Decentralization is a lot more than a word you can use to signal that you exist in the crypto realm. It represents a set of ideals and beliefs, a conviction towards a way of doing things.
It’s no accident that Bitcoin, which pioneered blockchains as we now know them, also adheres to the ideals of decentralization. In fact, it was the conviction in these ideals that sparked Bitcoin. Each design element of the Bitcoin blockchain is defined by a core belief, such as that:
- Monetary policy is more effective when separated from the control of large entities and left to a set of mathematical rules.
- Everyone should have an equal chance, at least in principle, to contribute to the network.
- Every contribution should be judged by the same standards and rewarded in proportion to its size.
- The majority’s rule should always be upheld.
- Anyone should be free to fork the network with their own set of rules if they don’t want to abide by the majority.
- No one person or entity could take control of the network as long as there are others interested in participating.
As you can see, the crypto ecosystem was founded upon the ideals of decentralization: the belief that planning and decision-making are better distributed than upheld by a central authority. As unique social and even political technologies, blockchains continue to be how these ideas are brought into making a change in the “real” world.
How far decentralization has come
It’d be an understatement to say that a lot has happened in the blockchain world since Bitcoin came along.
The crypto community has achieved truly incredible acts of decentralization. We managed to make the value of Bitcoin surpass the market capitalization of companies such as Visa and Mastercard. We set up decentralized autonomous organizations (DAOs) that manage assets, hire employees, collaborate with each other, and set themselves to achieve major goals, such as purchasing the U.S. Constitution. And through DeFi, we have managed to re-create and improve upon every aspect of Traditional Finance.
Whatever your take is on how or why we got here, the world seems to be increasingly turning into fully decentralized solutions as the next step of information technologies. We are now moving into a world in which the ways we process data are not bounded by centralized technologies.
And yet, being decentralized in 2022 is still tricky
We now have systems and networks that allow us to deploy decentralized solutions, but this is not without its challenges. Some issues immediately become apparent when attempting to build products for the decentralized world. In particular, there three areas to have in mind when doing this are:
As we’ve mentioned, the blockchain ecosystem has evolved to unprecedented levels. Nowadays, decentralized, organic approaches do not allow projects to compete in many of our industry’s categories.
Some of the most “basic” use cases of blockchains (like decentralized computation, representing scarce assets, stablecoin minting, and value storage) are already successfully executed by existing protocols. Incumbent protocols, which enjoy powerful network effects in and out of themselves, can only be challenged by heavily-funded mega initiatives. This happens largely because developing in the blockchain scene is seriously time-consuming and expensive.
Perhaps ironically, competing in the existing scene involves facing incumbent protocols (some of which had many years to grow organically with low pressure and helped advance the industry tremendously) at the same time as more centralized, quickly-iterating entities. This phenomenon makes it difficult for newer projects to be as decentralized as possible from the get-go, as this eliminates their competitive advantages on both fronts. In other words, more centralized approaches are largely favored in the shorter term.
In an ideal world, blockchain-based products would not only be useful and competitive but also fully decentralized. To meet this expectation, protocols and dApps would have to be owned by their community and run permissionlessly on the blockchain.
If succeeding as a startup is already hard, facing the extra burden of adopting a decentralized framework doesn’t make it easier. Aiming for community governance involves its own set of challenges, such as distributing voting power in a fair way, weighting these votes, limiting possibilities to collude, devising systems for proposals, etc.
As mentioned above, building with decentralization as the most immediate priority hampers rapid iteration, the ability to fix mistakes swiftly, and leadership, all essential to achieving a successful product. Waiting for the community to react to and direct the development needs simply does not bring Silicon Valley-level efficiency at the early stages of a project. As such, many projects instead opt for progressive decentralization, which is outlined in a16z’s framework below:
Then, of course, there’s the issue of sticking to regulations that weren’t thought out for decentralized incentives, enforced by jurisdictions that often fail to see the mismatch between their laws and the evolution of times.
Take as an example this quote from our April 14th AMA, in which our CEO, Oliver Gale, addressed the real-world complexities of executing a seemingly permissionless transaction on-chain for a blockchain protocol:
“For example, the SEC is trying to push an amendment to legislation that increases the definition of what Market Making is, from being limited to order book creation, to something that encompasses what AMMs do. In Gibraltar, the legislation is so broad that it covers arrangements or steps to facilitate it (liquidity). That’s such a broad definition that it more or less says “if you take any steps to facilitate or provide liquidity directly, you fall under the Act. You need a license.”
And again, in the spirit of transparency, the Gibraltar regulator has given us the thumbs up to continue doing what we were doing and what we have done in Gibraltar, but they have thus far been unwilling to give us a license as a Virtual Asset Service Provider. And so we are exploring a different corporate structure, i.e. re-domiciling our development studio. It might look like “Why can’t you send a transaction on MetaMask to the address on Uniswap?” But there’s a lot of complexities behind that. And if you want to do things right, sometimes you have to do them slowly.”
Although the mechanisms to execute transactions and create things that are decentralized by nature exist, those building in the space can rarely just pursue them. For example, even Ethereum had to jump through significant regulatory hurdles to conduct an ICO that allowed them to raise funds.
Building in the blockchain space requires significant funding to pay for developers, audits, marketing and more. Whether acquired through private or public means, these funds have to be obtained in a compliant way, which then make the human beings behind the fundraising efforts responsible for their use. Once again, this stacks the odds against decentralization, leaving it to teams to figure out creative ways to stay decentralized… or make the decision not to.
Getting creative to stay decentralized
We’re writing this article (hopefully the first of many like it) precisely because Panther considers itself a protocol willing to go to any length to be and stay decentralized. We are sharing our approach in hopes others derive inspiration from it.
The process of pursuing decentralization involves several factors. One of them is carefully designing your roadmap in hopes no trade-offs can compromise its ultimate goal. The steps in a roadmap have to be an aid in every field that we’ve mentioned above. They have to:
- Be compliance-friendly.
- Retain your competitive edge (making decentralization a strength rather than a weakness).
- Put power in the hands of the community.
Panther has utilized two tools that have allowed it to stay fully decentralized and in the hands of its community. One of them, LaunchDAO, is a private voting primitive that helped the Panther DAO launch the protocol. The other, Reality.eth, is a third-party oracle dApp for user-defined questions.
Let’s quickly look at the first before we dive deeper into the second.
LaunchDAO is the prototype of a generalized, private voting protocol. It can be used in far-reaching applications ranging from on-chain community governance matters to fair democratic elections that privately verify user identities. These use cases require each action in the voting process to be conducted in a fraud-proof manner. Coincidently, this was achieved by LaunchDAO for the first time ever to launch the Panther protocol.
LaunchDAO represented the first time in crypto history a fully verified user base has been able to vote on the future existence or non-existence of a protocol. The Panther protocol was deployed and launched privately and trustlessly by the LaunchDAO, a decision made privately by the Panther protocol KYC’d Private and Public Sale participants.
This act accomplished everything we mentioned above. It lifted any jurisdiction- or actor-specific liability for protocol launches off of the development team, gave Panther a competitive advantage by successfully debuting Panther ZK Reveals, and put the project in the community’s hands.
Reality.eth is an unsung hero of Panther’s decentralized governance.
Built by Social Minds Information Systems, it is a crowd-sourced oracle dApp for user-defined questions. This means, in practical terms, that whenever Panther puts out a DAO proposal, Reality.eth verifies the outcome of the vote. If this outcome is positive, the transactions embedded within the proposal can be executed permissionlessly by anyone via the Zodiac Reality module. Reality.eth achieves this (with the help of the Panther team) through a clever system that crowdsources answers on-chain.
How Reality.eth works
Through a system of bounties and bonded deposits, Reality.eth allows anyone to set up a question and tie funds to its answer. The answer to the question can be binary (yes/no), a timestamp, one option out of a list, or multiple options. An arbitrator, who can be an individual, DAO, or company that will settle disputes for a fee, is appointed. For additional decentralization, the arbitrator can be a decentralized on-chain system such as Kleros.
The question asked can then be answered and verified by anyone who wishes to claim the funds tied to it. In Panther’s case, this question is: “Did the Panther DAO approve proposal X on Snapshot at (ADDRESS)”? Should the question receive an initial answer (which has to be accompanied by a bond), it may either go uncontested (which awards the answerer the askers’ tied funds) or contested (which starts a bidding war, as each new contester has to introduce progressively higher bonds).
Because of the way Reality.eth is game-theoretically modeled, the system resolves after a given number of attempts, after which either the bid war stops or the arbitrator is called in. The owner of the answer selected by the arbitrator receives the entire amount in bonds from all submitted answers, thus permanently settling the question.
After finally settled and closed, a question and its answer remain on the blockchain as verified decentralized information accessible by any smart contract on the same network. Since this information is considered to be true, it can be used by the Zodiac Reality Module — developed by Gnosis — to execute the transactions tied to the proposal.
Like in our example, one of the most exciting uses for Reality.eth’s system is to verify a voting outcome. Thanks to the Zodiac Reality Module, deployment can be automated for changes to be instantly implemented should a given proposal pass.
Panther has been using Reality.eth and the Zodiac Reality Module to implement DAO proposals since Panther DAO Proposal #2. This process makes crafting proposals a lot more difficult since they have to be meticulously created to work as intended from the very first deployment. Panther accepts this trade-off to favor decentralization.
As of writing, Reality.eth can work on the Ethereum Mainnet, Polygon, Binance Smart Chain, among other Layer-1s, as well as the Optimism and Arbitrum rollups.
Benefits of using Reality.eth
Utilizing a “truth source” such as Reality.eth helps ensure that the Panther DAO’s decisions get automatically implemented. This gives users the possibility to have full certainty of what will happen after a voting outcome, as opposed to “traditional” politics. After a traditional election or referendum, there are often still many factors that could influence the exact implementation of the decided changes (including, e.g., politicians not sticking to their word).
Reality.eth also checks all of the three boxes we’ve defined above for Panther:
- It leaves the outcome and therefore governance in the hands of the DAO.
- It is fully compliant, as anyone can see on-chain that the proposals to the Panther DAO are only merged after a vote by $ZKP holders. This leaves the Panther developer team up to creating technology to support the protocol while trusting the community’s best judgment to either implement or reject their suggestions.
- It allows users to verify their trust in the protocol and is therefore decentralized. As opposed to blindly trusting developers, the Panther community and DAO can publicly see who the Panther team’s arbitrator is, raise questions about their qualifications, analyze the code in every proposal, and contest Reality.eth calls if they feel the need.
This system makes Panther more transparent, decentralized, team-agnostic, and validates the governance use case of $ZKP, strengthening the protocol. It also puts Panther among a small group of projects with truly decentralized governance, a rarity in the blockchain scene that will become more prescient as the importance of decentralization gets recognized.
Decentralization as an ethos and a process
In the future, Panther will continue to work towards further decentralizing its procedures. This includes refining its governance by implementing:
- On-chain voting. Panther’s governance is currently conducted 100% off-chain, primarily because of fees.
- Quadratic voting or time-based vote weighting.
- More sophisticated platforms for the community to discuss and author proposals in a structured fashion.
As previously covered in our documentation, the initial setup approved by LaunchDAO involves Panther keeping a multi-sig key to quickly make changes to the protocol in emergency cases. This mechanism can be relinquished as soon as $ZKP staking is widespread enough to guarantee economic security against malicious attacks.
Putting aside specific tactics and approaches, we can finish this article with an ultimate takeaway: Presented with an opportunity to further decentralize in a lean, sustainable manner, Panther will more often than not err on the side of minimizing its team’s influence. Panther is first and foremost a DAO, and as such, our #1 job is to figure out the delicate balance between compliance, decentralization, and competitive edge.
See you next time!
Panther is a decentralized protocol that enables interoperable privacy in DeFi using zero-knowledge proofs.
Users can mint fully-collateralized, composable tokens called zAssets, which can be used to execute private, trusted DeFi transactions across multiple blockchains.
Panther helps investors protect their personal financial data and trading strategies, and provides financial institutions with a clear path to compliantly participate in DeFi.