Decentralization, Liability, L2's, and Property Rights
There's a secret bonus reason to decentralize that has yet to rear its ugly head.
There are cypherpunk reasons why we want decentralization, and there are pragmatic ones. I believe the pragmatics will be what force us to adapt. We’re not decentralizing because it’s fun, or because we think everyone has the same based cypherpunk ideals as us, but because it’s necessary. This essay will review what “necessary” looks like.
I was hit by an onchain hack recently. I was stolen from. I’m angry. I want to be made whole. Someone who’s had his property stolen and isn’t willing to have centralizing bodies force its return only feels this way because he didn’t lose enough.
Allegiance to ideological beliefs and self-interest sits on a spectrum; some people require more distress than others for fight-or-flight to awaken. Espousing "code is law" beliefs are something of a proxy for "I've never experienced sufficient hardship from an attack". You too have a number at which you won’t care what the code said, you want your money back.
At what point does someone defect from the Rules of Engagement and standard decorum, because he has too much to gain in doing so? The answer to that depends on the victim, but it always has an answer. It’s inferior game theory to expect everyone to always respect what the code did as the final outcome. Ideology is not an enforcement mechanism, violence is, which I have previously covered in Code is Not Law, Men With Guns is Law.
At a certain level of pain, your best interests will supersede ideological fealty, as they should. The reason capitalism works is because we’re evolved to act in our own self-interests. There’s a difference between rational self-interest (wanting to right a wrong, get what you’ve earned) and pathological self-interest (sociopathy, parasitism). Rational self-interest is a healthy, darwinian characteristic.
It won’t be ideology that brings us to our decentralized destination, it will be survival-based necessity. It’s not a very romantic answer, but I think it’s the truthful one.
Let’s review some scenarios.
The Reckoning of That Guy
I can’t make someone return my stolen funds to me. I’m not That Guy. I’m not rich enough. I’m not motivated or connected enough. But one day, the wrong guy is going to get robbed onchain (a hack is theft), and you’ll draw the full ire of That Guy. He will not fuck around.
That Guy is rich. He’s going to lose a lot of money in this robbery (call it what it is), but will still be wealthy. He’s going to be enraged, vengeful, and motivated. He’s going to do more than just complain about it online, he’s going to use the legal system to get his money back. He will appeal to men with guns to undo the matter by leveraging the legal system. He will defect from the current DeFi ethos of “well these things happen you know, nothing you can do about it.”
And he’s probably going to win, and force something that everyone will absolutely hate, but ultimately is necessary.
Why Decentralize? A Secret Bonus Reason
The path to true decentralization won’t be found in a roadmap, it’ll be found in survival.
Why make something decentralized? Why are we intentionally making inefficient, slower databases? It’s so no single entity can control them.
The benefits of one person not controlling a financial ledger are worth the inefficiencies: no censorship, no gatekeeping, permissionless access, and the disintermediation of money and the state.
But what if there was another critical reason that has yet to rear its ugly head: no liability.
L2s and Decentralization Theater
Basically no L2 is decentralized. They all can rollback state, block withdrawals, or have a centralized sequencer. This is not decentralization. You can review this here.
I’m not criticizing them for it. I understand scaling and building is a complex, difficult process that requires centralized decision making at the onset, and decentralization is a spectrum to work towards.
However, if you have all those centralized abilities, and a major act of fraud goes down on your financial ledger, and you don’t fix it……
I’m adversarially minded. When I see centralization and a crime someone chooses to not stop, arguably permitting, I default to how the meanest prosecutor might think...“accomplice”.
Bank Transfers Are Law: A Scenario
Globobank was defrauded and mistakenly wired out $20M from accounts in an elaborate scam. Globobank is kinda like one big ledger in a way, with one validator and one sequencer.
Reversing this would be hairy, but Globobank can unwind the fraud and return the $20M back to the rightful owners. But chooses not to, because ideology.
Conversation:
Feds: “You need to either freeze these accounts or reverse this while we investigate.”
Globobank: “I’m sorry we can’t, it goes against our deeply held belief that bank transfers are law. If we undo this, then our clients will realize a lot of their Globobank assumptions are wrong, and the optics are bad. Also it’s a pain.”
Feds: “So you can undo this, but some clients would be mad because they think you can’t. So you’re refusing to rectify massive fraud because management thinks bank transfers are law?”
Globobank: “That’s right. A little rude, but correct.”
Feds: “Sounds like aiding criminal activity, let’s see what the courts say…..”
The Judgement of Boomie McOlds
Now I’m going to provide an entirely plausible, unpleasant scenario for DeFi:
There was a $100M hack on Optimism. They could have frozen bridges and block production and rolled it all back, but leadership chose not to. Because ideology and optics.
That Guy I told you about, the rich, vindictive, angry one who lost a lot of money but is still very rich, he got hit hard. He’s going scorched earth and suing Optimism for enabling fraud and to recoup his losses. The case is going to court.
The honorable Boomie McOlds is presiding:
Plaintiff: “Your honor, as we reviewed in our bank-transfer example, nowhere else would we accept willful facilitation of fraud at a financial institution. Optimism is controlled almost entirely by management and isn’t actually decentralized. Thus, you’re just as culpable as the exploiter if you refuse to stop it…”
Defense: “Objection! Your honor, a blockchain isn’t a financial institution, it’s an *insert nuanced details about blocks, validators, etc. that Boomie finds irrelevant*.”
“…So you see, if these transactions were reversed — which my L2 client could have done — it would have been totally not cool. All our users would have been very angry because we’re supposed to be decentralized.”
Honorable Boomie McOlds: “So you could have stopped this crime, but you didn’t because you’re fake decentralized. However you're working towards real decentralized?”
Defense: “Yes, but please don’t say that out loud. Code is law.”
Honorable Boomie McOlds: “The court rules in favor of the plaintiff. You owe $100M plus damages.”
Objection!
You have nuanced, technical reasons why the blockchain and financial institution parallel is amiss. You studied cryptography at MIT, maybe law at Yale, and actually this scenario overlooks a key point about possession and finality that when viewed in conjunction with the Wooden Canoe Act of 1912 blah blah.
You’re probably right. I’m not dismissing your objections because you’re wrong. I’m dismissing them because they’re likely to be ineffective against a legal system dominated by predatory regulators and politicized prosecutors that are hired guns to protect the state, not to protect consumers.
You don’t have to convince me, you have to convince the Boomie McOlds that saturate the legislature and judiciary. The state hates DeFi and is right to see it as a threat to their soft power, because we’re incrementally taking away their control of the financial system. The state makes the law, interprets the law, and enforces the law; and it’s Boomies all the way down. To say you’re at a structural disadvantage is an understatement.
Coinbase and Uniswap have the legal teams of God and did everything as by-the-book as possible, and are still getting attacked with Wells Notices. That’s because this isn’t a legal discussion, it’s a power-based one. Battles over power fundamentally don’t happen in court rooms. The court facilitates the rules imposed by the entity in power.
When this event goes to trial, I do not expect it to go well for us.
Pseudo-Decentralization: The Worst of Both Worlds
Currently, we have what I would describe as the worst of both worlds in respect to centralization and receiving its benefits. We act like the pros aren’t there, while being every bit still exposed to its cons.
We have centralized entities masquerading as distributed networks. A kind of decentralization pageantry. This provides few of the security and censorship benefits of decentralization, and even less of the centralization perks.
We have full exposure to censorship, AND get no protections against hacks!
When lowlifes steal, we have to pretend like we can’t thwart it. Being able to stop this falls firmly in the benefit camp of centralization, and we're denied it. We allow billions in theft because…. eww?
Pseudo-decentralization is the worst of both worlds because we’re subject to all the risks of centralization as it relates to censorship, and get none of the pros of that censorship ability. In the interim, while we’re centralized, we should reap the full benefits of it and not pretend like they're not there.
Pragmatics over purity. Hacks on centralized chains should not exist.
Property Rights Are Sacred
If you’re going to be centralized, that’s fine. It’s a hard process and Rome wasn’t built in an epoch. But be transparent about what it means for risk AND protections, and don’t allow people to be wronged because it disrupts the theater.
People rightfully want their property back when someone steals it. And until chains figure out ways to credibly decentralize, we should work to avoid the eventual wrath of That Guy and the legal system, and also to do what’s right by people.
Leverage the pros of our current environment to help victims. Instead we act like they’re not there, opting to protect North Korean hackers and criminal scum over regular users? No, sorry I don’t value them nor do I have religious deference for block creation as the word of God sketched into a stone, this shit can be undone if like five guys decide they want it to.
Property-rights violators are morally loathsome criminals. The DeFi zeitgeist seems to hold these people's actions as more worthy of protection than the return of rightful belongings. Don’t deprive people of their property because it exposes false optics.
Theft is fundamentally a property-rights violation. We all believe in property rights, right? Do you think if a burglar breaks into your home and steals he should be caught, punished, and your property returned to you? Would you call the cops if you got robbed and leverage violence (the legal system) to get back what’s yours?
Ok and why is getting burglarized onchain different? It’s not. It’s a property-rights violation. It’s orders of magnitude more ethically repugnant than halting block creation. There is no equivalence here.
We all think we should be able to self-custody our crypto because of property rights, yes? Well if crypto is in fact property (which it is), what does that mean if you’re robbed of it?
Radical respect of property rights is essentially the bulwark of Western beliefs.
Willfully allowing property-rights violations is a vastly greater moral wrong than stopping the sequencer. In fact, property-rights violations may be the second-worst moral wrong that exists (second only to violent assault). If you can stop them, you should.
In Closing: Decentralize to Avoid This Dilemma
If you don’t want the liability and obligation of rectifying legal and moral wrongs, the answer is very simple: credibly decentralize. Make it so you literally can’t change what happened.
I encourage all chains to take this seriously. Start to create a framework for freezing and rectifying obvious theft and fraud. Because That Guy exists, and when he gets hit, he’s going to go after you, and you don't want the legal system to view this the way I just laid out. It will open up a huge can of worms.
Further, I personally think it’s the correct moral decision to leverage the power you have to right wrongs while you still have that power. Don’t pretend like you don’t.
The best way to rid yourself of any moral or legal liability is to make it so it's not your decision to make. I prefer a decentralized world where actions can’t be undone by any single entity. But I also don’t deny the world as it is now.
It's a completely valid, and even correct, feeling to hate this essay, because it shows your heart's in the right place. Nothing about this is pleasant. But don't dismiss reality because you find it unsettling.
If you don't like this, change it.
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One of your bests posts so far!