What is the true innovation behind crypto and blockchain? We believe the disruption is decentralization. The ability to build practical organizations that work towards a clear business goal, yet are not controlled by any centralized entity. Organizations that are both trustless and permissionless.
While this idea is applicable to many industries, it is primarily applicable to finance. Business goals are generally embodied in the generation of financial value, making the industry of financial services a first necessary target of this disruption. This explains our focus on DeFi.
Practical decentralization dictates a level playing field. It does not mean that everybody is equal, but all players in the ecosystem must have equal access and compete on equal grounds.
Practical decentralization dictates a level playing field - this requires that all players have equal and absolute access to all data and all source code of a dapp. If transparency is not absolute, the parties privy to insider knowledge would have an unfair advantage.
This principle is paramount in the blockchain infrastructure layer. All users must have access to the full source code of validator nodes. They must have full access to all blocks in the chain including all proofs that designate them as valid. Users should also be encouraged to run an audit node and see for themselves that execution of all transactions indeed yields the state presented to them.
All parts of a dapp must be open source. Its entire backend must be run as smart contracts on-chain, with published source that has been verified to compile the bytecode that was deployed. The frontend must be provided to users as a non-minified non-uglified version that they can easily run on their own.
Practical decentralization dictates a level playing field - this implies that any decision that changes the rules of the game and modifies the behavior of the protocol in any way, such as an upgrade of a dapp’s code, must undergo proper community governance.
Dapps are generally expected to have an incentives system revolving around a token. The governance power of a party should be proportional to the party’s holdings of this token. All parties should be allowed to participate in votes and no party can be censored.
Users should have complete and absolute access to all historic votes and resulting governance decisions. Users should also be encouraged to audit the voting process based on immutable chain data and see for themselves that the majority of stake has prevailed.
To allow a DeFi ecosystem to reach its full potential, all participating protocols must see themselves as part of a protocol stack that is freely composable. Composition allows the output of one protocol to be directed into the input of another.
To permit composition, every dapp should be consumable by other dapps. Since all dapps are implemented as smart contracts, these should be designed to be callable from other smart contracts and thus cannot depend on centralized infrastructure not available on-chain.
Patterns of composition are not necessarily predictable. Protocols may be combined in ways that were not intended by their original creators to solve problems that were not originally anticipated.
Dapps are generally expected to have an incentives system revolving around a token. This incentives layer is what allows the actions of independent users of this decentralized system to converge around pre designed goals.
The market forces of all participants that deal in this token constitute an economy. This economy must be carefully designed to remain balanced over time. Since a decentralized system does not allow intervention, sustainability must be a property of the system itself.
An economy that is not sustainable will eventually spiral to its own death. Economies must be made resilient to adverse conditions and must be designed under the assumption that not all players have the system’s best interest at heart.
In the domain of smart contracts, code is law. If a contract’s implementation allows it to be abused in a manner unforeseen by its creator and its users, this abuse is considered valid. Code does not have intent, nor subjective interpretation of its purpose.
Successful DeFi applications often contain significant amounts of user funds in their smart contracts. These funds are inherently at risk, since misunderstanding of the code may allow a third party to extract the funds against their rightful owners’ wishes.
Creators and users must collaborate continuously to minimize this risk. Code should be changed slowly and after thorough community review. Security audits are encouraged, yet their existence does not guarantee protection.
Dapps are generally expected to have an incentive system revolving around a token. Tokens are often distributed to parties during protocol launch to incentivize participation or investment and ensure the launch is successful.
Practical decentralization ideally dictates a level playing field - this implies that no party can be granted special access or favorable terms. Accordingly, private sales or initial closed participation rounds are a breach of this principle and should be avoided.
Team allocations are another sensitive area. While the team building a protocol should generally be compensated for its work, its inherent position as creators will disrupt the level playing field. Accordingly, team allocations should be minimal and external equivalent contributions encouraged.