In the early days of blockchain, full decentralization was deemed to be the North Star: the objective all projects should work to attain. Even today, the word "decentralization" is the subject of heated industry debate.
Yet as we enter the early weeks of what many expect will be a pivotal year for the mainstream adoption of this transformative technology, it has become increasingly clear that, for many, decentralization for decentralization's sake is little more than a utopian ideal that falls apart in the cold light of reality.
If we are to create viable and thriving blockchain businesses that meet the needs of customers, the time has come to strike an appropriate and application-specific balance between decentralization and centralization.
Where on the spectrum that balance sits should be determined by the specifics of each use case, not by a rigid ideology. A digital token vying to be a global reserve asset or new form of money, for instance, necessitates a very different set of characteristics than an entertainment application.
There are enormous benefits to building a business using decentralized technology: resiliency, transparency and accountability chief among them. For certain applications, creating a permission-less interface and a censorship-resistant network would also rank highly. But there are situations where full decentralization is neither feasible nor desirable, and we must be realistic about the trade-offs.
And here is a hard truth that many in Web3 are reluctant to admit: what began as a laudable aspiration to empower the many quickly became a concept hijacked by any project hoping to operate outside regulatory reach. Indeed, many of the projects that advocated loudest for extreme decentralization were not truly decentralized at all.
To be true to the ideals espoused by Web3's earliest advocates, all parts of an application need to be decentralized, up to and including management. In other words, the project would need to be run by a decentralized autonomous organization (DAO) – a governance structure that offers everyone an equal say in the business's future.
DAOs were originally seen as the best and most democratic way to manage Web3 projects while adhering to the core blockchain values of self-sovereignty, transparency and freedom from centralized control.
But questions about the viability of the DAO structure abounded in 2023, with weak engagement levels hampering decision-making and leaving these egalitarian structures vulnerable to attacks by organized groups of raiders.
The realities of building and operating decentralized applications have led some projects to concentrate certain powers or automate processes, sometimes leading to "shadow decentralization," where a project retains centralized elements while billing itself as fully decentralized.
Furthermore, the early assumptions that DAOs would be somewhat insulated from regulatory overreach are proving unrealistic. And as recent events have demonstrated, DAO members in certain jurisdictions and situations may even face individual liability.
While crypto regulation in the United States is still in a state of flux, the global trend is toward more, not less, regulation. In 2023, jurisdictions from the European Union to Hong Kong announced plans to tighten oversight of a sector that has until now been largely unregulated in many countries.
As a result, there are a growing number of situations where some degree of centralization is becoming unavoidable, such as when an application works in a regulated industry and requires a license to function in one or more of its operating jurisdictions.
Thus it is more important than ever for teams to be fast, flexible and ready to adjust to new requirements. While all projects strive to have a maximally engaged community, an organization that has the expertise and accountability in place can more readily respond to a dynamic environment than one that has to seek consensus from a disparate – and often disengaged – group of stakeholders.
For certain applications, there are also ethical advantages to having a permissioned frontend. It allows an organization to operate with demonstrable integrity and ensure it is not being used to channel funding to illegal activities such as money laundering or terrorism.
Then there is the all-important user experience question.
Just as the early Internet was built by technically adept people for technically adept people, the vanguard of crypto applications was not designed with the user journey in mind. The assumption was that if you wanted to play in the blockchain world, you would be willing to put up with complicated interfaces just to be part of the movement.
But most neophyte and casual users are not prepared to navigate the complexities of blockchain environments – from private keys to crypto wallets – when they can find simpler options in Web2. Such complexity is cited as one of the major barriers to mass crypto adoption.
If the goal is to bring the benefits of Web3 to the wider world, thus allowing blockchain to fulfill its potential to democratize finance and beyond, that has to change.
88% of ecommerce customers say a negative experience will turn them off a website forever. That's why to attract users beyond the tech-savvy earliest adopters, Web3 applications must strive for a smooth, straightforward, glitch-free and engaging user journey. And in today's competitive environment, every company that interacts with consumers in virtual space must stay on top of changing customer needs and demands.
This kind of responsiveness and ruthless focus on customer satisfaction requires an ability to process data and feedback, prioritize development and iterate at a pace best achieved with some degree of centralization, particularly in the early days when a business is refining its offering.
It is important to stress that there is no reason a business that centralizes certain processes to achieve regulatory adherence, operating efficiency, integrity, and/or an engaging customer experience must sacrifice transparency or other benefits of using blockchain as its technological backbone.
Moreover, no choice is cast in stone. The point a project chooses on the decentralization spectrum at a given moment can – and likely will – shift over time in response to changes in customer needs, the regulatory landscape, or the product itself.
By staying flexible, avoiding an all-or-nothing approach to decentralization, and giving thoughtful consideration to each component of your project, it is possible to have the best of both worlds: best for your business, your users, and, ultimately, the future of blockchain.
(Peter Argerakis is the CEO of Six Sigma Sports, an application re-imagining the sports betting experience on the Sports, Gaming and Entertainment Network (SGE Network), a sovereign layer-1 blockchain.
