Ever since the SEC’s William Hinman introduced the term “sufficiently decentralized” in 2018 in reference to Ethereum, builders up and down the stack have tried to optimize for decentralization as a regulatory compliance strategy, regardless of its desirability or applicability to their project.
In this breezy and engaging conversation from ETHDenver, Jesse and Jake explore other potential ways to navigate regulatory considerations.
Below the video, check out our biggest takeaways from the panel.
Progressive decentralization > Sufficient decentralization (3:05)
Decentralization at the base layer is vital, but it doesn’t follow that all projects must be decentralized, especially in the early stages. Those at the application layer and elsewhere should instead be aiming for progressive decentralization, says Jesse. “Do it step by step at the right time.”
There are two ways to address regulatory challenges. (9:15)
Projects can either comply with regulatory requirements or structure their product or service so that the regulation doesn’t apply. “Sufficient decentralization…is one way to make sure that the securities laws do not apply, by knocking out one of the prongs of the Howey Test,” says Jake. But “it’s not the only prong.” Airdrops, for instance, seek to knock out the prong regarding an investment of money because there’s no investment; in this case, decentralization is moot.
DAO governance can slow you down at the wrong time. (13:10)
A successful startup captures lightning in a bottle; take away the leadership and the lights might just go dark. Yet following a strict sufficient decentralization playbook can force founders and leaders to step back too soon and hand over vital decision-making to a community that’s not yet ready. The result is a slowdown when you need to be building—”the last thing you want to do when you have lightning in a bottle,” says Jesse.
Don’t pretend. (15:50)
Some projects opt for decentralization-lite, nominally giving power to DAOs while actually still running the show. “If you have conversations with regulators, your attempt to pull off decentralization theater will actually give you more trouble in the end than just being honest about what you’re doing,” says Jake.
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