What is decentralization in terms of DAO, and how can we measure it?
In the world of cryptocurrency and investment, there are a few key terms that one must become familiar with to be successful. Two of these terms are “decentralization” and “DAO.” In this blog post, we will discuss decentralization in terms of DAOs and how it can be measured.
What is decentralization?
Decentralization is a system with no central authority to run the show. Activities are managed and operated by a group of individuals who work towards a shared mission. The structure aims to put power back in the hands of the people who are a part of the system.
Web3.0 is all about decentralization of ownership. People own the content they produce in contrast with Web2, where your content is managed by the platform where you created it.
On the other hand, decentralized systems like Decentralized Autonomous Organizations(DAOs) are perfect examples of how a group of people can run an organization without any central leadership. They truly embody the principle of “We the people….”
So what are DAOs?
A DAO is a co-owned, blockchain-governed organization that works towards a common goal.
DAOs enable us to collaborate with like-minded people globally without relying on a single leader to handle the finances or operations.
Instead, blockchain-based rules in the blockchain code govern the operations and fund collection of the organization.
They have built-in treasuries that no one can access without the group’s permission. Decisions are made transparently through proposals and voting by the members of the DAO. Hence, the governing process is completely decentralized, ensuring that everyone in the company has a voice and everything happens publicly on-chain.
How to measure decentralization?
It is a common misconception that all blockchains are decentralized. However, Blockchain platform decentralization is a spectrum, with certain systems being more decentralized than others.
A proof-of-work blockchain’s degree of decentralization is determined by the amount of its hash rate, the distribution of that rate across various organizations, and the frequency of community-driven protocol upgrades.
The hash rate of a proof-of-work blockchain indicates the network’s cumulative processing power miners provide. The higher the hash rate, the harder it is to disrupt.
The number of stake pools or validators, the division of token supply among them, and the proportion of the token supply that is staked are all indicators of how decentralized a proof-of-stake blockchain is. Another crucial factor to consider is the degree of decentralization in the growth and governance of a proof-of-stake blockchain.
The higher the percentage of the staked token supply, the harder it is to disrupt the network.
Take into account the initial distribution of proof-of-stake tokens in private sales. Proof-of-stake blockchains select who may add blocks to the chain depending on how many tokens they own. Selling tokens to venture capital companies or other inside investors before they are available to the general public might result in unfair benefits for these early investors.
Distribution of token supply across validators
The stake spread across validators can also give insight into a coin’s degree of decentralization.
- Binance Coin (BNB): 21 approved validators on the Binance hold staked BNB Smart Chain.
- Solana (SOL): The top 19 validators on Solana’s network control just under 34% of the total stake in the network.
- Cardano (ADA): Over 2,200 single-pool operators own 22% of the entire investment. The remainder are entities running two or more stake pools with 3.14% or less of the total stake. Binance, which operates 62 pools and owns slightly under 12.4% of the total stake, is one example of centralization.
- Avalanche (AVAX): 50 nodes control 50% of the AVAX staked.
The initial idea of Bitcoin was for it to be open and available to anybody. Early bitcoin nodes were run on simple home PCs and did not require specialist mining gear. However, competition has resulted in increasingly complicated and specialized bitcoin mining technology.
While raising the cumulative hash rate improved network security, it reduced network accessibility.
Distribution of governance and development
Investors looking for more decentralized initiatives should think about the governance of a blockchain and whether community members or a centralized entity oversee development.
Some more recent blockchains still rely on centralized development teams to issue upgrades, while this procedure could become decentralized in the future. Others, like Bitcoin, have more open development communities where anybody may suggest changes.
This is how investors can use decentralization as one factor when assessing a blockchain’s potential as an investment opportunity.
Stay tuned for more insights into DeFi, blockchain and crypto!
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