By Victor Young, Chief Architect at ANALOG
Web 3.0 - the decentralized internet - promises a future free of intermediaries and centralized authorities.
Crypto aficionados claim that instead of multi-billion dollar companies controlling every aspect of the internet, Web 3.0 will essentially hand over much of that power to the users. Everything will be powered by networks of decentralized computers rather than being managed via third-party servers. It will be a progressive era where cryptocurrencies and non-fungible tokens (NFTs) will take center stage, driven by the continuous advancement of blockchain technology.
While all of the above sounds amazing, I feel that the Web 3.0 realm - at least, for now - isn’t as decentralized as claimed. The reason is what I call the blockchain trilemma.
At present, the majority of the blockchain networks can only offer two out of three benefits (decentralization, scalability, and security) at any given time. To cater to the increasing number of users and billions of dollars locked across different platforms, blockchain developers are focusing more on offering scalability and security, which has led to a gradual decline in decentralization. Besides, Web 3.0 infrastructure, driven by blockchain-based decentralized applications (dApps) and protocols, relies heavily on APIs (Application Programming Interfaces) to communicate with each other.
In this context, who provides these APIs? Obviously, third-party service providers, most of which are highly centralized. As ironic as it sounds, the truth is that blockchain developers are building decentralized applications using centralized platforms.
Main Issues With Web3
It is critical to realize that the problem of a not-so decentralized Web 3.0 stems from existing blockchain technology's inherent design (and limitations). Moreover, as valuations started to surge across tokens, most existing blockchains were unable to support a level playing field for participants - something that goes against the core concept of decentralization.
For example, the Bitcoin network, initially started as an innovative decentralized (permissionless) protocol where participants must solve complicated mathematical problems to validate network transactions and mine for new Bitcoin. In its early days, anyone could easily join the network and validate transactions through mining. However, over time the mathematical problems become increasingly difficult due to network adjustments, requiring more and more resources to mine and validate transactions competitively.
Accordingly, over the years, the initial cost of joining the Bitcoin network as a miner or transaction validator skyrocketed, making it nearly impossible for the majority of users to participate in these activities. More importantly, it created ripe conditions for centralization. Now, many of the most successful miners and mining organizations are backed by venture capital funds and corporations with the financial muscle to invest sizable sums in cutting-edge mining hardware. Now, as an individual seeking to join the Bitcoin network as a miner, you’ll have to shell out a significant upfront investment for the required hardware.
Due to the high entry costs, large-scale mining farms have emerged all around the world. These mining farms are usually backed by a handful of deep-pocketed backers and investors. In this context, the larger the mining farm, the larger their mining rewards, and thus, the greater their dominance over the network.
The result: a handful of big companies are now controlling the majority of the Bitcoin network
The takeaway: any system that relies on the mining / validation combo will naturally become centralized
As cryptocurrencies started gaining mainstream attention, the underlying blockchain networks started facing scalability problems. To solve the problem of scalability while maintaining security, developers had no other option but to compromise on decentralization (the blockchain trilemma strikes again). This, in turn, pushed most chains to start transitioning towards a mechanism that depends on the amount of a network’s native token staked in a node, which is used to validate transactions and mine for cryptocurrency. The benefit is more efficiency, and less energy-intensive operations.
Even Ethereum - the go-to blockchain for DeFi and NFTs - intends to migrate to the new mechanism by the end of the year in a bid to achieve greater scalability, security, and sustainability. Did you notice the big elephant here? Perhaps, the missing attribute of decentralization?
While the new mechanism is definitely more scalable, it isn’t decentralized. In fact, it also leads to centralization. The mechanism is designed to pick entities with a higher number of tokens above those with a lower number of tokens. This is because it is your “stake” that matters the most.
Depending on the cost of the blockchain’s native token, there will be a point where the cost of being a part of the mining operation through one’s stake will become unaffordable, causing at least the smaller stakeholders to drop out eventually. As a result, similar to the centralization conundrum, institutions and corporations will also likely take over a network as entry barriers rise over time with a token’s valuation, thus leading to an inevitable centralization.
What A Truly Decentralized Web3 Means
A truly decentralized Web3 would mean a highly efficient and connected, or interoperable, ecosystem for exchanging information controlled by many stakeholders. Every component of this ecosystem must stick to the core principles of decentralization, which means that everything should be fair, transparent, and inclusive.
There shouldn’t be walled operational silos. Instead, every service provider should adopt open source standards, where everyone can contribute and participate in the development of the service further to benefit the larger population. The decision-making process should be fully democratic, without any special privileges.
Finally, end-users should be able to move freely between different ecosystems, including their personal data and assets. They should have more control over their data and information, who they share it with, and how they share it. A decentralized Web 3.0 would also facilitate a censorship-resistant ecosystem, with ample monetization opportunities for service providers and consumers alike.
That said, I can’t deny that we have made some serious progress in building a truly decentralized Web 3.0. Several promising concepts such as decentralized identification tools, privacy-focused services, highly interoperable and scalable blockchain networks, and many more emerging technologies have started creating the much-needed difference. Together, they are gradually laying the groundwork for our true transition toward Web 3.0.
Victor Young is the Founder and Chief Architect at ANALOG, a layer-0, proof-of-time (PoT)-enabled, trustless omnichain interoperability network using PoT consensus and threshold cryptography to achieve complete decentralization and security. Young is a serial investor with two decades of experience in guiding early-stage startups (web 2.0/web 3.0) into successful companies.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.