Deconstructing 'Decentralization': Exploring the Core Claim of Crypto Systems

Abstract

In stating that ether is not a security, the SEC has suggested that the 'decentralization' of a blockchain system may have legal consequences. This paper examines the common ways 'decentralization' is used in blockchain discourse, arguing that it is generally used to suggest that the systems are resilient and lack concentrated power centers. The paper critically examines the claims of 'decentralization,' providing examples of actions by core developers and miners within crypto systems that undermine claims of decentralization. Finally, the paper's core contribution is to examine the consequences of uncritically applying the term 'decentralized' to blockchain systems and making legal judgments based on it. The paper argues that in suggesting that blockchain systems lack sites of centralized power, the term "decentralized" in effect functions as a liability shield for those operating the systems (developers and miners), creating what I call a "Veil of Decentralization" and giving a core benefit of organizational law to participants in these systems without accompanying obligations. Further, misunderstanding the power dynamics within blockchain systems can lead to faulty risk assessments, in that we may view the tokens of these systems as less malleable than they actually are. This errant risk assessment affects direct uses of the tokens as well as any financial products that use them as infrastructure, and may affect our understanding of them as commodities or money.

Keywords: Blockchain, DLT, Cryptocurrency, Crypto, Decentralization, Governance, Corporate Governance, Limited Liability, Tokens, ICOs, Ethereum, Bitcoin