How crypto has evolved to abandon its ethos of decentralization
Disclaimer: Opinions expressed below belong solely to the author.
More than a decade ago, Satoshi Nakamoto released the first Bitcoin Whitepaper.
Out of this white paper a dream was born – a dream where money was not tied to a sovereign government, and finance was no longer tied to bankers feeding people’s hard work. Money would be decentralized, trustless and free.
For a time, this seemed to be the direction cryptocurrency was taking. Decentralized finance replaced banks in the crypto ecosystem, decentralized autonomous organizations replaced governments, and above all, decentralized currency replaced fiat as the currency of choice.
The ethos of decentralization stood at the pinnacle of cryptoculture, and its proponents held it up as the ideological backbone of an ecosystem that would one day sweep away everything about the old world of fiat currencies, tyrannical governments, and theft through seigniorage.
But today, as the cryptoecosystem tries to rebuild itself after the Terra-Luna crash that triggered a rupture in the values of cryptoassets, preachers of ideological decentralization are rare, if any.
What happened to the strong ideological presence of early cryptocurrency fanatics? Have crypto advocates abandoned this lofty dream of a world free of authority and regulation? And what remains for the ecosystem, if not decentralization?
The scalability problem
The Web3 world has seen a lot of interest in recent years. Today, certain cryptocurrencies are considered safe bets – think Bitcoin, Ethereum and other blue-chip coins.
Still, while some may be able to make a living trading these cryptocurrencies, making money is not the be all and end all of an ecosystem.
While cryptocurrency speculation seems to have exploded, the question is also whether other aspects of crypto and Web3 infrastructure have kept pace. Game-fi for once is an area where the Web3 world can be said to have failed spectacularly. Apart from a few games like Axie Infinity that have made it big, games in the Web3 space have not had the same success.
For a quick recap, Axie Infinity announced that it generated $1.3 billion in revenue last year, claiming around 2.71 million players.
While this compares to titles within the Web2 space such as League of Legends’ 3 million players and $1.63 billion, we should also recognize that Axie is one of the rare few that has succeeded in establishing itself.
In contrast, the Web2 gaming space has far more titles that can claim such a large user base and revenue.
Not to forget – the numbers that Axie cites for their user base are for those who have the three NFTs required to play the game, not the number of active users.
This lack of scale is not unique to the game-fi ecosystem. While there are around 300,000 cryptocurrency transactions every day, there are around 1 billion credit card transactions every day – not including all other non-Web3 transactions such as cash, debit cards or bank transfers.
For decentralized lending, there is an estimated $43 billion in DeFi protocols, far less than the $9.5 trillion that US banks alone have lent.
Obviously, scale is an issue that the crypto ecosystem must overcome. Without the infrastructure, investment and utility that the Web2 world provides, how can the Web3 world hope to replace the Web2 world?
That said, some aspects of the Web3 world have managed to grow in scope and attract mainstream attention. Celebrities have bought into the NFT craze, and some of Singapore’s own artists have also released their own NFTs.
NFT marketplace Opensea recorded back-to-back record months last year, with volumes comparable to e-commerce sites such as eBay.
The story is somewhat tragic. Blockchain technology is hugely useful and holds a lot of promise, but is held back by the problem that has always plagued new technologies – that it is new and therefore underdeveloped and underserved.
It should come as no surprise that at last week’s Token2049 event, several panelists identified mass adoption of blockchain technology as one of the core goals that the crypto community needed to push for.
But why should the Web2 world adopt blockchain technology, if blockchain remains ideologically bound to its ethos of decentralization and supremacy?
Many have already recognized the inherent paradox of this dilemma – for Web3 to replace Web2, it must, at least for now, cooperate with Web2.
At the end of the day, the Web2 world is still far larger in scale, and for the Web3 world to grow, it needs to tap into this large market and provide value to both.
Fair weather friends in crypto don’t last
The Web3 world founded as an anarchist’s dream without government or law worked well for a time. In doing so, crypto companies developed new protocols and new products – Ethereum and NFTs emerged, and other blockchains – each with their unique features – grew to become mainstream as well.
But the absence of government has not proven to be the same as the absence of tyranny, and the last crypto winter has proven as much.
First came the Terra-Luna crash. While it is certainly true that Do Kwon and the Luna Foundation Guard were to blame for much of the carnage, what is interesting was the way the company proceeded after the initial crash.
Citing a possible governance attack, Luna Foundation Guard purchased around 221 million Luna tokens, which represents around 60 percent of the votes within the blockchain.
It was only then that the company released a proposal for the community to vote on, which would determine the future of the Luna blockchain. The proposal for Luna 2.0 by Do Kwon went through easily, to no one’s surprise.
Yet this façade of decentralization was soon to prove generous compared to what Celsius, under Alex Mashinsky, would do.
On June 12, a month after the Luna crash, Celsius announced that it would pause all withdrawals from the platform – users were given no choice in the matter, and the next day Celsius gave debtors a choice of either top up the collateral or be liquidated.
In July, the company finally bowed to the inevitable and filed for bankruptcy. For those unfamiliar with the crisis, you can expect the company to liquidate, pay back any outstanding loans to the best of its ability, and issue a public apology for the company’s mistakes.
But not Celsius. In the company’s bankruptcy filing, Celsius’ legal team referred to users as unsecured creditors, and unveiled a new plan — investing in cryptocurrency mining rigs to try to repay the debt the company owed.
For reasons I have discussed in another article, this is a ridiculous and grossly irresponsible act. But what matters is that consumers and users were unable to stand up to Celsius, and that Celsius was able to abuse its position of power to trample over its users. The users were not given the choice to appeal the decision, partly because there were no institutions to which they could appeal.
The latest update? Mashinsky has resigned from the company, and the Financial Times has reported that he took $10 million from the company before stopping all withdrawals.
Rather than being controlled by governments or banks, the fates of so many users’ cryptos lay in the hands of Do Kwon and Alex Mashinsky.
And here lies the second reason why the ideologues no longer preach the ideology of decentralization – because the industry has failed spectacularly at self-regulation.
Industry has depended on self-government for so long, but has forgotten that power corrupts, and that absolute power corrupts absolutely.
While the masses may well follow the companies’ ideologues and demagogues during the bull run, when the bear market comes, the shoe will be on the other foot to the highest degree.
Return of institutions
Once derided as unnecessary in the Web3 world and relics of the past, institutions in the Web2 world have not remained as they were as the Web3 world evolved.
On the contrary, it seems that many institutions within the Web2 world are eager to participate in the Web3 world – and have been closely following developments in the crypto ecosystem.
The introduction of traditional investors to the Web3 world has yielded far more benefit and growth than the efforts of the Web2 world alone.
Venture capital firms invest in blockchain technology and Web3 companies not with cryptocurrencies but with fiat currencies. These investors are pouring huge amounts into the Web3 space.
Singapore’s state investor Temasek Holdings announced it would lead a US$100 million funding round for Animoca Brands, and this came after Temasek had already invested in Binance and Amber Group, among others.
The Web3 world has also proven that many of these institutions are necessary for the smooth running of the ecosystem. The BAYC #2162 NFT dispute resulted in a landmark injunction for NFT owners when Singapore’s High Court ruled that NFTs could be classified as digital assets, and therefore afforded protection under the law.
As it stands right now, institutions — not individuals — are the significant players in the crypto ecosystem.
When John Mearsheimer wrote “The Tragedy of Great Power Politics” and compared states to billiard balls, he was discussing politics in the international system. Nevertheless, this analogy is still relevant to financial ecosystems as well – and mainly to the crypto ecosystem now.
According to his theory, states are represented by billiard balls on a table, with the size of the ball representing the power possessed by the state. Big balls are rarely affected by other balls, and are mostly affected by other big balls; while smaller balls are affected by all other balls – and must consider the position and movement of large balls to get where they want to go.
Individuals in the cryptosystem are not unlike the smaller balls on the table – lacking protection and power, and often unable to move as they please. Institutions, on the other hand, are big players — who have control over capital and can bully their way through if necessary, stopped only by other big players.
Instead of the free world of individualism and decentralized power and currency, the original crypto dream has morphed into something that bears a striking resemblance to the Web2 world that many of the Web3 ideologues were fleeing—a world of powerful institutions with the ability to oppress many individuals became too large to stop.
So ends the story of one of the greatest dreams of the Web3 ideologues—not of a heroic last stand, but a miserable realization that the new world of Web3 cannot be completely separated from the world of Web2.
But what does this mean for the future? Is it the end of Web3 as we know it?
Maybe not. As investors and individuals become more hands-on with the development of blockchain technology, there is also growing interest in Web2.5 – to act as a bridge between the Web2 and Web3 worlds.
This is where perhaps a new vision for the future can be built – one that is not based on conflict between the Web2 and Web3 worlds, but on cooperation to provide value to all players.
Featured image credit: Medium
