Forbes: Exposing the Myth of Decentralization, a Brave New World?
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Forbes: Exposing the Myth of Decentralization, a Brave New World?
The vision of decentralization is exciting, but the path to practice is fraught with challenges.
Navigating Web3 tides with focused insightsBy Nina Bambysheva and Maria Gracia Santillana Linares, Forbes Staff
Translated by Luffy, Foresight News
On November 2, 2023, holders of a cryptocurrency called Aragon (ANT) were told that their ANT tokens would be redeemed—whether they liked it or not. These tokens were issued by the Aragon Association, a nonprofit entity headquartered in Zug, Switzerland, whose software helps run 7,500 decentralized autonomous organizations (DAOs) managing a staggering $25 billion in crypto assets. Aragon also created its own DAO with the goal of establishing a court system to resolve disputes in the digital world, where ANT holders could serve as jurors—an ambitious but somewhat impractical vision.
The concept caught the attention of crypto-friendly venture capitalist Tim Draper, whose firm Draper Associates bought $1 million worth of ANT tokens in February 2020 before cashing out. At the time, Draper tweeted that this “new form of governance from Aragon” was “very exciting.”
Perhaps it truly was—but ANT holders wouldn’t get to participate. They were pushed aside when Aragon Association, a standard-bearer for decentralized finance, did something very centralized: unilaterally taking control of its assets while shutting out shareholder activists. In early May, a group including hedge fund Arca Investments sought to close the gap between Aragon’s roughly $200 million in assets and the $123 million market cap of ANT, then trading slightly above $3 per token. Arca did not respond to requests for comment.
Fearing investors might eventually control over 50% of votes, Aragon Association offered a “take-it-or-leave-it” buyout at 0.0025376 ETH (about $5.76), giving holders 12 months (until this November) to cash out. The deal would funnel at least $11 million—and possibly much more—into a new nonprofit successor entity formed by Aragon. Aragon Association did not respond to requests for comment.
But the story didn’t end there. Disgruntled ANT holders managed to pull $300,000 from the DAO and used it to hire a law firm to challenge Aragon’s decision.
This all sounds like the peak of Wall Street corporate raider culture in the 1980s—and indeed, it is. The Aragon saga illustrates how financial and governance decentralization—where decisions are made by a broad base of individuals rather than a few large organizations—might just be a utopian daydream.
“If you want to attract new investors in crypto and gain legitimacy, decentralization is what you have to do,” says Camila Russo, founder of DeFi publication The Defiant. Most crypto businesses simply mimic existing traditional finance products and dress them up with glossy high-tech narratives.
Founded in 2016, the Aragon Association aimed, according to its white paper, to become a “token-managed digital jurisdiction.” Its purpose was to create a “decentralized court” to manage user conflicts beyond the scope of programmable smart contracts. Clients using Aragon’s management software include dominant crypto staking service Lido and metaverse provider Decentraland.
In May 2017, the association raised $25 million by selling ANT tokens, followed by a manifesto declaring it would build free, open-source technology to enable DAO management as part of its “fight for freedom.” But it wasn’t until January 2023 that the Aragon DAO launched, intended to serve as the organization’s governing body and custodian of funds—including proceeds from the ANT sale, which remained under the association’s control.
An insider familiar with the organization’s internal operations said the plan for the year was to gradually transfer assets to the DAO. “There was pressure both internally and externally: being a DAO building technology for other DAOs.”
Ironically, a provider of voting technology for decentralized organizations discovered that full decentralization isn’t necessarily efficient. “We’re deeply focused on this path toward decentralization,” says Anthony Leutenegger, CEO of Aragon X, “but decentralization is a means to an end, not the end itself.”
Leutenegger says Aragon X will restructure into a traditional Swiss nonprofit company in November, when the ANT redemption period ends. He notes his team is not part of the Aragon Association board and cannot address the legality of dissolving the DAO.
The rationale for dissolving the Aragon Association stems from Swiss legal requirements. In a blog post on May 9, the association described activist investors as a “coordinated group” with “evidence suggesting their involvement aims to extract value from Aragon for economic profit. The Aragon treasury’s clear mission is to support builders advancing decentralized governance infrastructure.”
The activists’ goal was to turn ANT into a utility token under Swiss regulations, whereas the stated objective was “to provide permissionless, trustless, and censorship-resistant decentralized governance for token holders to fulfill Aragon’s mission.” Aragon argued that turning a social mission into a profit-driven enterprise could “lead to regulatory enforcement actions.”
Arca stated in an open letter that while Aragon’s goals were “ambitious and noble,” “to unlock future utility and governance value, financial value must be recognized.” It proposed that Aragon buy back ANT tokens to boost their price, similar to stock buybacks in traditional markets.
Arca got the buyback it sought—but found the terms bittersweet. The deal allocates $11 million to fund a new nonprofit that will assume the DAO’s functions. However, any unredeemed ANT tokens after this November will become worthless, with Aragon retaining those funds. In a post on its website, Arca estimated that 25–35% of tokens won’t be redeemed, leaving the new company with $43.5 million to $61.4 million in assets. According to Dune Analytics, more than half of the ANT tokens—around 17.4 million—have already been submitted.
The dispute with Arca occurred after the Aragon Association transferred the first tranche of funds—$300,000—to the Aragon DAO. Remaining ANT holders chose to partner with Patagon Management, an investment firm with a track record of litigation against DAO founding teams. The ANT holders provided Patagon with $300,000 to negotiate or take legal action against Aragon. In a post on X, Patagon claimed the ANT tokens obtained by the DAO were acquired “at the direct expense of investors without legal basis,” calling it “theft dressed up and sanitized.”
Since Bitcoin’s creation in 2008, decentralization has been a driving force for thousands of entrepreneurs and developers. Bitcoin’s mysterious creator, Satoshi Nakamoto, envisioned a peer-to-peer payment system relying on cryptographic proof to verify transactions, replacing intermediaries like banks and brokers.
That idea spawned an entire industry. Cryptocurrencies now have a market capitalization approaching $1.7 trillion, relying on distributed ledgers to exchange, track, and establish ownership of assets ranging from physical commodities like precious metals and real estate to digital currencies themselves. Companies such as JPMorgan, Samsung, and Tencent use blockchain technology in supply chain management, data security, and digital identity verification.
According to PitchBook, risk capital investors poured nearly $50 billion into blockchain-based economic systems during the 2021 and 2022 crypto bull runs alone.
“Parties agree to transact publicly and transparently on blockchains instead of opaque, human-driven, conflict-prone financial actors operating behind closed doors—that’s the vision we should strive for, rather than clinging to inefficient centralized financial systems,” wrote Dan Morehead, founder and managing partner of Pantera Capital, in a July 2022 letter. Decentralized finance (DeFi), he argued, offers better protections for investors than centralized firms.
Yet around the same time, crypto broker Voyager and digital lending firm Celsius filed for bankruptcy after plunging crypto prices disrupted their business models. Morehead viewed these failures as highlighting DeFi’s advantages. For example, in Celsius’s case, the company would have been forced to repay lenders to retain collateral. But critics argue that rigid automated protocols don’t allow for changing conditions—a poor way to run an industry.
How did these companies end up assuming liabilities or debts beyond their initial capacity? The simple answer: they offered attractive high yields. While banks offered high-yield savings accounts at 4–5% interest, DeFi lenders paid rates as high as 20%.
But a series of hacks and crises across DeFi and the broader crypto industry—culminating in Sam Bankman-Fried’s FTX collapse in November 2023—left investors shaken. According to DeFiLlama, the total value locked in DeFi projects currently stands at $54.7 billion, less than that of a mid-sized regional bank, down from a peak of about $179 billion in November 2021. While much of the decline is attributed to falling crypto prices, rising interest rates on low-risk assets like U.S. Treasuries—as governments withdrew pandemic-era market support—also eroded DeFi’s appeal.
A bigger issue is that the concept of decentralization often works better in theory than in practice. One reason: if a single entity or allied group controls more than half of the computing power or rights to validate network transactions, a blockchain project can be hijacked. In what’s known as a 51% attack, bad actors could block new transactions, reverse settled ones, or send the same tokens to multiple recipients (double-spending attacks)—potentially fatal blows to an entire blockchain.
Aragon hinted at something similar when it transferred the first batch of ANT tokens to the DAO, stating in its May 9 blog post that it suffered a “coordinated social engineering attack and 51% attack.” This isn’t exactly the same as attacking a blockchain, since DAOs are supposed to be governed by their token holders. But Aragon’s decision to take matters into its own hands to meet what it saw as legal obligations shows how real-world concerns can limit pure decentralization.
Economists at the Bank for International Settlements (BIS) wrote in a 2021 industry review: “Full decentralization in DeFi is impractical.” “DeFi platforms contain centralized elements—for instance, ‘governance token’ holders (often platform developers) who vote on proposals, unlike corporate shareholders.”
Yearn.Finance founder Andre Cronje told Forbes in 2022 that major DeFi project decisions typically don’t pass without support from founders and financial backers.
That year, researchers at the University of Luxembourg studied token voting across nine major DeFi projects and found power “highly concentrated.”
Unlike common stock voting, there’s no mechanism to notify token holders of upcoming votes, and those storing DeFi tokens on exchanges like Coinbase can’t even participate in voting.
“DeFi has evolved to be more centralized than expected,” says Russo of The Defiant. “You see centralization in governance—where a
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