Understanding decentralization, transparency and custody
The recent collapse of FTX has highlighted the importance of understanding decentralization, transparency and custody.
Blockchain technology was created on the principle of decentralization. Bitcoin itself was a response to the financial crisis of 2008, which highlighted the custody banks have over customer assets. Custody is another word for control.
HUMAN Protocol was founded on the principles of decentralization. The Foundation has demonstrated this by the proposal of a Routing Protocol to facilitate decentralization; and the implementation of this protocol was itself put to a community vote by Wormhole only weeks ago on our Discord server.
The vote passed. The RP will be built. With it, decentralization has a runway at HUMAN Protocol.
But not everything in the industry abides by the principles of decentralization. We want our community to understand what decentralization means in practice, what it is, and what it is not.
There are different forms of decentralization. There is decentralization of decision making power, such as community voting. Then there is decentralization of network infrastructure. They are related and inform each other.
Decentralization of decision making can ensure that the stakeholders of a given ecosystem have a voice in the direction of a project. This creates the ultimate alignment of interests.
Decentralization of network infrastructure is about creating separation in the operating entities within a given network. This reduces the risk of there being a single point of failure. It also implicitly spreads the power that any one entity can have.
Decentralization is really about no one person, board, or company having too much power and control. What is ‘too much’ control? Unilateral decision making without transparency is the problem.
Transparency is an important complement to decentralization. In fact, transparency is itself a form of decentralization, because with true transparency the influence of the observer creates scrutiny and informs decision making.
Custody is another word for control or ownership. When you place your cryptocurrency – which is designed to be maintained on a decentralized blockchain – with a custodial service, like an exchange, you place the asset under the control of a centralized entity. This is the opposite of decentralization. It creates a risk as you now have to trust wholly that entity – if the entity is a bad actor, your funds are exposed.
In the example of an exchange, what you are doing is handing over the control of your private keys to the exchange for them to use your crypto. This is why people say…
Not your keys, not your crypto.
Non-custodial solutions are a form of decentralization because they provide individuals with decision making power over their own assets. That’s why it is often best to store crypto in non-custodial wallets, like Trust Wallet or Metamask. But these are hot wallets, and therefore still connected to the internet, which leaves them slightly exposed.
Cold wallets, like the Ledger, are disconnected from the internet and non-custodial. They are designed for long term storage, and are the safest option. But nothing is completely safe. There is only reduction of risks.
Having custody of your assets comes with responsibility. If you lose your private keys, you lose your crypto.
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The HUMAN Protocol Foundation makes no representation, warranty, or undertaking, express or implied, as to the accuracy, reliability, completeness, or reasonableness of the information contained here. Any assumptions, opinions, and estimations expressed constitute the HUMAN Protocol Foundation’s judgment as of the time of publishing and are subject to change without notice. Any projection contained within the information presented here is based on a number of assumptions, and there can be no guarantee that any projected outcomes will be achieved.