Is decentralisation the future?

Wednesday 26 April 2023

Author: Jon MacDonald 

The recent collapse of Silicon Valley Bank has demonstrated structural challenges in the system, and bolsters the case for decentralisation, says Jon MacDonald, Chief Marketing Officer at Minima.


What SVB and FTX share in common is more than just a 3-letter acronym. When Silicon Valley Bank suddenly collapsed, this caused chaos in the finance industry, much like what happened with the collapse of FTX, the Bahamas-based cryptocurrency exchange. When things go up in flames, like SVB, it’s easy to start running in a wild panic - but knowing where to run is crucial. In this case, we need to run to a truly decentralised platform, untethered to any large corporation or gatekeeper. 

In spite of this relatively rosy longer-term outlook, VCMs are facing a credibility test in 2023. The quality of many, perhaps most, carbon credits have been called into question, with a notable increase in criticism from both the media and industry participants over issues such as lack of quality control or additionality and leakage. The multiplication of standards, marketplaces and new services around VCMs are adding confusion to an already opaque market, which could erode confidence in those markets until best practices are well established. 

The Problem with Centralisation

Centralisation is fundamentally flawed. It's useful to look at how centralised structures have become the way that they are, especially in TradFi, a modern term for traditional finance and banking. Taking recent events in the banking world as a snapshot, a commonly viewed cause is that US banks were provided interest-free money by the US government and the Federal Reserve Bank for years to prop themselves up, and this system ultimately proved not to work. A pragmatic view is that the endemic features of centralisation are what led to its downfall. From nature to technology and everything in between, centralisation stems from greed, where one party or parties have more control than others, another party is ignorant to this control and is fed a narrative to keep the harmony between the two. When something slips, the disharmony is a narrative problem, because those unaware start losing out. In rare cases, those controlling parties and groups getting marginalised need a rescue plan, like a new system or bailout which makes the controlling group subdominant. Then the narrative continues. 

It's unfair to blame the government or banks, or the Roman Empire, for capitalism in terms of a centralised construct. This is actually the outcome of greed and fear, and is a systemic trait of humans. Such systems can never be fair or equitable, nor decentralised. As the adage goes, power corrupts and absolute power corrupts absolutely. 

The unregulated nature of VCMs hinder greater take-up of them, as it compromises their credibility and use case for buyers. As such, state- or industry-imposed governance will probably rise for VCMs. Some progress was made at COP 27 over Article 6, which aims to set up a UN-administered system of carbon trading between countries and companies. However, some key questions remain on how this will affect VCMs.

Given that the collapse of the Washington Mutual Fund back in 2008 was a hallmark event in the leadup to the Global Financial Crisis (GFC), such events threaten a new crisis. What this means for crypto depends on whether the crypto project is centralised or decentralised. If a crypto project is fully decentralised, then this fallout could serve as an advertising campaign for the strength of decentralisation. Note, however, that decentralisation is perhaps one of the biggest lies in crypto. Decentralisation is a binary situation: you either are or you aren't - there is no such thing as slightly decentralised or mostly decentralised - the term ‘fully’ is only used so that our bias can be corrected. Unfortunately, nothing so far has been truly decentralised: from Bitcoin to Ethereum, every protocol has points of centralisation. To be a decentralised blockchain, there must be zero hierarchy whatsoever. 

The only solution is to enable a network that's created by the people, for the people. One that cannot be attacked or censored. 

For a regulator or lawmaker, centralised structures bring forth many questions. Centralised protocols masquerading as decentralised ones are supposedly run by their people, while having the kill switch in the hands of a company, or the mining farm of validator groups. Bitcoin, for example, has 4 groups controlling 75% of its hashrate. The risk of such a fall as SVB is that, in the short term, people may move their money to crypto, because they think it's safer than in a bank. In the midterm, these centralised blockchains will become increasingly under attack. You always know whether something is centralised, because you’re able to successfully attack it. These attacks come with scrutiny from the Securities Exchange Commission, including such projects as stablecoins and Ethereum-based offerings that could feasibly come under investigation as being unregulated securities. 

The Importance of Blockchain

People are understandably cynical about blockchain due to the large procession of bad actors and the lack of truth surrounding decentralisation. We must remember why blockchain matters: freedom through decentralisation. Surely this should usher in a whole generation of people who believe in that purpose. Unfortunately, the word decentralisation has been misused and abused. Even the term DeFi, a modern term for decentralised finance, refers to a small volume of people who control a set of transactions for a great deal of people who feel as if they're buying into something decentralised. The only decentralised element of DeFi is in its name. 

If you played football with a circular goal post your whole life, only to be told it was supposed to be rectangular, there’s no doubt you’d be sceptical or derisive. The same thing applies to decentralisation: what is required is a fundamental and widespread shift in mindset and industry. That’s a long game indeed.

Looking Ahead

SVB funded a large volume of startups and where they will go now is concerning. The hope is that new crypto projects will learn that, from a finance perspective, centralised banks are not indestructible, especially if powerful forces have a vice-like grip over them. From a crypto perspective, new launches will likely suffer the fate of all centralised structures over time, where they erode themselves internally. With Ethereum, for example, anyone who's tried to use Metamask and paid exorbitant gas fees has probably hoped for a better future for crypto. Ethereum sacrifices the hope for decentralisation and justifies this by citing the blockchain trilemma, but the truth is that there has only ever been a di-lemma: there is either centralisation or no centralisation. 

What’s happened with SVB highlights the enormous fragility of traditional banking and the complete travesty of crypto offerings that are Decentralised In Name Only (DINO). The reason why blockchain protocols exist, first as a system of thought in the 1990s, is because of what happened recently in the banking world. We only need to look around and smell the smoke of the repeated financial fires we see around us to know that we need something better. The Bitcoin whitepaper, spurred on by the GFC, was meant to be a beacon of hope, but instead found itself being the object of many dinner party jokes and memes about ‘how are your bitcoins are doing’, with some finding more value in pizza than 10000 Bitcoin tokens.

Shortly prior to its collapse, SVB received a clean bill of health from its auditor. Within finance especially, the only source of truth should be the individual. Ultimately, we need to know what is in our wallets, and what our codes are, and we need to audit ourselves. Inevitably, we will find ourselves in transactional relationships, but there should be no other parties involved. Reducing points of failure is as important in finance as in engineering, and in nature. We need to have complete control of our assets and actions, in addition to knowing that we are not vulnerable to intermediaries or changing regulations. Current mainstream financial trade involves reliance on institutions and platforms with multiple third, fourth, fifth parties and financial relationships we are unaware of. We have no way of trusting their position and intent. The furthest stretch of trust should be with someone who has a shared intent in our transactions. You're sending something to me, I'm buying something from you: we have an intent. No other parties involved.

Ultimately, we all have a choice. Do you trust faceless third parties with questionable intents? Or do you trust yourself: your keys and your coins? If your answer is the former, then you should wait for the next news story or celebrity to take over the front page, and continue with traditional banking, knowing that their intent has nothing to do with your personal benefit.

But if your answer is the latter, then you understand the need for decentralisation. Welcome to the dawn.

Jon MacDonald is Chief Marketing Officer at Minima


Related Articles

Sep 2023 » Investments

The ascent of primary research

Sep 2023 » Investments

Investment Opportunities in Biotechnology

Sep 2023 » Climate Change

Are hedge funds stepping up on climate transition?

Aug 2023 » Investments

Value for money: a more holistic approach is needed