Finding the Balance of Centralization: How Can Cryptotechnology Fulfill Its Untapped Potential?
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Finding the Balance of Centralization: How Can Cryptotechnology Fulfill Its Untapped Potential?
Bear markets are temporary, but the alpha you generate during bear markets will give you a greater advantage in the bull market cycle.
Navigating Web3 tides with focused insightsWritten by: Jack Inabinet
Compiled by: TechFlow
At the start of the new year, Bankless released its latest interview with Erik Voorhees.
Erik shared with Bankless listeners why he joined the cryptocurrency movement and offered an OG perspective on crypto’s recent market cycles. As a libertarian, Voorhees passionately defended why money must be separated from the state and why complete decentralization cannot meet societal needs.
Today, we'll explore why both extremes along the centralization spectrum fail to deliver positive outcomes, why cryptocurrency will trend toward maximum decentralization, and what you can do to help build a decentralized future.
Full Centralization
Erik uses an all-powerful world government as an example of extreme centralization: it would be a repressive entity with no checks on its power.
There are two distinct forms of power: voluntary and coercive.
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Voluntary power is held by leaders in social hierarchies and corporate structures. Many heavily centralized governments rely on coercive power to direct their citizens. Individuals may place themselves under voluntary authority. While there are concerns about Amazon's labor practices, the company does not appear to force employees to work in its warehouses at gunpoint; the employment relationship is voluntary for both parties.
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Coercive power is exercised through violence, threats of law, or deception. The IRS uses coercive power and threats of wage garnishment or imprisonment to compel tax payments. For U.S. citizens, only two ways exist to avoid paying taxes: death or renouncing citizenship (which comes with a fee). Moreover, if the IRS determines you're renouncing solely to evade taxes, you may be barred from giving up your citizenship.
Full Decentralization
Complete decentralization is impossible and unnatural: the resulting system would be marked by chaos and inefficiency.
Just as mammals require skeletal structures to function, societies need centralization. Without it, we lose coordination, cooperation, and order.
Centralized structures benefit from economies of scale and specialization. The Industrial Revolution demonstrated the power of corporate hierarchies. Purchasing equipment required intensive capital expenditures, funded by a small group of owners who delegated tasks to workers. As a result, business enterprises were able to produce larger quantities of goods at lower prices than competitors.
Striving for Maximum Decentralization
Custodial cryptocurrency exchanges represent concentration points of crypto capital.
Just as power granted to monarchs could spread war and chaos globally, handing your private keys to an exchange CEO can spread memes and chaos across the globe.
Having witnessed the collapse of Mt. Gox firsthand, Voorhees is no stranger to corrupt exchange CEOs seizing wealth through coercive power. He notes that while the lesson of self-custody is not new, the crypto community relearns it in every cycle.
What is the simplest solution to get more crypto users off exchanges?
Better user experience. Although demand for dApps is often associated with poor user experiences, traditional banking and financial systems are undeniably advanced.
MetaMask has already onboarded millions of cryptocurrency users into self-custody solutions—many without even realizing it: they simply created a user-friendly wallet that makes doing all DeFi activities convenient.
Voorhees expects the boundlessness experienced by users of decentralized money and networks to become the antidote to CBDCs. After genuinely experiencing DeFi, the restrictions on CBDC chains will feel even more painful!
Shaping the Future
While crypto critics and statists alike predict the demise of decentralized blockchains, Voorhees holds a different view: capital will flow like liquidity along the path of least resistance.
The presence of TradFi regulations and restrictions on CBDC chains will create friction for capital flows into these ecosystems, incentivizing investment in alternative, decentralized blockchains. Pure economic forces will drive capital toward adopting decentralized protocols.
Don't waste energy calling out the noise and scams flooding the crypto industry. Instead, direct your efforts toward amplifying the things you find truly valuable!
Pain will always occur in crypto. While pain is never pleasant, enduring it occasionally leads to better outcomes—and we should embrace this reality. Evolution in nature is a fierce and difficult process. The maturation of an emerging industry aiming to replace the traditional global financial system will face similar obstacles. What remains will be stronger, more resilient, and better suited to its purpose.
From the thriving Ethereum Layer 2 ecosystem to MetaMask's non-custodial hot wallets, from asset management protocols leveraging GLP yields to NFT projects pushing community boundaries, and even projects we haven't yet heard of—progress is happening.
Bear markets are temporary, but the alpha you generate during a bear market will give you a greater edge throughout the next bull run.
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