Federico Ast

Online organizations are becoming a normal setting for a large part of our social and economic interactions. And just like in the offline world, disagreements are now cropping up in these online spaces.&nbsp;



Web3 is no exception: We have recently witnessed disputes in communities such as <a href="https://www.coindesk.com/business/2022/07/06/is-makerdao-becoming-a-company-run-by-politics/">MakerDAO</a>, <a href="https://medium.com/@ClementLesaege/making-sense-of-recent-drama-in-proof-of-humanity-ccf3082eb0fa">Proof of Humanity</a> and <a href="https://decrypt.co/es/124083/defi-llama-drama-resolved-no-token?amp=1">DefiLlama</a>.



Those conflicts were of political nature and involved deep disagreements between different factions within the projects. Members disagreed on matters ranging from resource allocation (how funds and other assets should be assigned), community norms (how members are expected to treat each other) and legal issues (how to manage compliance requirements).



These recent public community governance dramas have put a spotlight on the fact that we are still learning how to govern decentralized organizations. As such conflicts are more likely to become commonplace, decentralized communities need to start experimenting with how to resolve them.



The problems of DAO governance need to be dealt with by people that understand the value of a humanistic, big-picture approach, who realize that there is ultimately nothing new under the sun. If you look all the way back to the days of ancient Athens, philosophers have been trying to understand how to create environments where humans can collaborate effectively and thrive — and DAOs are no different.



<h2>How to agree to disagree</h2>



What do the philosophers of ancient Athenian democracy and the founding fathers of the United States have in common? A big concern about factionalism as the main threat to a working democracy.



When factions win, citizens turn their focus away from the common good and toward the particular interests of their clan or party.



In the book How Democracies Die, Steven Levitsky argues that a key reason for the success of American democracy was the development of a number of informal norms on how disagreements had to be handled and how one was expected to treat political adversaries. A civilized way to agree to disagree.



Efforts should be taken in DAO communities to develop norms of civility, open debate and mutual respect. While this is easier said than done, the way in which a community recruits and educates their new members can play an important role.



<h2>Who’s in charge?</h2>



Many DAO disputes arise from poorly designed governance systems leaving ambiguity on how decisions should be made and who should make them.



Should every member be allowed to vote on every issue, or only experts get the votes? Who counts as a “community member” anyway? Should the DAO work on a 1 token/1 vote system or 1 person/1 vote system?



For example, the failure of Proof of Humanity DAO was attributed to a lack of clear decision rights, according to an <a href="https://drive.google.com/file/d/1l_faHo8WAr-T4MzagCcLyfvIA7xRlUD5/view">ethnographic research paper</a> published by BlockchainGov.



We are already witnessing the rise of constitution-building processes for DAOs. Clarifying the way in which the governance system works (who gets to decide about what and how) will be an important avenue for conflict prevention in the future.



<h2>Bring on the third parties</h2>



After a conflict starts, it’s typically too late to agree on a dispute resolution method —&nbsp;especially in a decentralized organization that owes its existence to a set of rules. DAO governance rules should have an explicitly stated structure for resolving all disputes from the get-go.



DAOs can take an example from the oil and gas or construction industries and make use of a neutral evaluation process: a non-binding mediation or conciliation facilitated by a trusted third party.



Contracts in these industries usually involve long-term commitments between parties over large amounts of money. If a conflict arises (an economic shock unexpectedly sends the price of oil skyrocketing!) parties need a neutral way to resolve the issue while at the same time avoiding any damage to their business relationship.



If the non-binding agreement fails, then the conflict could potentially escalate to a binding instance, a mechanism similar to a “<a href="https://blog.kleros.io/kleros-a-decentralized-supreme-court-for-daos/">Supreme Court of the DAO</a>” which would have the right to make an authoritative decision.



This process should certainly have clear guidelines (how to start the mediation, the type of evidence that would be acceptable), impartial arbitrators, transparency and an enforcement mechanism.



<h2>A forking procedure (when DAOs get divorced)</h2>



Sometimes disagreements between the different factions go so deep that the only option is divorce. When this happens, a number of decisions will have to be made about how to split the right to use the brand and how to divide the treasury and other assets.



Most sovereign states don’t recognize the right to self-determination through secession in their Constitution. But this isn’t <a href="https://en.wikipedia.org/wiki/Secession#Rights_to_secession">without precedent</a>. For example, <a href="https://en.wikipedia.org/wiki/Withdrawal_from_the_European_Union#Procedure">article 50 of the Treaty of the European Union</a> gives the right to withdraw from the EU, which was used by the UK for Brexit. For DAOs, it&#8217;s way easier, as the majority don&#8217;t have a physical territory. If a DAO has a predefined forking procedure from the get go, then this can avoid lots of conflict about the terms for the split (similarly to how prenup agreements can avoid messy divorces).



A DAO constitution should have some guidelines on how to conduct the forking process in case it happens and to give all parties in the conflict clear expectations about the outcome.



<h2>Humans over machines</h2>



Ultimately, putting aside the technical sophistication of blockchains, DAOs are made up of humans who have emotions, passions and fears. Creating good governance systems for DAOs must be more about dealing with the “mental software” of humans rather than the “computer software” of machines.&nbsp;



Topics such as power, inclusion, opportunism and loyalty have been recurrent throughout history. Even if DAOs are novel forms of human organization due to their structure, we can always remember the words of Winston Churchill, “Study history, study history. In history lies all the secrets of statecraft.”



<hr class="wp-block-separator has-alpha-channel-opacity"/>


<div class="wp-block-post-author-biography">Federico Ast graduated in economics and philosophy from the University of Buenos Aires and holds a PhD in management from IAE Business School. He is founder and president at Kleros, a legaltech company using game theory and blockchain technology in arbitration. As a pioneer in the field of decentralized justice, he has lectured in universities such as Stanford, Oxford and Columbia and in international organizations such as the United Nations.</div>


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Made by Humans but Governed by Code?

Bessie Liu

The Arbitrum ARB governance token airdrop is one day away and will mark the beginning of its transition into decentralization.



Prior to its token launch, the Ethereum layer-2 network had been governed by New York startup <a href="https://blockworks.co/tag/offchain-labs" target="_blank" rel="noreferrer noopener">Offchain Labs</a> — the developer behind the protocol. 



Arbitrum is an <a href="https://ethereum.org/en/developers/docs/scaling/optimistic-rollups/" target="_blank" rel="noreferrer noopener">optimistic</a> rollup scaling solution on Ethereum. Scaling solutions are designed to ease congestion and prices of gas fees on the Ethereum network.



Rather than executing a transaction on Ethereum, the transaction is instead sent to Arbitrum, whose throughput capacity is seven to <a href="https://blockworks.co/news/arbitrum-optimism-exceed-ethereum">10 times greater than that of Ethereum</a>.&nbsp;



Following Arbitrum’s <a href="https://blockworks.co/news/arbitrum-upgrades-to-nitro-ahead-of-ethereum-merge">Nitro upgrade</a>, there has been an <a href="https://dune.com/blockworks_research/l2-comparison-dashboard" target="_blank" rel="noreferrer noopener">uptick</a> in transactions on-chain, recently <a href="https://dune.com/queries/1873519/3083010" target="_blank" rel="noreferrer noopener">overtaking Ethereum</a> in daily transactions.



There’s currently $2 billion locked inside Arbitrum-powered protocols compared to Optimism’s $1 billion, per <a href="https://defillama.com/chain/Arbitrum" target="_blank" rel="noreferrer noopener">DeFiLlama</a>. Decentralized derivatives platform GMX and exchange Uniswap command the most value. Ethereum native dapps Aave and Curve have also launched on the network, among others. 



<figure class="wp-block-image size-large"><img decoding="async" loading="lazy" width="1600" height="760" src="https://blockworks-co.imgix.net/wp-content/uploads/2023/03/unnamed-1.png?w=1024&amp;h=1024" alt="" class="wp-image-49814" srcset="https://blockworks-co.imgix.net/wp-content/uploads/2023/03/unnamed-1.png?w=1600 1600w, https://blockworks-co.imgix.net/wp-content/uploads/2023/03/unnamed-1.png?w=300 300w, https://blockworks-co.imgix.net/wp-content/uploads/2023/03/unnamed-1.png?w=1024 1024w, https://blockworks-co.imgix.net/wp-content/uploads/2023/03/unnamed-1.png?w=768 768w, https://blockworks-co.imgix.net/wp-content/uploads/2023/03/unnamed-1.png?w=1536 1536w, https://blockworks-co.imgix.net/wp-content/uploads/2023/03/unnamed-1.png?w=428 428w, https://blockworks-co.imgix.net/wp-content/uploads/2023/03/unnamed-1.png?w=470 470w, https://blockworks-co.imgix.net/wp-content/uploads/2023/03/unnamed-1.png?w=389 389w, https://blockworks-co.imgix.net/wp-content/uploads/2023/03/unnamed-1.png?w=80 80w" sizes="(max-width: 1600px) 100vw, 1600px" /></figure>



Rising usage only amplifies the need for decentralization. According to <a href="https://www.blockworksresearch.com/" target="_blank" rel="noreferrer noopener">Blockworks Research</a>, ARB will allow for decentralized governance over the Arbitrum protocol, similar to Optimism’s OP token. 



ARB holders will vote on all aspects of the protocol including upgrades, inflation adjustments, as well as capital allocations (including grants).&nbsp;



Almost 12% of the total airdrop supply will be distributed to Arbitrum users and a tad over 1% of will be given to <a href="https://docs.google.com/spreadsheets/d/e/2PACX-1vSSAzkIIJqw4WGKCF9gXFUkQojTt6weQTExZYmp3YRIR2TUjir9N8nh8xg7gQ2wuPA8mJKL2neL--to/pubhtml#" target="_blank" rel="noreferrer noopener">DAOs</a> building on top of the network.



<ul>
<li>43% to the Arbitrum DAO treasury overseen by the protocol’s community governance.&nbsp;</li>



<li>27% to the Offchain Labs team and future advisers.</li>



<li>17.5% to Offchain Labs investors.</li>
</ul>



A security council will also be established to make swift decisions when a normal governance process may be too slow.&nbsp;



“The security council, while removing some element of decentralization, is meant as a backstop in case of emergencies,” Blockworks Research said. “Since Arbitrum, and rollups in general, are still in their infancy it&#8217;s not enough to say they are truly 100% secure especially as new upgrades get added.”



Token holders will elect two groups of six security council members (totaling 12) every six months, each who will have private keys to a multsig that will control the protocol’s primary smart contract.



An eligible candidate for the council must be a member of the DAO and receive support from 0.2% of votable tokens. Chosen members will receive a $5,000 stipend in the form of ARB tokens.



<figure class="wp-block-image size-large"><img decoding="async" loading="lazy" width="1600" height="819" src="https://blockworks-co.imgix.net/wp-content/uploads/2023/03/image-6.png?w=1024&amp;h=1024" alt="" class="wp-image-49810" srcset="https://blockworks-co.imgix.net/wp-content/uploads/2023/03/image-6.png?w=1600 1600w, https://blockworks-co.imgix.net/wp-content/uploads/2023/03/image-6.png?w=300 300w, https://blockworks-co.imgix.net/wp-content/uploads/2023/03/image-6.png?w=1024 1024w, https://blockworks-co.imgix.net/wp-content/uploads/2023/03/image-6.png?w=768 768w, https://blockworks-co.imgix.net/wp-content/uploads/2023/03/image-6.png?w=1536 1536w, https://blockworks-co.imgix.net/wp-content/uploads/2023/03/image-6.png?w=428 428w, https://blockworks-co.imgix.net/wp-content/uploads/2023/03/image-6.png?w=470 470w, https://blockworks-co.imgix.net/wp-content/uploads/2023/03/image-6.png?w=389 389w, https://blockworks-co.imgix.net/wp-content/uploads/2023/03/image-6.png?w=80 80w" sizes="(max-width: 1600px) 100vw, 1600px" /></figure>



<h2>How much trust is baked into Arbitrum?</h2>



Main trust <a href="https://l2beat.com/scaling/projects/arbitrum" target="_blank" rel="noreferrer noopener">concerns</a> around Arbitrum are in its state validation and upgradability. Arbitrum did not respond to Blockworks’ request for comment.



State validation refers to the proofs used or how the network decides which transactions (network state) are valid.



“In Arbitrum&#8217;s case, they have fraud proofs enabled, but only by whitelisted validators and used interactive proofs which take many transactions to solve,” Blockworks Research said.



Although enabling fraud proofs is much better than having none at all — as in the case of Arbitrum’s competitor Optimism — it would be more ideal to have permissionless proofs. 



Another risk is the upgradability of Arbiturm’s smart contract, as seen with Jump Crypto’s <a href="https://blockworks.co/news/jump-crypto-wormhole-hack-recovery">counter-exploit of the Wormhole hacker</a> last month. A smart contract is considered to be most secure if it can not be upgraded, which is not the case for both Arbitrum and Optimism.



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Arbitrum Airdrop: What You Need To Know About This Ethereum Layer-2

Sebastian Sinclair

The recent wave of bank closures across the US has highlighted the vulnerability of the traditional banking system, prompting crypto industry experts to advocate for decentralized financial infrastructure as a more secure and reliable alternative.



Cracks across international banking sectors are being papered over by regulators hellbent on preserving the status quo, Blockworks was told.



Rob Alcorn, CEO and co-founder of DeFi credit marketplace Clearpool, argues that while some of the closed banks had significant connections to digital assets, the primary factors contributing to their failures were monetary and prudential policy decisions that impacted liquidity and market structure.



“In the short term, there will be additional headwinds for some crypto market participants to access USD-based banking services,” he said. “But the knock-on effects will continue to have more of an impact on centralized institutions than on decentralized protocols.”



Silicon Valley Bank’s demise has all but <a href="https://abcnews.go.com/Politics/trump-era-rollback-bank-rules-after-silicon-valley/story?id=97852603">reignited the focus</a> on financial institutional reforms that were wound back during the presidency of Donald Trump in 2018 — namely the Dodd-Frank Act.



The act was passed by Congress in 2010 as a response to the severe economic downturn caused by the bank-induced Great Financial Crisis two years earlier.



Part of the act was to classify banks with more than $50 billion in assets as “too big to fail,” making them subject to heightened prudential standards such as stress tests, capital planning, and liquidity requirements.



This provision, in turn, gave the US Federal Reserve greater regulatory power over banks, even those it did not directly supervise.&nbsp;



However, the Dodd-Frank Act faced resistance from the financial industry, which viewed the regulations as excessive and aimed primarily at the largest banks.&nbsp;



As a result, Congress passed a law under the Trump administration that eased some of the Dodd-Frank rules for smaller and mid-tier banks, after years of political pressure.



<h2>Blame games and finger pointing</h2>



Abroad, conditions are also beginning to fracture.



Following a recent sell-off of Credit Suisse stock and credit default swaps, regulators have issued a statement affirming the bank meets the higher capital and liquidity requirements for <a href="https://www.afr.com/chanticleer/pure-panic-at-credit-suisse-is-now-everyone-s-problem-20230316-p5csjy">systemically important banks</a>.&nbsp;



They have also pledged to provide liquidity to the bank if necessary, a move that was largely derided during the 2008 financial crises among politically and financially motivated activists.



Proponents are now <a href="https://www.nytimes.com/2023/03/11/technology/silicon-valley-bank-crypto-investing.html">pointing fingers</a> at digital assets as the catalyst for the failure of Signature Silvergate and Silicon Valley Bank, leading to a <a href="https://blockworks.co/news/uks-natwest-paysafe-distance-from-crypto-as-banks-roil">blame game</a> amongst regulators, crypto enthusiasts and market participants.



Alessio Quaglini, the CEO and co-founder of Hex Trust, told Blockworks the hostility towards crypto is less relevant than the failure of the overall banking system.&nbsp;



“Compared to traditional finance, counterparty risk is far more transparent with decentralized finance and it’s events like these that make investors realize there is an alternative,” he said.



Bitcoin was designed for this exact moment and has performed as intended during times of fiat instability via its decentralized nature, the co-founder added.



Decentralization is a fundamental aspect of crypto finance that provides several key benefits, according to industry experts.



It’s supposed to mean there exists no central authority or single point of control that can manipulate or censor transactions.



In the ideal, decentralization is meant to create a more resilient defense against attacks while making it less vulnerable to corruption. It is often harder to implement in practice, as hacks and exploits targeting multi-sig wallets and price oracles across various protocols in recent years can attest.



Another important aspect of decentralization is its allowance for greater privacy and security.&nbsp;



Since there is no central database of user information or transaction history, it becomes more difficult for malicious actors to gain access to sensitive information, or so the argument goes.



Decentralization also promotes innovation and competition by allowing for a level playing field where anyone can participate and contribute to the development of the system.&nbsp;



<h2>Building the necessary rails</h2>



In order to fully realize the benefits of decentralization, appropriate infrastructure is essential. This includes secure and reliable networks, decentralized storage and computing resources, and user-friendly interfaces that enable people to interact with the system easily and safely.&nbsp;



Setting up appropriate infrastructure is useful because it helps to ensure that the system is secure, efficient, and accessible to everyone, the industry experts said.



It also helps to foster trust and confidence in the system, which is crucial for widespread adoption and acceptance.&nbsp;



Ultimately, building the right infrastructure is key to realizing the full potential of crypto finance and creating a more decentralized, universal and equitable financial system, they said.



Hamilton Keats, CEO, and co-founder of Krayon, also sees the recent banking crisis as a sign that the traditional financial system is weakening.&nbsp;



Keats points to the Federal Reserve&#8217;s decision to raise rates too quickly in an attempt to combat inflation as a key factor contributing to the crisis.



“Yes, SVB’s failure to hedge its duration risk was a catastrophic failure in risk management, but they’re not the only bank at risk, and we’re now seeing rumblings throughout the sector,” he said.



Conversely, blockchain-based payment infrastructure and decentralized monetary systems have been working effectively to build investor confidence, abstracting away from the manual interventions of the existing banking systems and providing risk visibility, Keats added.



“Whilst the effects of this recent crisis are likely to be short-term, we’ll likely see a move towards the crypto asset ecosystem over the longer term, where on-chain transparency brings trust.”



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Banking Sector Stumbles Are Boon For DeFi

The spectrum of decentralization has been a hot topic following a <a href="https://blockworks.co/news/jump-crypto-wormhole-hack-recovery">counter-exploit</a> recently executed by Jump Crypto on the Wormhole hacker who stole 120,000 ETH — around $325 million — in February last year.



After receiving an <a href="https://blog.oasis.app/statement-regarding-the-transactions-from-the-oasis-multisig-on-21st-feb-2023/" target="_blank" rel="noreferrer noopener">order</a> from the High Court of England, Oasis — a privately owned app deployed on top of decentralized finance (DeFi) protocol MakerDAO — carried out a counterattack by adding an “authorized third party” to its multisig. The third party — believed to be Jump — then used it to upgrade Oasis’ proxy contract, ultimately seizing the funds.



Many industry participants raised concerns about this move as an indication of the centralization of DeFi, and whether these upgradable contracts should be used at all.



<h2>Wait, what’s a proxy contract?</h2>



In an interview with Blockworks, Joe Coll, a venture investor at Framework Ventures, said that proxy contracts provide upgradability to a protocol’s set of smart contracts.



“When contracts are immutable — when they&#8217;re non-upgradable, it requires the entirety of the network to fork out the code,” Coll said.



<a href="https://blockworks.co/tag/uniswap" target="_blank" rel="noreferrer noopener">Uniswap</a> is one example of this type of protocol. That’s why Uniswap, over several years, deployed discrete versions of its market-leading decentralized exchange, the most recent being “Uniswap V3.” Previous versions are still operating — just as they always have been since their original deployment — and will continue to do so as long as the Ethereum network is producing blocks.



Had Uniswap instead used proxy contracts, it could instead have retired the older versions.



“When a user sends a transaction through a proxy contract, it will point it to another contract that contains the core logic, almost like a router,” Coll said.



Proxy contracts can be controlled in multiple different ways: It could be upgraded by a single private key, it could also be upgraded through on-chain votes where an entire community would have to use tokens to vote before any changes were made to the contract, or it could be controlled by a multisig, he said.



A multisig — short for multi-signature — is a cryptocurrency wallet with two or more key holders.&nbsp;



In the case of the counter-exploit, the proxy contract was controlled by a 4 of 12 Oasis multisig — a known group of individuals who maintained multiple private keys that collectively enable transaction authorization.



“The nuance here is that a few days before all of this happened, what they described as a white hack group came to [Oasis] and identified a previously ‘vulnerability’ within this multisig proxy contract,” Coll said. “And once that was realized by them, and apparently realized by the court as well, the opportunity for unilateral action by this multisig was actually possible, and that’s what the court appears to have enforced.”



<h2>Does this mark the end of decentralization?</h2>



The short answer to this question is no, though lessons can be learned from this counter-exploit.



“Multisigs exist because [protocols] want to do something fast, and just because it has upgradability doesn’t mean they can do everything,” Coll said.&nbsp;



In this particular situation, Coll notes that it was a “really nuanced combination with a vulnerability that was unknown in the middle of it.”



“Multisigs can be very legitimate and they can maintain decentralization if they’re implemented in the right way,” Coll said.



This sentiment is shared by <a href="https://www.blockworksresearch.com/">Blockworks Research</a> analyst <a href="https://www.blockworksresearch.com/research?author=daniel">Dan Smith</a>, who noted that this particular exploit was a unique situation.&nbsp;&nbsp;&nbsp;



“The real issue here is the use of proxies AND a centralized multisig. It&#8217;s the combination of both things. Proxies play an important role in DeFi and aren&#8217;t going anywhere anytime soon,” Smith said.



As proxy contracts are upgraded by their owners, a centralized multisig owner can remove this one aspect of decentralization.



“The UK gov forced Oasis — a private company [headquartered] in [the] UK — to let this counter-exploit happen,” Smith said. “People are not immune to regulation just because they build on blockchain rails.”



Code, on the other hand, when deployed in an immutable fashion, is much more resistant to interference, whether justified or not.



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Wormhole Counter-exploit Forces Scrutiny of Multisigs in DeFi

Alex Pruden

Web3 adoption is hindered by a lack of privacy.



We don’t always want our online activity to be public, whether when we interact with a social media app or buy a meal, to say nothing of our sensitive financial and medical data.&nbsp;



Imagine a setting on Venmo where everyone can see every purchase — but magnified for all aspects of your digital life.



Dystopian, right?



This goes for businesses too; contracts with suppliers/vendors, capital investments, and even wages would be visible to all, telegraphing intentions and making it much harder to operate and/or compete. For enterprises considering doing business on blockchain-based systems, the transparent reality of an architecture like Ethereum has been a non-starter.



That’s why technologists are keen on <a href="https://www.blockworksresearch.com/glossary#Z" target="_blank" rel="noreferrer noopener">zero-knowledge</a> (ZK) cryptography, which allows sensitive information to remain hidden but usable. With ZK cryptography, individuals control what apps and other users see, whether it’s the content of their transactions or the real identity of someone with a blue checkmark on Twitter, for instance — you always have the control to decide what to share and with whom.&nbsp;



Privacy is essential across a range of applications. Blockchains like <a href="https://blockworks.co/price/zec" target="_blank" rel="noreferrer noopener">ZCash</a> have already been able to use zero-knowledge encryption to make financial transactions private and verifiably legitimate. Now we’re on the cusp of entire applications enabled by ZK that are private by default.



<h2>So what’s holding us back?</h2>



In addition to the lack of privacy, the challenge today facing blockchain-based systems is their ability to scale. We’ve had decentralized applications for years now, but it took decades for the technologies powering the internet to become standardized, let alone efficient enough to scale to the point they are at today.



That said, the pace of innovation in Web3 (and ZK specifically) is accelerating thanks to the infusion of talent and capital into the space.&nbsp;



As blockchains have increasingly moved from <a href="https://blockworks.co/tag/proof-of-work" target="_blank" rel="noreferrer noopener">proof-of-work</a> to <a href="https://blockworks.co/tag/proof-of-stake" target="_blank" rel="noreferrer noopener">proof-of-stake</a>, we are witnessing a transition from energy-inefficient mining and redundant effort to a more efficient crypto-economic system that relies on verification instead of re-execution. Blockchains that leverage zero-knowledge cryptography for privacy require additional players — provers.&nbsp;



For a quick brush-up, to have private applications on a blockchain using ZK, you need a prover to generate a zero-knowledge proof attesting to the validity of a transaction. For example: someone using a ZK-enabled app could log in without having to send or reveal their password/credentials. Instead, what would happen is that they’d generate a proof that they have the correct credentials to log in to the app, the app would be able to verify the proof is valid, and they’d get signed in.



To add a bit of complexity to this picture, the best way to scale ZK-based systems is generally to have proving be an outsourced job performed by a specialized service provider rather than the responsibility of individual users.



As ZK continues to become adopted, it will be essential to make proving a distinct, decentralized layer of the stack, just like mining and validating.



Unfortunately, most ZK blockchain projects today (like Starkware and most zkEVMs under development) rely on a single, centralized prover. By creating a bottleneck at the proving layer, these projects are unable to enable user privacy and sacrifice the permissionless nature of the blockchain they are building on.&nbsp;



By decentralizing proving and making it a marketplace akin to what we see with validators on proof-of-stake blockchains, we reap multiple benefits. For one, it’s crucial for blockchains to be truly permissionless, which is their killer feature. On top of that, a decentralized proving ecosystem helps accelerate the development of specialized and efficient hardware to address the current computational bottlenecks of ZK systems.&nbsp;



By unleashing market forces with decentralized proving, we help make ZK-enabled applications viable and scalable.



<h2>The future of decentralized proving</h2>



I’m encouraged that in addition to the decentralized proving layer we’ve already launched at Aleo, others in the ZK space are also leaning into this concept with projects like =nil;’s Proof Market. I expect that this trend will lead to a proving industry with a number of service providers, similar to what’s happened with cloud computing. Already, over 40,000 provers have entered the market, and the competition is just getting started.



This specialization is already happening on both the hardware and the software levels. We’re currently seeing provers using hardware like FPGAs (field-programmable gate arrays) as well as GPUs, some of which were even previously used for mining on Ethereum. Eventually, the growth of this industry will spur chipmakers to build ASICs (application-specific integrated circuits) tailored specifically for efficient ZK proving.



Collaboration between computing hardware giants and the ZK community is also underway and encouraging the development of this technology. Last year’s <a href="https://www.zprize.io/" target="_blank" rel="noreferrer noopener">ZPrize</a>, for instance, brought together companies like AMD and Samsung alongside a number of leading ZK development teams.



The nature of the competition was similar to that of <a href="https://www.darpa.mil/about-us/timeline/-grand-challenge-for-autonomous-vehicles" target="_blank" rel="noreferrer noopener">DARPA’s Grand Challenge</a>, and participants raced to optimize the software side of ZK proving on various hardware platforms, from GPUs to FPGAs to mobile phones. The competition yielded average improvements across these hardware categories ranging from 2x to 11x! Better yet, all these optimizations are open-source to help accelerate the adoption of ZK and scaffold the growing ecosystem around ZK.



Zero-knowledge cryptography is going to transform the internet as well as the infrastructure and services built on top. I envision a whole new category of cloud services built around ZK, with proving as an example of one of the most important of those. In the coming years, I can’t wait to see the advent of a private yet personalized web experience enabled by zero-knowledge cryptography.



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Like Mining and Validation, Proving Needs To Be Decentralized

Jack Kubinec

<div id="highlights-block_63501c8c54915" class="highlights">
 <ul>
 <li>The app provides biometric protection for wallets and allows users to claim yield in-app</li>
 <li>“Without a legal entity wrapper, there’s going to be a risk of liability in the same way that the Ooki DAO token holders are alleged to be liable,” a crypto lawyer said</li>
 </ul>
 
</div>



The decentralized trading platform ShapeShift is releasing a mobile app connecting chains and assets from across DeFi.



ShapeShift’s app connects DeFi wallets and tokens with a seamless interface. But some fear regulation — rather than technology — could be a thorn in the DAO’s side.



With its app release, ShapeShift is tossing its hat into the <a href="https://cms.blockworks.co/ex-terra-developer-neel-somani-raises-15m-for-cross-chain-rollups/" target="_blank" rel="noreferrer noopener">multichain ring</a> to become DeFi’s go-to protocol.



<blockquote class="wp-block-quote">“Our vision of the DAO is to support all the wallets, all the chains and all the protocols. There&#8217;s not an interface that does that yet,” Willy Ogorzaly, head of decentralization at ShapeShift’s foundation, said.</blockquote>



ShapeShift’s app has a sleek user interface with a Robinhood-like portfolio value graph displayed prominently on the home page. The app provides biometric protection for wallets and allows users to claim staking yield in-app, a feature that is new to ShapeShift, Ogorzaly told Blockworks.



The app code is open source, and the ShapeShift foundation currently only runs back-end node infrastructure, with the goal of completely decentralizing in the future.



Early Bitcoin adopter and ShapeShift co-founder Erik Voorhees announced ShapeShift’s move to decentralize in 2021, <a href="https://cms.blockworks.co/the-investors-guide-to-daos/" target="_blank" rel="noreferrer noopener">writing</a> at the time the protocol would outsource “regulated activity to an immutable decentralized protocol” by having its code integrate decentralized exchanges, <a href="https://cms.blockworks.co/pantera-capital-leads-15m-fundraise-in-dex-protocol-0x/" target="_blank" rel="noreferrer noopener">such as 0x protocol</a>.



Notably, the project uses <a href="https://www.blockworksresearch.com/research/thorchain-valuation-model" target="_blank" rel="noreferrer noopener">Thorchain</a> to allow trades between native bitcoin — not a wrapped variety subject to custodial risks — and other supported chains.



<figure class="wp-block-embed is-type-rich is-provider-twitter wp-block-embed-twitter"><div class="wp-block-embed__wrapper">
<blockquote class="twitter-tweet" data-width="550" data-dnt="true">Crucially, it&#39;s multi-chain. This is not just another ETH-based wallet. It supports: &#8211; native Bitcoin &#8211; <a href="https://twitter.com/cosmos?ref_src=twsrc%5Etfw">@cosmos</a> &#8211; <a href="https://twitter.com/avalancheavax?ref_src=twsrc%5Etfw">@avalancheavax</a> It&#39;s architecture enables further chains to be added. There is no KYC. It is borderless. The front-end is redundant over IPFS.&mdash; Erik Voorhees (@ErikVoorhees) <a href="https://twitter.com/ErikVoorhees/status/1578710480562294785?ref_src=twsrc%5Etfw">October 8, 2022</a></blockquote><script async src="https://platform.twitter.com/widgets.js" charset="utf-8"></script>
</div></figure>



Voorhees is no stranger to the regulatory microscope, and he expressed pride at the principled approach the DAO was taking, including offering services without know your customer (KYC) checks.



“[ShapeShift has] been harassed by a litany of government agencies hell-bent on controlling and surveilling how allegedly free peoples interact economically,” <a href="https://twitter.com/ErikVoorhees/status/1578710491404193793" target="_blank" rel="noreferrer noopener">he tweeted</a> in a thread announcing the new app.



<h3>DAO governance uncertainty</h3>



Shapeshift launched a governance token, FOX, in July 2021 and established a token voting governance model.



But as the crypto world <a href="https://cms.blockworks.co/dao-gains-venture-capital-ally-in-cftc-suit/" target="_blank" rel="noreferrer noopener">awaits</a> a decision in the CFTC’s case against Ooki DAO, some in the space are questioning whether ShapeShift’s decentralization can shield the protocol, or its DAO members, from regulation.



<figure class="wp-block-embed is-type-rich is-provider-twitter wp-block-embed-twitter"><div class="wp-block-embed__wrapper">
<blockquote class="twitter-tweet" data-width="550" data-dnt="true">Not being critical here, just curious. Aren&#39;t you worried about the recent CFTC actions against that DAO that was running a &quot;decentralized&quot; exchange? Seems pretty bold advirtising no KYC after the new slew of enforcement actions Isn&#39;t shapeshift vulnerable to the same?&mdash; Jack Alderson (@_Jack_Alderson) <a href="https://twitter.com/_Jack_Alderson/status/1578746185329696768?ref_src=twsrc%5Etfw">October 8, 2022</a></blockquote><script async src="https://platform.twitter.com/widgets.js" charset="utf-8"></script>
</div></figure>



ShapeShift’s position is the DAO does not engage in regulated activity because it outsources trading to decentralized exchanges (DEXes), and no one will control the DAO once the foundation winds down, so regulation shouldn’t be a concern.



“ShapeShift is a DAO and has no registered entities in any jurisdiction,” chief information security officer Michael Perklin said in a Telegram message.



Added Ogorzaly: “The DAO doesn’t have any legal entity.”&nbsp;



But some legal experts are doubtful of ShapeShift’s position, as US regulators show a willingness to take legal action against <a href="https://cms.blockworks.co/texas-state-securities-board-investigating-ftx-us-sam-bankman-fried/" target="_blank" rel="noreferrer noopener">centralized</a> and <a href="https://cms.blockworks.co/decentralized-or-not-officials-say-tornado-cash-responsible-for-illicit-activity/" target="_blank" rel="noreferrer noopener">decentralized</a> protocols alike.



“There&#8217;s no ability to not register with the CFTC or SEC and take the position that because there&#8217;s no entities, everything is decentralized, that you can engage in those activities without liability,” Mike Selig, a crypto and Web3 lawyer at Willkie Farr &amp; Gallagher, said.



Other crypto lawyers are going to bat for DAOs. Most recently, the venture capital firm Paradigm <a href="https://cms.blockworks.co/dao-gains-venture-capital-ally-in-cftc-suit/" target="_blank" rel="noreferrer noopener">weighed in on the CFTC’s course of action</a>.



In Selig’s eyes, a DAO’s best option is creating legal wrappers that define who is liable for regulation. Otherwise, liability could shift unpredictably outward.



“Without a legal entity wrapper, there’s going to be a risk of liability in the same way that the Ooki DAO token holders are alleged to be liable,” Selig said. “These are low-hanging fruits for regulators.”



Additional reporting by Macauley Peterson.



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ShapeShift DAO Releases Decentralized Mobile App

Ben Strack

<div id="highlights-block_63408f996c97c" class="highlights">
 <ul>
 <li>BNB Chain contacted community validators to stop incident from spreading</li>
 <li>“Either be fully decentralized, or be centralized enough to have responsibility for responding to security incidents,” OpenZeppelin head of solutions architecture says</li>
 </ul>
 
</div>



Following attackers <a href="https://cms.blockworks.co/binance-pauses-trading-of-native-token/" target="_blank" rel="noreferrer noopener">exploiting Binance’s BNB Chain</a> and withdrawing 2 million BNB, the crypto industry is now grappling with questions of decentralization, responses to security incidents and the prevalence of hacks.



Operators and protocols in the space must choose to become fully decentralized or be better prepared to respond to hacks, said Michael Lewellen, head of solutions architecture at blockchain security firm <a href="https://www.openzeppelin.com/" target="_blank" rel="noreferrer noopener">OpenZeppelin</a>.



BNB Chain said <a href="https://www.bnbchain.org/en/blog/bnb-chain-ecosystem-update/" target="_blank" rel="noreferrer noopener">in a statement Friday</a> that the latest exploit affected BSC Token Hub — the native cross-chain bridge between BNB Beacon Chain and BNB Smart Chain.



Blockchain analytics unit <a href="https://blog.chainalysis.com/reports/cross-chain-bridge-hacks-2022/?utm_campaign=twitter&amp;utm_source=OrganicSocial&amp;utm_content=Thread" target="_blank" rel="noreferrer noopener">Chainalysis estimated in August</a> that $2 billion worth of crypto had been stolen across 13 cross-chain bridge hacks. Attacks on bridges accounted for 69% of total funds stolen this year, the company said at the time.



“Decentralized chains are not designed to be stopped, but by contacting community validators one by one, we were able to stop the incident from spreading,” BNB Chain said in a statement Friday.



BNB Smart Chain has 26 active validators and 44 in total, the network stated, adding that it seeks to expand the validators to boost <a href="https://cms.blockworks.co/what-it-takes-to-halt-a-decentralized-blockchain-like-binance/" target="_blank" rel="noreferrer noopener">further decentralization</a>.



Though BNB Chain reported “the vast majority of the funds remain under control,” a spokesperson did not immediately return a request for further comment.&nbsp;



The latest hack is likely to spur operators to address the lack of automated response to security incidents in the crypto space, Lewellen told Blockworks.&nbsp;



Founded in 2015, OpenZeppelin has a platform allowing users to manage smart contract administration, such as access controls, upgrades and pausing. The company safeguards tens of billions of dollars in funds for organizations such as Coinbase and the Ethereum Foundation.



Keep reading for excerpts from Blockworks’ interview with Lewellen following the hack.



Blockworks: What do you make of this latest hack on the BNB Chain?



Lewellen: This is actually kind of a weird one, as this is a bug that was in a pre-compiled smart contract.



With Binance Chain, they were just adding a lot of features into the native protocol to support smart contracts, and that’s where the bug ended up coming in. So I think there needs to be a question of whether these sorts of changes should be in a native protocol. Maybe it should be contained within a smart contract and kept outside of the scope of the protocol because these things are risky.



We don’t know how the bug appeared inside of the protocol or its original source. But where code is — and the level of safety pieces of code have depending on what layer they’re in — need to be better.



These proof-of-authority chains and bridges kind of complicate that. It’s no longer a clear hierarchy. There’s now a lot of different layers happening in parallel that people need to be a lot more conscious of.&nbsp;&nbsp;&nbsp;



Blockworks: How could the response to this hack have been better?



Lewellen: While I think they responded well overall here, there’s a larger question of…was this really the best that could be done if that role was embraced.



I can’t speak to what the Binance Chain validator community does or how they coordinate or practice for these sorts of things…but they’ve obviously practiced it once now.



I’m speaking as someone from the outside, but seeing other DeFi projects respond to this as their client, I think there could be a lot more diligence and embracing the role of someone that has the ability to respond to security incidents.&nbsp;



And if they don’t have the role, they just need to be very up-front with that. Whether there’s a hesitancy to utilize it in some cases and maybe not in others, right now obviously it exists and I think it could be done better in the future if we learn a lot from this. &nbsp;&nbsp;



Blockworks: Can you point to any examples of an effective automated instant response to a hack?



Lewellen: We’re still in the early stages. I think we’re seeing teams that are getting better at detecting things and responding, but I think honestly these hacks have been occurring on bridges that I don’t think have been embracing that same level of due diligence.



I don’t think we’ve seen a good case for that. We know it’s possible, we’ve done the simulations at OpenZeppelin to know it’s feasible, and we’ve built tools to address it. But ironically I think the teams best prepared for that might be the teams that are least susceptible to being hacked in the first place.



The people that are being hacked the most are also the ones that I think are the least prepared to be hacked.



Blockworks: What sorts of tools or practices should be used to quickly defend against hacks?&nbsp;&nbsp;



Lewellen: What [operators] really need is something that gives you immediate notification, or basically something that is watching everything on-chain…analyzing it and then determining, “were any risks exposed here?”



If large amounts of funds get moved, it’s probably fine and part of the day-to-day operations, but if it falls out of the norm…[it’s important to have] immediate notification of that.



If you can go further and detect things that should never occur, such as money moving out of a vault that should be locked or more tokens than what should be in the token supply existing…you know something’s happening. If not getting people immediately on call to respond, maybe even automating some of the ways that you might immediately cut down some of the exit ramps…or getting your validators to be ready to respond and maybe even doing drills with them.



Blockworks: What is the key for operators as they seek to address security risks going forward?&nbsp;



Lewellen: I think it’s going to be becoming a little bit more honest with the role of different operators and protocols and what the administrative powers are.&nbsp;



With the Ethereum blockchain, the way that Binance Chain responded would not have been possible for Ethereum, but Ethereum also creates this expectation that the chain isn’t going to step in and save you.



If you’re going to have that sort of approach where you have a network where people can respond, either embrace it or move away from it. Either be fully decentralized, or be centralized enough to have responsibility for responding to security incidents. Embrace the role fully by trying to be as prepared as possible and telling node operators for your network that this will be their responsibility.



This interview has been edited for clarity and brevity.



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After BNB Chain Hack, Operators Must Face Question of Decentralization

David Canellis

<div id="highlights-block_634087d3458b6" class="highlights">
 <ul>
 <li> BNB Chain operates with far fewer validators than Etheruem or Bitcoin, allowing Binance greater control over the network</li>
 <li>The speed at which participants could pause the network is in significant contrast from more decentralized blockchains</li>
 </ul>
 
</div>



BNB Chain, the branded blockchain deployed by the world’s top crypto exchange, Binance, was halted earlier today in response to a debilitating bridge hack worth some $566 million.



That figure was eventually <a href="https://cms.blockworks.co/binance-pauses-trading-of-native-token/" target="_blank" rel="noreferrer noopener">reduced</a> to just $100 million thanks to quick coordination among BNB Chain’s 26 <a href="http://bnbchain.org/en/staking" target="_blank" rel="noreferrer noopener">validators</a>, 19 of which came together to halt the chain before the hacker(s) could successfully smuggle most of the stolen crypto out of the Binance ecosystem.



Validators <a href="https://www.coindesk.com/markets/2022/10/07/bnb-smart-chain-resumes-operations-after-100m-exploit/" target="_blank" rel="noreferrer noopener">pushed</a> an update hours later and brought the network back online (only 21 BNB Chain validators are ever active at one time, and there&#8217;s 26 currently with potential to participate).



Unlike Bitcoin and Ethereum, which both feature thousands — and even tens of thousands — of network participants all working together to process transactions, BNB Chain strategically decided for a more centralized structure with far fewer individuals in charge.



BNB Chain’s “proof-of-staked authority” echoes many other consensus styles employed by blockchains, such as EOS’ “delegated proof-of-stake.”&nbsp;



In standard proof-of-stake systems, token holders are given more power depending on the value of tokens in their wallets; in Binance’s case, BNB token holders use their balances to elect to trusted third parties.



This awards validators both lucrative revenues associated with keeping the network running smoothly and total effective control over the functionality of the network (although there are penalties for operating out of bounds).



Generally, fewer validators allow for higher throughput: It takes much longer for data to seep through a network consisting of thousands of nodes than it does for two dozen servers to agree on which transactions to approve.



There’s also arguably a far more important benefit of such a smaller set of network validators: It&#8217;s much easier to coordinate between them and thus exert control over the network, as we’ve now seen.



<h3>BNB Chain entity exerted control over Binance blockchain</h3>



BNB Chain was quick to laud its ability to coordinate between its validators and switch off the network, despite some degree of chaos triggered across its DeFi apps, which <a href="https://defillama.com/chain/BSC" target="_blank" rel="noreferrer noopener">currently</a> have $5.45 billion in digital assets in play.



Blockchain engineer Zak Cole, chief technology officer at Web3 trading platform Slingshot Finance, found the speed at which validators banded together to suspend operations concerning.



“It&#8217;s kind of sketchy. I mean, halting a chain should require a huge amount of coordination between disparate validators and ideally, for the sake of censorship prevention, you don&#8217;t really know who the validators are.”



Blockworks has reached out to Binance and many of the 19 validators involved in halting the network to learn more about the process, and will update this piece as we hear back.



Coinbase, whose Cloud division maintains a BNB Chain validator, directed us to a BNB Chain <a href="https://www.bnbchain.org/en/blog/bnb-chain-ecosystem-update/" target="_blank" rel="noreferrer noopener">blog</a> post, which said that it was able to coordinate between network validators by contacting them all individually (“one by one”) and touted their quick consensus despite the elected stewards operating in different time zones.&nbsp;



This suggests a simple group chat wasn’t involved, with the wording of BNB Chain&#8217;s post indicating that each validator was encouraged to halt the chain without input from the others.



“I think it just nods towards centralization, that somebody can send a message to some group and essentially shut down a blockchain. I don&#8217;t know if that meets the definition of a blockchain by my standards,” Cole said.&nbsp;



One could argue that Binance opted for a smaller validator set to make it easier to navigate extreme circumstances such as hacks and other security incidents, however Cole highlighted that ease of coordination is not written into the codebase: Those effects are purely social.



<h3>BNB Chain is cheap, very cheap</h3>



With this in mind, Binance, by extension of BNB Chain, in this case is somewhat more akin to a tech company than a traditional blockchain network — almost like Facebook deciding to take the site down for maintenance.&nbsp;



Cole brought up the Ethereum ecosystem’s lengthy debate over emergency measures following The DAO hack in 2016, in which $60 million in ether was stolen.&nbsp;



That process took weeks of serious decision-making, Cole noted, with Ethereum participants eventually deciding to rollback the chain via a hard fork (not a chain halt), allowing the transactions to be undone and stolen money returned to The DAO investors.



Such a process is a reflection of the number of network participants involved in Ethereum governance when compared to Binance.&nbsp;



“I think the higher the number of separate participants, the better off in terms of decentralization. Such a low validator set [with BNB Chain], I think, is kind of inherently insecure,” Cole said.



So, what would it take to decentralize BNB Chain? Cole suggested allowing anyone to run a validator and participate in consensus, regardless of whether they’re elected, similar to the purely permissionless nature of Ethereum and Bitcoin.



But Cole expressed that BNB Chain boasts a slightly different use case: It’s a centralized chain built to be much cheaper than Ethereum. Anyone can deploy a contract — and thus launch a token — on BNB Chain and begin selling it to degens across hundreds of BNB-powered Uniswap forks.



It’s similarly true that anyone can deploy tokens on Ethereum and sell them on the actual Uniswap. But on BNB Chain, it costs a fraction of a cent versus dollars, making it cheaper by a magnitude of 100 at least.



“People are making choices based on performance, security and decentralization, and they&#8217;re choosing performance over decentralization,” Cole said. “I don&#8217;t think that presents a significant value proposition necessarily.”



Article updated to make distinction between BNB Chain and Binance.



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What It Takes to Halt a ‘Decentralized’ Blockchain Like Binance

<div id="highlights-block_62cd9245db0ef" class="highlights">
 <ul>
 <li>Loss of faith in industry leaders is harming the crypto industry</li>
 <li>Current custodial solutions leave users vulnerable when funds face financial trouble</li>
 </ul>
 
</div>



The crypto industry is troubled by two challenges.



First, the market downturn — a temporary, albeit painful, challenge.



The second is the loss of faith in industry leaders, a much more foundational and lasting challenge.



Both can be solved by a move to DeFi. The result will be a return to the very reason crypto exists: truly independent finance.



Let’s be direct about why custodial solutions are failing. Crypto companies marketed themselves as industry experts and claimed they were experienced investors. They offered well-above market interest rates to entice retail deposits.&nbsp;



The reality is that — just like so-called ‘professional’ stock pickers — not all of these ‘experts’ know how to invest money any better than the average user. In fact, according to the Wall Street Journal, 85% of professional investors <a href="https://www.wsj.com/articles/stock-pickers-are-struggling-to-beat-the-market-11640692983" target="_blank" rel="noreferrer noopener">failed to beat the market</a> average in 2021, up from around 65% the previous year.



For example: Voyager became a publicly traded company in 2019, claiming that “being public creates an environment that furthers trust and transparency while providing investors with an opportunity to invest directly in Voyager stock.”&nbsp;



The problem is that Voyager lacked real transparency. It failed to tell users it had loaned an estimated $650 million in their funds to hedge fund Three Arrows Capital (3AC). When 3AC defaulted on its loan, the user funds that fronted it in the 3AC loan disappeared and Voyager began denying users access to their money.&nbsp;



That’s why it’s critical the entire crypto community remembers why the community exists in the first place: We hated expensive, greedy intermediaries who took investors’ funds but left them holding the bag when things went awry.



Future crypto investors should eliminate these centralized, custodial companies.



That brings us to the future of crypto: DeFi (decentralized finance).



With a DeFi wallet, users — not third parties — maintain control of their funds. There aren’t bank runs because users already have their funds in their possession, either on their hard drive, their computer or their phone.&nbsp;



DeFi is still in its infancy, though, and the majority of currently-available Web3 wallets are confusing, even for advanced users. Users bounce between wallets or DeFi protocols, often unaware of their gaping security flaws. Other investors feel frustrated by the outdated technology and poor user experience.



To gain traction and trust, DeFi-powered Web3 wallets need to have the easy feel of a centralized service. Users would then get the benefits of DeFi — from control over their funds to high interest rates — without the typical DeFi protocol headaches.



Developing effective, usable decentralized tools will not only help our industry endure these custodial nightmares, but also help the crypto community rediscover what inspired the creation of crypto in the first place.&nbsp;



DeFi is the way we can re-instill trust in the technology and welcome in the next bullish crypto spring.



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Decentralization Could Cure Crypto’s Current Ills

Macauley Peterson

<div id="highlights-block_6245df33eb370" class="highlights">
 <ul>
 <li>Infrastructure for developers and Web3 applications today are often too centralized, leading to common failures, experts say</li>
 <li>Ankr plans to move part of its operations into a DAO over time</li>
 </ul>
 
</div>



Web3 infrastructure provider Ankr is disrupting itself. What the team describes as a “shift from platform to protocol” is aimed at placing community-run nodes at the center of its strategy.&nbsp;



That’s a stark contrast to the model pursued by rivals like <a href="https://cms.blockworks.co/?s=infura" target="_blank" rel="noreferrer noopener">Infura</a>, <a href="https://cms.blockworks.co/?s=alchemy" target="_blank" rel="noreferrer noopener">Alchemy</a> and <a href="https://cms.blockworks.co/?s=Blockdaemon" target="_blank" rel="noreferrer noopener">Blockdaemon</a>, according to Josh Neuroth, Ankr’s head of product. Institutions that want to get into the node business — to earn staking rewards for participating in blockchain security and transaction validating — don’t necessarily care much about the principles of decentralization.



But the idea of turning users into owners is integral to the Web3 ethos, and it forms a key part of Neuroth’s answer to the question, “What does mass adoption look like?”



“The analogy I like to use is, this is its own digital economy, and layer-1s are like the town square in the middle of the city,” Neuroth told Blockworks.



<blockquote class="wp-block-quote">“Projects and protocols like Ankr are building all the infrastructure — we’re building the power, the pipes, the water, even the roads that connect all these things together and that enable the economic growth.”</blockquote>



Infrastructure for developers and Web3 applications today remains a relatively centralized point of failure. Much like when Amazon Web Services suffers an outage that impacts your Netflix and Spotify experience, when Infrastructure-as-a-Service (IaaS) provider Infura <a href="https://status.infura.io/history?page=1" target="_blank" rel="noreferrer noopener">goes down</a>, it can significantly impact blockchain performance or the ability to use the popular wallet software Metamask.



“Infrastructure companies in Web2 became the most powerful in the world because, at scale, they are unstoppable,” Neuroth said. “Without this move, we end up in the same space as Web2.”



“It’s a constantly evolving move towards decentralization,” added Greg Gopman, Ankr’s chief marketing and business development officer. “Ankr will not provide the only nodes; there will be a decentralized group of node providers, including other infrastructure companies in the space, providing nodes in this network.”



Gopman said that Alchemy is looking to be acquired by Microsoft. The Ankr team’s plan entails moving parts of the operation into a decentralized autonomous organization (DAO) over time.



Ankr provides staking node infrastructure for multiple blockchains, including the Ethereum <a href="https://ethereum.org/en/upgrades/beacon-chain/" target="_blank" rel="noreferrer noopener">Beacon Chain</a>, which is slated to merge with the Ethereum mainnet this summer. It was the first to offer a version of liquid staked ether, but at $168 million in total value locked (TVL), it’s a distant fifth to market-leader Lido’s $10 billion, according to <a href="https://defillama.com/protocols/liquid%20staking/Ethereum" target="_blank" rel="noreferrer noopener">DeFi Llama</a>.



More recently, Ankr has helped Binance upgrade its BNB Chain, which includes a subnet-like concept dubbed BAS — for BNB Application Sidechains — part of Binance’s efforts to decentralize the BNB chain, according to Neuroth.



“This is being seen as a new phase of scaling in the space,” he said. “We’ve realized that across the space, the path of scaling is going to be these subnets.”



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Ankr Doubles Down on Decentralization of Web3 Infrastructure

Luke Conway

Crypto culture has become increasingly tribalistic over the last several years. Fans of one crypto often take to social media to argue with rival token holders. A common insult used during these debates is to say another crypto is centralized.



A repeated misconception among crypto investors is that blockchains are decentralized by default. But what is decentralization, and how do crypto investors determine if a coin is or isn’t decentralized?&nbsp;



<h3>Quick facts:</h3>



<ul><li>The decentralization of blockchain platforms is a spectrum, with some more decentralized than others.</li><li>The decentralization of proof-of-work blockchains can be measured by the size of their cumulative hash rate and the number of entities it is divided amongst.</li><li>The decentralization of proof-of-stake blockchains can be measured by the percentage of a coins circulating supply that is staked to the network and how many entities that stake is divided amongst.</li><li>Other factors, such as governance and development control, network accessibility and figurehead influence, should be considered when determining the decentralization of a blockchain platform.</li></ul>



<h2>What is decentralization?</h2>



A good or service is decentralized if it is run by a collective of participants using majority rule. In the case of bitcoin, its attributes, such as the total supply of bitcoins, are determined by the majority of its network participants.



Understanding decentralization and its importance is imperative to understanding cryptocurrency in general and why it was created in the first place.



<h2>Why is decentralization important?</h2>



Centralized systems, or systems where one entity has full control, often fall victim to conflicts of interest. These systems also have one single point of failure, making them more susceptible to attacks.



Decentralized systems have no single point of failure and cannot enact changes unless the majority of participating parties agree, significantly decreasing the likelihood of a successful attack and the possibility of corruption.



Outside of the internet, which is partially centralized due to internet service providers, bitcoin is the first real example of a system with no central authority.



<h3>Manipulation of money and inequality</h3>



Bitcoin was born out of the 2008 financial crisis, a time when banks were bailed out and the Federal Reserve used quantitative easing to slow the recession.



Bitcoiners believed the Fed’s strategy was entirely unfair to citizens who had no say whether banks should be given taxpayer money for failed investments. They also questioned whether one entity, the Fed, should have the autonomy to expand or contract the money supply.



Inflation from quantitative easing has drastically lowered the purchasing power of the dollar over time, damaging those living from paycheck to paycheck with stagnant wages. This contributes to inequality, as those who can afford to invest in other assets can compound wealth while those who cannot continue to lose purchasing power.



Bitcoiners also feel the existing monetary systems of the world significantly increase the disenfranchisement of certain populations, particularly those in countries where access to financial products is uncommon or nonexistent.



These products typically require two or more forms of government-issued identification, verifiable addresses, credit and other conditions to which many people do not have access. As a result, they often have no alternative to cash-based economies where theft and violence are prominent.



While some argue that cryptocurrency allows criminals to slip by more easily, others say it can increase financial inclusivity, resulting in a net positive, regardless of criminal activity.



<h3>“Centralized shitcoin,” the ultimate crypto diss&nbsp;</h3>



The idea behind bitcoin was to create a global monetary network, run by and for the people, with no restrictions. Many crypto investors claim that cryptocurrencies with little decentralization are more akin to a random currency minted by a company, and that cryptos that forego decentralization are completely missing the initial point.&nbsp;



For that reason, crypto enthusiasts often prize decentralization and shame coins that show signs of centralization.



<h2>Measuring decentralization</h2>



The decentralization of a crypto network can be hard to measure, especially when comparing networks with different designs. Fortunately, blockchains share enough traits to assess a network’s decentralization, but investors should understand that decentralization is a spectrum, and most popular blockchains are not entirely centralized or decentralized.



Measuring the decentralization of the <a href="https://cms.blockworks.co/proof-of-work-vs-proof-of-stake-whats-the-difference/" target="_blank" rel="noreferrer noopener">two types</a> of blockchains — proof-of-work and proof-of-stake — involves different factors.



<h3>Proof-of-work</h3>



Proof-of-work blockchains, such as Bitcoin, are made up of users and nodes — both non-mining and mining. The decentralization and security of these networks are largely dependent on how high their hash rate is and how many entities the hash rate is distributed among. The hash rate of a proof-of-work blockchain represents the cumulative processing power miners provide the network. The higher the hash rate, the harder it is to disrupt.



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*Statistics are gathered using applicable block explorers and may not be exact. Node counts displayed by explorers do not account for hidden tor nodes. It is not uncommon for miners to use tor nodes, meaning actual node counts could be far higher.



1 TH/s (terahash) = 1000^4 = 1 000 000 000 000 hashes per second&nbsp; 1 PH/s (petahash) = 1000^5 = 1 000 000 000 000 000 hashes per second&nbsp; 1 EH/s (exahash) = 1000^6 = 1 000 000 000 000 000 000 hashes per second



Anyone can set up mining pools on proof-of-work blockchains, and anyone can add hash rate to a pool. This means that the hash rate in pools can be redistributed to other pools at any moment. Still, a higher distribution of hash rate among a larger number of pools is preferred for decentralization.



<h3>Proof-of-stake</h3>



Decentralization of a proof-of-stake blockchain can be measured by the count of stake pools or validators, distribution of the token supply across those validators, and the 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.



Also consider the initial distribution of proof-of-stake tokens in private sales. Proof-of-stake blockchains determine who can add blocks to the chain based on the number of tokens they hold. The sale of tokens to venture capital firms or other inside investors before the public can purchase them can create unfair advantages for these early investors.



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* A validator cap is the limit of coins a validator can have. Some proof-of-stake blockchains use a saturation limit — validators that reach a certain threshold of staked coins begin receiving diminishing returns on their stake. These limits incentivize stakers to delegate to other smaller validators, helping to spread the coin supply across a broader validator set.



** A lock-up period is the time during which tokens cannot be moved after they are staked.



*** Binance combines the proof-of-stake and proof-of-authority consensus mechanisms. This system allows only those who have been approved by Binance to become validators. 



**** Terra has unbonded and bonded nodes. Bonded validators have reached enough tokens to begin earning rewards. Currently, only 130 validators can be bonded at a time on Terra.



<h3>Distribution of token supply across validators</h3>



The spread of the stake across validators can also give insight into a coin’s degree of decentralization.



Binance Coin (BNB): All staked BNB is delegated to the 21 approved validators on the Binance Smart Chain.&nbsp;



Terra (LUNA): All staked LUNA is delegated to the 130 bonded validators on the Terra network.



Solana (SOL): The top 19 validators on Solana’s network control just under 34% of the total stake on the network. Solana’s consensus model requires a supermajority, or greater than 66% of the stake, to reach consensus. 



If 33% of the stake colluded and decided to go offline, they can effectively perform a denial of service attack and shut down the network. While this does not necessarily result in false or lost transactions, it can cause intermittent downtime, which Solana has fallen <a href="https://cms.blockworks.co/what-is-solana-everything-you-need-to-know-about-the-ethereum-rival/" target="_blank" rel="noreferrer noopener">victim</a> to in the past. 



Cardano (ADA): Over 2,200 individual single-pool operators hold 22% of the total stake. One vector of centralization is Binance, which runs 62 pools and holds just under 12.4% of the total stake. The rest is made up of entities running 2 or more stake pools with 3.14% of the total stake or less.



Avalanche (AVAX): 50 nodes control 50% of the staked AVAX.



<h2>Accessibility</h2>



Bitcoin’s initial design was to be open and accessible to anyone. Early bitcoin nodes were run on basic home computers and did not require specialized hardware to mine. This changed when early bitcoin user Laszlo Hanyecz managed to mine bitcoin using a GPU (graphics processing unit), a processor more powerful than typical computer chips.&nbsp;



From that point on, bitcoin mining became a highly competitive market where miners rushed to buy the fastest GPUs to win as many blocks as possible. Eventually, companies formed to develop new chips dedicated to bitcoin mining.



While this bolstered the network’s security by increasing the cumulative hash rate, it lowered network accessibility. Only those with deeper pockets could participate in its infrastructure.



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*The cost to run a miner varies greatly depending on location and the type of energy used. <a href="https://www.asicminervalue.com/" target="_blank" rel="noreferrer noopener">ASIC Miner Value</a> was used to determine the profitability of miners, which uses an average energy cost.



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</script>



Hardware costs are estimates based on each chain's validator hardware requirements.



* The Binance Smart Chain only allows 21 validators at a time that all must be approved by Binance. 



<h2>Governance and development distribution</h2>



Investors seeking more decentralized projects should consider how a blockchain’s governance operates and whether development is controlled by a centralized organization or the community.&nbsp;



Some newer blockchains still rely on centralized development teams to make updates and may decentralize this process over time. Others, like Bitcoin, have broader development communities where proposals for change can be made by anyone.&nbsp;



<h3>Proof-of-work governance and development</h3>



Development for leading proof-of-work blockchains is mostly community-driven. Community members can submit improvement proposals that the community will then debate and implement if agreed upon. Should a majority of node operators agree that the proposal is the right step forward, then they will update their nodes with the new code that reflects the improvements.



There are nonprofit foundations, such as the Ethereum Foundation and Litecoin Foundation, that help support the development of these platforms. While these foundations can deploy money in certain areas, they do not dictate the direction of these platforms.



<h3>Proof-of-stake governance and development </h3>



Proof-of-stake blockchain governance and development are largely driven by founding teams. This is a centralization concern, but many of these networks are still in their infancy and require some sort of guidance to achieve technological goals. 



Validator count and distribution become more important when founding teams still have a large influence on upgrades. Should a founding entity want to enact a new change, the validators of the network still need to accept and download the changes for them to actually be implemented across the network. 



If there are very few validators and if the founding entity controls a large percentage of them, then that founding entity can unilaterally deploy changes at will. The more validators there are and the more they are spread among different entities, the more democratic protocol changes become.



Private sales can also have an effect on governance. If a large percentage of the token supply was sold to select insiders, they can have a large influence on governance and the general direction of a blockchain platform. 



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*On-chain governance refers to voting systems built into smart contracts on the blockchain. Voters use tokens they hold to place votes on changes directly on the blockchain.



<h2>Other Considerations</h2>



The world of crypto is messy and confusing. For this reason, some investors have only a basic understanding of their investments, allowing some coin founders to become more influential to a decentralized protocol than they should be. Even early bitcoin investors give Satoshi Nakamoto a deity-like status even though the pseudonymous person has no control over bitcoin’s direction.



While there is likely no reason for a figurehead to act in anything but the best interest of an ecosystem they helped to create, investors should still be wary of their influence.



Examples of this in today’s crypto market include Vitalik Buterin of Ethereum, Charles Hoskinson of Cardano, Gavin Wood of Polkadot and Anatoly Yakavenko of Solana.



<h2>Frequently asked questions:</h2>



<h3>What is decentralization?</h3>



A good or service is decentralized if it is run by a collective of participants using majority rule. In the case of bitcoin, its attributes, such as the total supply of bitcoins, are determined by the majority of its network participants.



<h3>How do you measure decentralization?</h3>



<h4>Proof-of-work</h4>



The decentralization of a proof-of-work blockchain is measured by the size of its hash rate, how distributed the hash rate is among different entities and how community-driven updates to the protocol are.



<h4>Proof-of-stake</h4>



Decentralization of a proof-of-stake blockchain is measured by the count of stake pools or validators, distribution of the token supply across those validators, and the percentage of token supply that is staked. The level of democracy in a proof-of-stake blockchain’s development and governance is another important consideration.

Measuring Decentralization: Is Your Crypto Decentralized?

Jacquelyn Melinek

<div id="highlights-block_620beb8ed6394" class="highlights">
 <ul>
 <li>BNB, formerly Binance Coin, now stands for “Build and Build” as the blockchain token for the BNB chain</li>
 <li>“Binance doesn’t own the chain, it’s just a contributor in the community and will continue to do so, but the BNB chain is completely running on its own,” Zhao said</li>
 </ul>
 
</div>



Cryptocurrency exchange Binance has rebranded the blockchain powering its platform in a bid to emphasize decentralization.



In the move, Binance’s CEO Changpeng Zhao <a href="https://www.youtube.com/watch?v=bTbsuE60naI" target="_blank" rel="noreferrer noopener">said</a> in a webinar Tuesday that Binance Smart Chain (BSC) is now BNB Chain.



“People always think of Binance Smart Chain, because it carries the Binance word, as something owned by Binance,” Zhao said. “We’ve done a lot of work to decentralize it, and we also realize BNB is beyond Binance. It’s bigger than Binance…BNB is its own living, breathing ecosystem with the BNB Chain.”



<meta charset="utf-8">Meanwhile, the SEC is examining the relationship between Binance’s US arm and two trading firms, Sigma Chain AG and Merit Peak Ltd., that have ties to Zhao, people familiar with the probe <a href="https://www.wsj.com/articles/sec-probes-trading-affiliates-of-crypto-giant-binances-u-s-arm-11644948162?st=oiyo5wi9j7jhzll&amp;reflink=desktopwebshare_permalink" target="_blank" rel="noreferrer noopener">told</a> The Wall Street Journal.



When the exchange&#8217;s blockchain was launched 18 months ago, its creators didn’t consider its Binance branding for what was then just an experiment, according to Samy Karim, who holds the title of BNB Chain coordinator.



“When we started off, we definitely didn’t expect BSC, now BNB chain, to grow to where it is today,” Karim said. “It shows the level of underserved demand there really was, and this type of infrastructure really helped to drive massive new user growth in decentralized applications that wasn’t really happening before.”



BNB, formerly Binance Coin, now stands for “Build and Build” as the blockchain token for the BNB chain.



The chain is a community-driven, decentralized blockchain powered by the token and consists of BNB Beacon Chain and BNB Smart Chain (BSC), which is compatible with the Ethereum Virtual Machine (EVM). As of Tuesday, the total value locked (TVL) in BNB was 25 billion, according to BSCProject <a href="https://bscproject.org/#/" target="_blank" rel="noreferrer noopener">data</a>.&nbsp;



<blockquote class="wp-block-quote">The rebranding is to stress its independence and deemphasize Binance’s role going forward, Zhao said.&nbsp;</blockquote>



“BSC, now BNB, was an experimental product that we initially contributed to and helped with the initial funding, but now it’s community driven, open sourced and decentralized,” Zhao said. “Binance doesn’t own the chain, it’s just a contributor in the community and will continue to do so, but the BNB chain is completely running on its own. It’s not run by us or anyone else,” he added.&nbsp; 



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<hr class="wp-block-separator">

Binance Rebrands Its Blockchain in Overture to Decentralization

<div id="highlights-block_61f34342f4b25" class="highlights">
 <ul>
 <li>Google&#8217;s cloud division has formed a new business unit that will seek to support its new and existing customers developing on the blockchain</li>
 <li>The Digital Asset Team will provide dedicated node hosting for developers through to on-chain governance </li>
 </ul>
 
</div>





Google&#8217;s cloud computing division is hunting down blockchain experts as part of a new business unit aimed at supporting the tech giant&#8217;s existing customers.



The unit, known as the Digital Assets Team, will focus on the retail and healthcare sectors as Google attempts to expand its offerings beyond advertising.



<blockquote class="wp-block-quote">“We’re seeing [interest in the blockchain space] across every industry vertical we interact with — from financial services and capital markets to retail, sports and gaming,” Richard Widmann, Google Cloud&#8217;s head of strategy for digital assets, told Blockworks.</blockquote>



”Digital asset and blockchains technology is already having a profound impact on our customers and their users across nearly every major vertical, and perhaps most prominently in the financial services space,&#8221; he said. 



Decentralization is a major component of the crypto-industry. Decentralized finance, or DeFi, has sprung up in recent years based on the philosophy of cutting out the middleman, including banks and lenders, to transact peer-to-peer via the use of smart contracts. Google is hoping to capitalize on the movement as finance continues to evolve.



”We see the evolution of blockchain technology and decentralized networks today as analogous to the rise of open source and the internet 10-15 years ago,” Widmann said.



The new unit will support customers seeking to build, transact, store value and deploy new products via blockchain-based platforms, said Yolande Piazza, vice president of financial services at Google Cloud in a <a href="https://cloud.google.com/blog/topics/financial-services/google-cloud-launches-dedicated-digital-asset-team" target="_blank" rel="noreferrer noopener">blog post</a> on Thursday.



<blockquote class="wp-block-quote">&#8220;This new team will enable our customers to accelerate their efforts in this emerging space and help underpin the blockchain ecosystems of tomorrow,&#8221; said Piazza.</blockquote>



Specifically, Google Cloud’s Digital Assets Team will provide dedicated node hosting for developers, take part in node validation and on-chain governance and support on-chain governance via participation from Google Cloud executives and senior engineers, per the post.



The team will also help drive co-development and integrations into Google&#8217;s partner ecosystem as well as advancing go-to-market initiatives with its ecosystem partners in the hope that Google Cloud becomes &#8220;the connective tissue between traditional enterprise and blockchain technologies.&#8221;



Several large blockchain and crypto companies utilize Google&#8217;s Cloud Platform including <a href="https://cloud.google.com/blog/topics/public-datasets/working-with-hedera-hashgraph-to-support-the-next-generation-of-distributed-ledger-technology" target="_blank" rel="noreferrer noopener">Hedera</a>, <a href="https://cloud.google.com/blog/products/data-analytics/how-theta-labs-reached-the-outer-limits-of-video-streaming" target="_blank" rel="noreferrer noopener">Theta Labs</a>, and <a href="https://cloud.google.com/blog/topics/startups/scaling-blockchain-and-nfts-with-google-cloud">Dapper Labs</a> which recently signed on in a bid to leverage the tech giant&#8217;s &#8220;performance, reliability and security.&#8221;



This story was updated on Jan. 28, 2022, at 2:25 pm ET to include commentary from Google.



Additional reporting by Casey Wagner



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