Decentralization has become a buzzword in the world of blockchain and decentralized applications (dApps). However, it's important to recognize that decentralization is not a binary concept but rather exists on a spectrum, with various stages of maturity and decentralization. In this article, we'll explore the four main stages of decentralization and how dApps and decentralized autonomous organizations (DAOs) evolve through these stages. We'll also discuss the current state of DeFi and touch on the challenges and opportunities in achieving true decentralization.
Most dApps begin their journey in the autocratic stage. During this stage, the development team has near-complete control over the project with little to no checks and balances. While this may seem counterintuitive for a decentralized application, the autocratic stage allows for rapid development and iteration. This enables the team to build minimum viable products (MVPs) and strive for product-market fit (PMF).
If a project has a token at this stage, it serves more as a fan club ticket than a governance instrument. Token holders have limited influence over decision-making and primarily serve as supporters of the project. If there is any governance, it is typically minimal and what is often mocked as “decentralization theater.” 👇
As a dApp progresses into the oligarchy stage, decentralization begins to take shape. This stage typically follows funding rounds, and token supply is concentrated among early investors. The oligarchy stage is a delicate balance between maintaining efficiency while gradually introducing decentralization.
Token holders start to gain more power in governance, but it can be challenging to overcome the influence of venture capital firms and early investors. The primary goal of this stage is to lay the groundwork for moving into the mature DAO stage.
The governance of Early Stage 2 looks like this: 👇
During the mature DAO stage, projects evolve into liquid representative democracies. This stage can only be achieved if the token supply is distributed enough to dilute the influence of the oligarchs from stage 2. Token distribution often occurs through early investor exits, airdrops, liquidity mining, and staking rewards. Another path observed is oligarchs delegating their voting power to independent delegates that have increasing degrees of decision-making freedom.
In the mature DAO stage, there is a healthy revenue stream, and service providers are paid by the DAO for their work. Governance is transparent and predictable, with well-defined frameworks in place. Token holders with active roles receive distributions from excess protocol revenue via staking or other protocol roles.
No project has reached the mature DAO stage yet, but some leading DeFi projects, such as MakerDAO and Aave, are on the verge of transitioning from late-stage 2 to stage 3.
Some observers might consider that MakerDAO has already achieved early stage 3, and while we’re more conservative, it’s a statement that can find serious grounds.
In two years, Aave is an example of moving from an early stage 2, to a Late stage 2 governance 👇
