How big is their power really?

According to the Cambridge Dictionary, a CEO has the “most important position in a company”. Because he or she is primarily responsible for the management of the company and receives mandatory reports from all other areas.

Applied to a blockchain, this initially sounds neither decentralized nor particularly democratic. Both properties that almost all projects in the crypto space are committed to. So what about the CEOs of crypto companies?

Blockchains themselves do not have CEOs

In most cases, there is more than one driving force behind a crypto project. Depending on the organization, there are one or more institutions in the background, often known as “Foundation” or “Labs” – see for example the IOTA Foundation behind the token of the same name.

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On the one hand, they are trying to attract more developers and projects to blockchains. On the other hand, the political and economic decision-makers influence and inform interested parties about the projects. Each of these institutions has its own boss at the helm.

At Cardano, the companies are made up of EMURGO, Cardano Foundation and Input Output Hong Kong (IOHK). EMURGO’s CEO is Ken Kodama, the Cardano Foundation is headed by Frederik Gregaard and Charles Hoskinson is the CEO of IOHK.

Every CEO, whether it is Cardano or other protocols, is occasionally asked for opinions and assessments in the media. Rightly so, after all, these CEOs are by definition also largely responsible for the company’s direction and priorities, right?

Are CEOs responsible for blockchains?

The companies are the responsibility of the CEOs and they play a key role in the development of the decentralized platforms. However, if they are programmed in this way, they do not have authority over the protocols per se. Using their consensus mechanisms and tokens, most blockchain protocols attempt to grant participation rights to their users, thereby distributing power within the network.

Currently, most blockchains rely on a proof-of-stake consensus mechanism. This strengthens decentralization by ensuring that developers can participate in the network. With the acquired tokens, the owner (s) get the right to participate in polls about the development of the network.

The following applies: one piece, one vote. At the same time, you get a reward of a predetermined percentage for the total number of tokens wagered. This results in the dark side of the evidence at stake for decentralization. Because the percentages reward the strikers according to their shares, and thus existing power structures remain in place. In simpler terms, whoever puts in a large amount of tokens will get absolutely more tokens than someone who has a smaller amount. Since both receive the same percentage of tokens, the management rights do not change.

When looking at the largest Proof of Stake blockchains by market value relative to their token distribution, XRP stands out with a particularly high value. With over 80 percent of XRP held in the custody of the top 50 holders, the governing power is “scattered” at just a few addresses.

Things are different with Cardano. Here, the top 50 holders have about ten percent of all available ADA tokens. Cardano thus achieves by far the lowest value in this category.

So why do CEOs have influence?

One reason for the high degree of centralization is that the CEOs are often the founders or developers behind the respective projects. Since there are often only a few people involved in setting up blockchains, they initially hold the majority or all of the existing tokens.

In the case of Cardano, the protocol was developed by Charles Hoskinson and Jeremy Wood. After programming, the two more developers won for their idea. These support the network as validators and hold ADA tokens according to their share. Over time, more users followed suit, neither betting nor validating and holding despite the token.

The situation is different with Binance Coin, for example. Here, the network remains highly centralized. The top 50 BNB holders own over 95 percent of the available tokens. A large part of this top 50 is in the Binance crypto exchange itself – more on that later.

As the stock exchange has a large part of its efforts through the Binance funds, it can greatly influence decisions in its own interest. This level of access makes Binance CEO Changpeng “CZ” Zhao one of the most powerful crypto CEOs in the world. Regulators around the world are not sure if this is happening legally. Zhao, who earlier this year was ranked among the ten richest people in the world by Bloomberg, has in the past faced charges of tax evasion.

Shares can be delegated

However, consideration of the top addresses must be treated with caution. Too often, the richest addresses show the largest crypto exchanges. However, these are not necessarily the true owners, but only the “administrators” of tokens for their users.

It gives the impression that there is only one address, even though it actually consists of many individual addresses. At the same time, the numbers can also be misleading in the other direction, for example if, as with Cardano, multiple wallet addresses belong to the same owner. The top 100 accounts have about one-sixth of the total number of tokens available.

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In addition, one quickly notices during the practical test: Just because many addresses can participate in staking does not mean they do. Therefore, when considering decentralization and power, one should take a closer look at the validating nodes.

The result is shocking to the ignorant: in the case of Binance, for example, it means that only 21 nodes are involved in the decisions about the Binance token. Zhao, who can always use the deposited Binance funds as a mass of effort, will have a very big influence on the development of the protocol.

It looks a little more decentralized, but still highly centralized, with XRP with the 150 validating nodes. The only Proof of Stake blockchain that distributes the power of validation and control across the network is Ethereum, which has over 220,000 nodes.

Despite these circumstances, one should not forget that many protocols are still in their infancy. Decentralization can grow with greater participation of others. Therefore, one should keep an eye on the validators and the address count.

Power depends on others

In conclusion, the influence of the CEOs on a decentralized network depends in particular on how many of the token shares he or she holds, whether the CEO is trying to get more proportionate, and to what extent the amount of tokens other users. growing.

For example, since December 2020, Cardano has added over 3,900 addresses with more than $ 10,000 and less than $ 1 million in ADA. This will increase their influence if they exercise their right to govern.

If Hoskinson did not buy tokens in the same style, these new “little whales” would have already reduced his voting power.

Basically, decentralization is not given for free. The power of the individual CEOs, whether it is Charles Hoskinson at Cardano or Changpeng Zhao at Binance, is determined by the cornerstones of the protocols and the active participation of the participants. Therefore, if decentralization plays a role before investing, one should check the networks for power relations before investing.

Disclaimer

This article has previously appeared in the March issue of BTC-ECHO Magazine.

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