing true. When these companies file for bankruptcy, the asset owners become creditors in the court system. This is not what people signed up for when putting their assets there.
Until people learn the difference, what the major corporations put out will have great appeal. However, if they want to be successful long term, they need to leverage the infrastructure that is being built. Even if they go with a ERC-20, they access the different wallets that are already on the market. It also makes the token compatible with exchanges, both centralized and decentralized.
In the end, that without liquidity hinders value. A centralized coin tied to a corporations server will limit the value. If it is tied to a larger financial system, such as DEX, liquidity pools, and other DeFi applications, then the value increases with utility and liquidity.
Is this something these major corporations will see? Not likely. They operate from a state of perpetual control. For this reason, they want to maintain how their brand is positioned. Here is where the challenge comes into play.
Decentralized systems bring this all into question. The entire nature of intellectual property is going to reach a crossroads. What was relevant for the past 30 years might not be duplicated over the next 20. Things are changing rapidly in this area.
Perhaps, in 5 or 10 years, the idea of brand expansion will come through the spreading of decentralized assets. Even though the control of the brand is lost to a great degree, the reach is much greater since the "community" is pushing it to every corner of the planet.
Hive is already showing this. Splinterlands have players from all over the world, many of then who were on Hive to begin with. As the ecosystem grows, that company can tap into the growth that is taking place. Since the account system is at the base layer, all who have a Hive account are eligible Splinterland players.
Even though the company is centralized, data is written on chain, assets exist in wallets outside the game, and accounts cannot be closed down.
With more infrastructure built, this will keep repeating itself.
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