10Mar 2020

The Race for Decentralisation

by Henrik Andersson

There is currently a race for decentralisation going on in the crypto industry. The reasons are multifold, but at the core is the key value proposition of blockchains: the ability for them to be trustless, permissionless and censorship resistant ultimately hinges on decentralisation.

More specifically, let’s look at decentralisation for two pressing reasons: security and regulation.


Perhaps this is no where as clear as in IOTA. This crypto asset is still up ~42% year to date, despite being a centralised train wreck. In fact it’s mainnet is offline — turned off by their Foundation.

Yes Eric is right, at least about IOTA.

Yes Eric is right, at least about IOTA.

Not only is IOTA up heavily this year but it is also in the top 30 of crypto assets with a market cap of $630M. When we get asked ‘do you invest in the top crypto assets?’, we are not shy about the fact that we avoid most of them.

So in IOTA there is a central party that simply can turn off the network by disabling something called the ‘Coordinator’.

In some smart contract systems, the developers have the potential to upgrade the system. This potentially has very grave security concerns as funds can be stolen when the rules of those contracts change. In DeFi-projects like Compound, Uniswap and Augur, the developers don’t have that upgradability ability — those protocols are decentralised to a point where they are unstoppable. Early on in a project we understand that there could be a need to upgrade things along the way — but those projects should race for decentralisation. It can be a gradual process, but it needs to be a major focus.

Regulatory capture

In my interview with Kain Warwick, the founder of Synthetix it was clear that they are looking to get rid of their foundation in Singapore as soon as possible and move to a decentralised autonomous organisation, a DAO.

A corporation or a foundation is a centralised entity that can be targeted by regulators or lawmakers, it’s a risk for developers, shareholders and ultimately users of a particular protocol. SEC has made clear that protocols need a sufficient level of decentralisation not to be deemed securities. Bitcoin doesn’t have a CEO and its founder chose not to become public for good reasons — it is, according to regulator, sufficiently decentralised.

One of my predictions for 2020 is the proliferation of DAOs. This is a way yo handle governance through crypt tokens. Instead of incorporating a legal entity most of the same things can be done in a decentralised manner through token economics. The latest project to move in this direction is Compound.

Compound announcing the release of the Compound governance token.

Compound announcing the release of the Compound governance token.

They started off and still are a for-profit company with world-class investors as shareholders such as Andreessen Horowitz and Bain Capital. The Compound governance token will be distributed to shareholders on a pro-rata basis. What I believe ultimately will happen is that all value will be captured in their native token. Shareholders will make their shares worthless — because a truly decentralised protocol is worth so much more.

There is a race for decentralisation. That shouldn’t come as a surprise, because what is the point of using blockchains if they are not decentralised? Remember, blockchains are slow and complex compared to centralised services.

Security and Regulatory capture are top of mind when it comes to decentralisation and we expect DAOs to proliferate in this brave new world.

Henrik Andersson

Henrik is the Chief Investment Officer at Apollo Crypto and is the fund manager for the Apollo Crypto Fund. He also acts as the fund advisor for the offshore Apollo Crypto investments funds, the Apollo Crypto Frontier Fund and the Apollo Crypto Market Neutral Fund. Henrik's expertise in traditional financial markets comes from spending a decade on Wall Street as a vice president in institutional equity sales. His exceptional understanding of DeFi comes from co-founding two successful DeFi protocols, mStable and dHEDGE.