Thread by @DiMoneymindset

#terraluna, The Most Centralized Protocol Out There,

Crashed Last Week Wiping Out $400 Billion Of Crypto MarketCap Along With It.

Why Is Decentralization The Most Important Metric To Evaluate Crypto Projects?

A Beginners Guide to Project Selection Based On Decentralization🧵👇

The traditional financial institutions that prevail in the world are known to be notoriously centralized.

It is the advent of cryptocurrency that ushered in an era of decentralized finance (DeFI).

The underlying technology for this new area of finance is the blockchain.

Many assume blockchains are decentralized by default,

but decentralization is a spectrum,

and some platforms are more decentralized than others.

Let's dig into the decentralization of crypto projects and how it can be assessed. 👇

What is decentralization?

A project is decentral if it is run by a collective of participants using majority rule.

It aims to provide financial services without using centralized entities.

But decentralization isn’t a goal unto itself.

So why is decentralization so important in DeFi?

• Reduced in-transparency and information asymmetry
• No single point of failure
• Reduced risk of manipulation of money
• Facilitates a trustless setting
• Improves data recovery

• Reduced risk of decision power in the hands of large coin-holders or influential leadership
• Increased performance & consistency as network resources scale-up
• Reduces financial exclusion for the unbanked
• Cost Reduction and increased transaction speed

Especially 2 main (problematic) pillars of CeFi (Centralized Finance) can be tackled with DeFI:

#1: CeFi´s Custodial approach:

assets are entrusted to CeFi entities for safekeeping and management

#2: CeFi´s Permissioned nature:

only vetted individuals and organizations can participate in the financial system; user activity is closely tied to identity.

It is obvious, that decentralization is the core of the crypto industry esp. in DeFi

with projects building on various blockchains and distributed ledger technologies.

But why do many underestimate or even ignore the lack of decentralization of crypto projects (The #Luna Case)?

• The trade-off between efficiency and decentralization
• People like charismatic and polarizing personalities who embody the project
• Centralization enables broader access and the social scalability of a solution

When you think about investing in a project it is important to evaluate its degree of decentralization.

How can the degree of decentralization be measured?

Measuring the decentralization of the 2 types of blockchains - PoW & PoS- involves different factors.

PoW: The Nakamoto Coefficient

The Nakamoto Coefficient is the number of entities you need to compromise at least one essential subsystem.

It comprises 6 measurements:

The Nakamoto Coefficient is focusing on PoW protocols.

Therefore it is important to consider additional indicators which focus on PoS.

PoS Indicators:

• Initial Token Distribution —> How are tokens distributed internally or to the community

• Governance & Dev distribution—> how a blockchain’s governance operates and whether development is controlled by a centralized organization or the community

• Count of stake pools or validators —>the higher, the further decentralized the network

• Percentage of token supply that is staked —> The higher the percentage of the token supply that is staked, the harder it is to disrupt the network.

What is the most decentralized project?

The calculation of the Nakamoto Coefficient is only applicable for

PoW and not very easy to gather for crypto beginners.

Hence, it is way easier to look for the 4 PoS-indications

to measure a project's degree of decentralization:

Here we look as an example at the decentralization of #Solana, #Avalanche, #Cardano and #BinanceCoin

A project with a high degree of decentralization is #Cardano having

• a high amount of network distribution with over 3.000 validators
• and only 17% of the token being held by project insiders

Also, #Avalanche and #Solana show varying amounts for decentralization when it comes to their number of validators.

But Keep in mind:

this is only one simplified way toward quantifying decentralization.

The collection of these indicators does not claim to be complete.

There is plenty of room for debate over which indicators for decentralization are essential.

However, those can serve as a good starting point to support your overall project research.

Sources:
explorer-xp.avax.network/validators
solanabeach.io/validators
stakingrewards.com/earn/binance-s…
datastudio.google.com/u/0/reporting/…

TL;DR - Key Indicators To Measure A Crypto Projects Degree Of Decentralisation:

• Initial Token Distribution
• Governance & Dev Distribution
• # of Stake Pools or Validators
• % of Token Supply that is Staked
• Nakamoto Coefficient (PoW)

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https://twitter.com/DiMoneymindset/status/1525517564503281665?s=20&t=ZVAaUz5FBBJBThg4Q2lKyw