Decentralization Factors for Tokenized Consensus
Protocols (Layer 1s and Layer 2s)
Category

Computation

Type

T&E

Partially
Decentralized

Signi cantly
Decentralized

Decentralized• Protocol is in testnet phase or,if in mainnet phase, block
creation is controlled by theCompany.

• Majority of block creation
power is controlled byindependent third parties.
• Company and Foundation may
act as block creators.
• Block creation may bepermissioned.
• Company and Foundation canlikely unilaterally affect a
block reorganization (reorg).

• Majority of block creation power
is controlled by independent
third parties that are nonInsiders.
• Significant number of
unaffiliated parties would haveto coordinate in order to obtaina majority of the block creation
power.
• If large block creator pools
exist, controls are in place atsuch pools to prevent overconcentration such that thepower of the pools is
distributed.
• If block creation ispermissioned, permissions are
granted by a decentralized
process.
• A block reorg would requiresignificant community
participation.

• Vast majority of block
creation power is controlled
by independent third parties
that are non-Insiders.
• A significant number of
unaffiliated parties would
have to coordinate in order toobtain a majority of the block
creation power.
• If large block creator pools
exist, controls are in place atsuch pools to prevent overconcentration such that thepower of the pools is
distributed.
• Block creation ispermissionless.
• A block reorg would requiresignificant community
participation and likely be a
hotly contested community
decision.

• Small number of nodes
operated by the Company, theFoundation, or Insiders.
• Node operation may bepermissioned.

• Multiple nodes operated byindependent third parties.
• Small number of nodes
crashing would not halt the
network.
• Nodes are located acrossmultiple geographic locations,potentially in multiple
continents.
• Node operation may bepermissioned.

• Large number of nodes, themajority of which are operated
by independent third parties
that are non-Insiders.
• Significant number of nodes
would need to crash to halt the
network.
• Nodes are spread across adiverse geographic area
including multiple continents.
• Node operation ispermissionless.

• Thousands of nodes, themajority of which areoperated by independent
third parties that are nonInsiders.
• Nodes are run in dozens ofcountries around the world.
• Node operation ispermissionless.

FactorCentralized

Block Creator
Concentration — How
concentrated is thepool of block creators(validators (measured
by US$ amountstaked) or miners(measured by hashpower)) for the
protocol’s consensus
mechanism?

Node Diversity —What different nodes
are contributing to
the protocol?
Tfi* There are three different but interrelated lenses through which
to view decentralization: Technical (T), Economic (E), and Legal
US-DOCS\141717128.1(L). For a more in-depth discussion, see this article.

Category

Type

T

Partially
Decentralized

Signi cantly
Decentralized

Decentralized• Single client developed andmaintained by the Company.

• One primary client that isopen source, likely developedby the Company.
• Foundation and/or community
may contribute to theimprovement or maintenanceof the client.
• Additional clients may be indevelopment.

• Primary client (if applicable) is
maintained by the Foundation
and/or community, and is open
source.
• Additional clients may be indevelopment.

• Multiple clients are in use andare maintained byindependent third parties thatare non-Insiders.
• Additional clients may be indevelopment.

Diversity of Data
Availability — Howdiverse are theredundancies of data
availability?

• There may be no relevant
chain data as the protocol isstill in testnet.
• The Company may maintainand store all relevant data
centrally.

• Multiple nodes store the statedata and historic chain data
including several independent
nodes.

• Many nodes store the state dataand historic chain data, themajority of which are operated
by independent third parties
that are non-Insiders.

• There is a robust ecosystemof data availability nodes witha significant number of
redundancies operated byindependent third parties thatare non-Insiders.

Layer 2 (L2)Integration — For
Layer 2, is the processof recordingtransactions to theLayer 1 (L1) andensuring fraud proof
decentralized?

• Company controls themechanism (e.g., a relayer)
for recording of transactions
to the L2’s L1.
• Company controls mechanism(e.g., a sequencer) for
determining the order oftransactions recorded to theL2’s L1.
• Company may run core
infrastructure for fraud proofs(e.g., a verifier).

• Foundation may control themechanism (e.g., a relayer)
for recording of transactions
to the L2’s L1.
• Foundation may control
mechanism (e.g., asequencer) for determining
the order of transactions
recorded to the L2’s L1.
• Foundation and/or community
may run core infrastructure
for fraud proofs (e.g., averifier).

• Mechanism (e.g., a relayer) forrecording of transactions to theL2’s L1 relies on multiple
entities.
• Mechanism (e.g., a sequencer)
for determining the order oftransactions recorded to theL2’s L1 is reliant on multiple
entities.
• There are multiple redundancies
for core infrastructure for fraud
proofs (e.g., a verifier).

• Mechanism (e.g., a relayer)
for recording of transactions
to the L2’s L1 is controlled bya broad, decentralized group.
• Mechanism (e.g., asequencer) for determining
the order of transactions
recorded to the L2’s L1 iscontrolled by a broad,decentralized group.
• There are many redundancies
for core infrastructure forfraud proofs (e.g., a verifier).

Completeness ofProtocol — Is the
protocol fully
functional?

• Protocol may still requiresignificant additions.
• May not be fully functional.

• Protocol is fully functional
and includes the features
expected at launch ofmainnet.
• Company may have publicly
discussed minor upcoming
developments or
improvements.

• Protocol is fully functional andincludes all material features
publicly discussed by theCompany.
• Company has not promoted
upcoming developments or
improvements, but industry
participants may expect someongoing contribution from theCompany.

• Protocol is fully functional
and includes all materialfeatures publicly discussed by
the Company.
• Company has not promoted
upcoming developments or
improvements, and industry
participants could have noreasonable expectation thatmaterial improvements could
only be pursued andimplemented by theCompany.

FactorCentralized

Client Diversity —What different clientsare being run bynodes to facilitateconsensus andexecution?

Computation

T

T&E

DevelopmentfiUS-DOCS\141717128.1

T&L

Category

Type

E&L

Development

T&L

T

fi

US-DOCS\141717128.1

Partially
Decentralized

Signi cantly
Decentralized• Company is responsible forvirtually all of the protocol’s
ongoing development.

• Company is primarily
responsible for the protocol’s
ongoing development, but
implementation of such newcode is subject togovernance/community
approval.
• Additional code is sourced
from independent third
parties.

• Foundation is primarily
responsible for coordinating theprotocol’s ongoing development.
• Independent third parties are
responsible for a majority of
new code created for the
protocol whether at thedirection of the Foundation,community, or otherwise.
• Implementation of all new codeis subject to governance/
community approval.

• Foundation or community is
responsible for coordinating
the protocol’s ongoingdevelopment.
• Independent third parties are
responsible for vast majorityof new code created for the
protocol at the direction of
the Foundation, community,or otherwise.
• Implementation of all newcode is subject togovernance/community
approval.

Protocol Roadmap —If ongoingdevelopment of the
protocol is being
undertaken, who
defines the roadmapof future protocol
improvements or
expansions?

• Company is solely responsiblefor defining the roadmap of
the protocol.

• Company has completed muchof the initial roadmap and thecommunity largely looks to
the Company for future
developments.
• Community feedback helps
drive Company decisions, but
the community itself
minimally dictates theroadmap.

• Foundation or community
primarily drives the roadmap of
future developments of the
protocol.
• Company and/or its founders
may be influential community
members but do not effectively
control direction.

• Foundation or community
entirely drives the roadmap of
future developments of the
protocol.
• Company and/or its founders
are one of many community
members.

Risk Management —Who is responsible for
audits of new code
deployments and who
is responsible for
protocol statemonitoring?

• Company directly hires third
parties to perform code
audits.
• Company is primarily
responsible for monitoring
protocol state and identifying
and fixing any hacks, bugs, or
irregularities.

• Code is public and Company
ensures updates are audited
before implementation.
• Public bug bounty programs
may be implemented.
• Company is primarily
responsible for monitoring
protocol state but
independent third parties may
also help monitor.

• Code is public and theFoundation or community
implements code audits for
updates.
• Public bug bounty programs may
be implemented.
• Independent third parties arepaid by Foundation or fromprotocol treasury to monitor the
protocol state.

• Code is public and theFoundation or community
implements audits for new
and existing code.
• Public bug bounty programs
may be implemented andpayments are honored bygovernance.
• Independent third parties arepaid by protocol treasury orotherwise incentivized suchthat non-Company community
is primarily responsible formonitoring the protocol state.

FactorCentralized

Ongoing
Development — If
ongoing developmentof the protocol isbeing undertaken,
what proportion ofsuch development
comes from one entity
or a group of related
entities?

DecentralizedCategoryPartially
Decentralized

Signi cantly
Decentralized• No fully functional
independent third-party
protocols have been deployedor only a small number indevelopment by third parties.
• Smart contract deployment
may be permissioned.

• Small number of fully
functional third-party
protocols have been
deployed.
• Large number of third-party
protocols in development by
independent third parties.
• Smart contract deployment
may be permissioned.

• Large number of decentralized
and fully functional third-party
protocols have been deployed.
• Large number of third-party
protocols in development by
independent third parties.
• Smart contract deployment ispermissionless.

• Hundreds of decentralized
and fully functional thirdparty protocols have been
deployed.
• Large number of third-party
protocols in development by
independent third parties.
• Smart contract deployment ispermissionless.

Development of Core
Applications — Howmany of the coreapplications (wallet,
explorer, etc.) for the
protocol does theCompany control?

• Company retains 100% control
over all core applications(wallet, explorer, etc.) for the
protocol.

• Company retains control over
updates to its own
applications (wallet, explorer,etc.).
• Other competing applications
may be operated by third
parties.

• Core applications are operated
by a number of independent
third parties, including theCompany.

• Core applications operated bya number of independent
third parties, including theCompany.

Ongoing
Development
Funding — How is
ongoing protocol
development andthird-party protocol
development funded?

• Company may operate an
ecosystem fund designed toincentivize third-party
development and/or
participation.
• Fund may include cash raised
through equity financing or atoken sale.

• Company has deployed mostof its allocated funds to third
parties for ongoingdevelopment.
• Small number of third-party
protocols are independently
financed.
• Independent ecosystem fund
may be operated by theFoundation, community, or an
independent third party to
incentivize ongoingdevelopment.
• Native token may be awarded
by governance mechanism toincentivize some ongoingdevelopment.

• Large number of third-party
protocols are independently
financed.
• Independent ecosystem fund is
the only protocol-sponsoredfunding mechanism for the
protocol’s ecosystem, including
continued development, and isoperated by the Foundation,community, or an independent
third party.
• Native token may be awarded bygovernance mechanism toincentivize some or mostongoing development.

• Large number of third-party
protocols are independently
financed.
• If any protocol-sponsoredecosystem fund exists, it isdirectly or indirectly
controlled by a highly
decentralized governancemechanism.
• Continued community
development is properly
incentivized without any
centrally managed fund.

Voting Control — Who
has the ability to voteand what is the
distribution of voting
power?

• Company has 100% control ofgovernance.

• Neither the Company or its
employees unilaterally control
governance (potentiallythrough restrictions on voting
under applicable company
policies or delegations).
• Insiders may collectively
control governance if acting
in concert.

• None of the Company, its
employees, or its other Insiders
unilaterally control governance(assuming no voting restrictions
apply).
• The votes of a number of
unaffiliated parties arenecessary in order to approve or
block any governance proposal.

• None of the Company, its
employees, or its otherInsiders can control orsignificantly influence
governance.
• The votes of a number of
unaffiliated parties arenecessary in order to approveor block any governanceproposal.

Type

FactorCentralized

E&L

Development ofThird-Party Protocols— How much thirdparty developer
activity occurs withrespect to third-party
protocols being built
and deployed to theprotocol?

E&L

Development

E&L

Governancefi

US-DOCS\141717128.1

E&L

DecentralizedCategory

Type

T

E&L

Governancefi

Signi cantly
Decentralized• Company retains 100% control
over code implementation
decisions.

• Code implementation
decisions primarily require
governance approval.
• Company or the Foundation
may retain veto/triage powerover third-party proposals.

• All code implementation
requires governance approval.
• Any veto/triage capability isnarrowly structured and held by
the Foundation or a distributed
group elected by governance.

• All code implementation
requires democratic approval
from governance and/or
protocol has limited or no
upgradeability.

Functionality Control— What protocol
functionality iscontrolled?

• Company retains 100% control
over functionality of the
protocol.

• Company retains little to nocontrol of functionality of the
protocol.
• Company may retain control
over emergency pause ability.

• Company retains no control offunctionality of the protocol.
• Foundation may retain control
over emergency pause ability.

• Company and Foundation
retain no control offunctionality of the protocol.
• Unaffiliated group elected/
nominated by the community
may retain control overemergency pause ability.

Significant Influence— Do any stakeholders
have significant andoutsized power overkey decisions?

• Company has final say overkey decisions, including
decision-making not subject togovernance (i.e., community
management, grant programs,etc.).

• Company and its founders
relinquish control over key
decisions but may exert
significant influence over suchdecisions.
• The Foundation may exert
some influence over key
decisions.
• The community may exert
limited influence over key
decisions.

• The Foundation and community
exert significant influence overkey decisions.
• Company and its founders
continue to exert influence overkey decisions.

• The Foundation andcommunity exert significant
influence over key decisions.
• Company may have dissolved,
or its influence and theinfluence of its founders may
be no greater than otherparticipants in the protocol’s
ecosystem — may be viewed
as advisors or thought-leaders
but not possessing outsized
power/control.

Communications —Who controls the
protocol’s social
media, community
channels, andcommunications?

• Company controls all of the
protocol’s social media
accounts, its community
channels, and its
communications.

• Company may control primarysocial media accounts andcommunity channels, but
additional accounts may becontrolled by the Foundation.
• Company primarily
responsible for public
communications but
Foundation and active
community members may
promote the protocol.

• Foundation or community
controls the primary protocolsocial media accounts andcommunity channels.
• Majority of public
communications are Foundationor community-driven.
• Company may have separatesocial media accounts
distinguished from Foundation/community accounts.

• Foundation or community
controls protocol social media
accounts and community
channels.
• Public communications arelargely or entirely
community-driven.
• Company may have separatesocial media accounts
distinguished from
Foundation/community
accounts.

Centralized

ProtocolDevelopment Control— Who controls theprocess for protocol
code implementation?

E

E

US-DOCS\141717128.1

Partially
Decentralized

FactorDecentralizedCategoryType

Partially
Decentralized

Signi cantly
Decentralized• The protocol may not have atoken; or• The protocol may have a token
and the Company is the solesource of value accrual(through development,
implementation, etc. of the
protocol).

• If the token has a mechanism
for explicit value accrual (gasor sequencer fees paid withtoken), a majority of on-chaintransaction value accrues tothe tokens through third-party
protocols and related
applications.
• If no explicit value accrualmechanism, Company may beperceived as the primary
driver of value.

• If the token has a mechanism for
explicit value accrual (gas orsequencer fees paid with token),a significant majority of onchain transaction value accrues
to the tokens through thirdparty protocols and related
applications.
• If no explicit value accrualmechanism, market forces andindependent third parties are
significant drivers of value.

• If the token has a mechanism
for explicit value accrual (gasor sequencer fees paid withtoken), substantially all onchain transaction value
accrues to the tokens throughthird-party protocols andrelated applications.
• If no explicit value accrualmechanism, market forces
and independent third parties
are the drivers of
substantially all value.

Token Ownership —How concentrated isownership of thetoken of the protocol?

• The protocol may not have atoken and Insiders may havecontractual right to a future
token; or• The protocol may have a token
and the tokens are held by theCompany, affiliates, andInsiders.

• Insiders may own a significant
portion or even a majority ofthe outstanding tokens of the
protocol.
• Independent third parties own
a substantial number of theoutstanding tokens of the
protocol (via airdrop, early
adopter rewards, token sale,etc.).

• Insiders own less than amajority of the outstanding
tokens of the protocol.
• Independent third parties own asignificant majority of theoutstanding tokens of the
protocol.
• Development funds, staking
rewards, and other incentives
are in place to continue
increasing the disbursed
ownership of the tokens of the
protocol by independent third
parties.

• The outstanding tokens of the
protocol are widelydistributed.
• No person or group of related
persons (including theCompany and its employees)
holds 20% or more of theoutstanding tokens of the
protocol.
• Development funds, staking
rewards, and other incentives
are in place to continue
increasing the disbursed
ownership of the tokens of
the protocol by independent
third parties.

Outstanding Tokens —What proportion of
the tokens of the
protocol are
outstanding and incirculation as opposed
to being locked up(due to contractual
agreements) or
unreleased?

• The protocol may not have atoken; or• The tokens may be issued but
are not yet in circulation orare entirely subject tolockups.

• A small portion (less than 25%)of the tokens of the protocol
are outstanding and incirculation.
• The tokens of the protocol
held by Insiders may bemostly locked up or unvested.
• Any tokens of the protocol
earmarked for an ecosystemfund, staking rewards, or
protocol incentives remain
largely un-deployed.

• A significant portion (at least
33%) of the tokens of the
protocol are outstanding and incirculation.
• A portion of the tokens of the
protocol held by Insiders havebeen vested and released fromany applicable lockups.
• Any tokens of the protocol
earmarked for an ecosystemfund, staking rewards, or
protocol incentives have been
partially deployed.

• A majority (at least 50%) of
the tokens of the protocol are
outstanding and incirculation.
• A majority of the tokens of
the protocol held by Insiders
have been vested andreleased from any applicable
lockups.
• A majority of any tokens of
the protocol earmarked for an
ecosystem fund, staking
rewards, or protocol
incentives have been
deployed.

FactorCentralized

Token Value — What
are the sources ofvalue accrual to thetokens of the
protocol?
E&L

Value
AccrualE

E

fi

US-DOCS\141717128.1

DecentralizedCategoryValue
AccrualType

FactorCentralizedfi

US-DOCS\141717128.1

Decentralized• Company owns all IP rights
relating to the Protocol.

• The majority of the protocol’s
code is open source, but may
be subject to certain use
restrictions.
• Company may hold residual IP
relating to the protocol, suchas trademarks, domainnames, and its proprietary
application.

• All of the protocol’s code isopen source, but may besubject to certain use
restrictions (controlled by theFoundation or community).
• Foundation or community owns
most residual IP relating to theprotocol, including trademarks.
• Company may hold residual IP
relating to the domain names
and its proprietary application.

• All of the protocol’s code isopen source and can be used/
forked by third parties.
• Foundation or community
owns residual IP relating to
the protocol, including
trademarks.
• Company may hold residual IP
relating to the domain names
and its proprietary
application.

Liquidity — How
liquid are thesecondary markets forthe tokens of the
protocol?

• There is no secondary market
for the tokens.

• A small amount of liquidity forthe token of the protocol isavailable on secondary
markets, but token price andtrading volumes remain
volatile.
• Company or the Foundation
may be directly funding or
incentivizing liquidity by
paying market makers or
conducting buybacks.

• A substantial amount of liquidity
for the token of the protocol isavailable on secondary markets.
• Company or the Foundation are
not directly funding or
incentivizing liquidity by paying
market makers or conducting
buybacks.

• A robust and diverse
secondary market exists forthe token of the protocol.
• The market for the token isseasoned and is not unduly
influenced by any third party.

Protocol Adoption
and Participation —How broad is the
adoption of the
protocol andparticipation with theprotocol?

• Limited or no adoption.

• At least some adoption, but
could be concentrated among
Insiders or early users.

• At least meaningful adoption
and usage outside of Insiders
and early users.
• Significant community
engagement and participation.
• Likely one or more protocollevel service provider
agreements, such as
independent third-party
treasury management, provisionof custom oracle feeds, or
protocol state monitoring.

• Network has become a core/foundational development in
its particular ecosystem, withmany independent users andcontributors.
• Insiders account for anegligible percentage ofusage.
• Rich and robust community
engagement andparticipation.
• Likely several protocol-levelservice provider agreements,
such as independent thirdparty treasury management,
provision of custom oracle
feeds, or protocol statemonitoring.

E

E

Signi cantly
Decentralized

IP Rights — Who owns
any intellectual
property (IP) relating
to the protocol?
E

Usage,
Participation,andAccessibility

Partially
Decentralized

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US-DOCS\141717128.1