Following our open letter to non-crypto friends, the crucial topic of decentralization demanded further elaboration. Why is it at the heart of so many discussions in cryptocurrency? And why has the crypto community reacted to Facebook’s Libra project with a mixture of amusement, hope for mainstream acceptance, and naked hostility?
Most importantly, we must not let the debate over Facebook’s intentions die down: while the hype cycle may have moved on, you can be sure that the people behind the Zuckerbuck are undeterred by the skeptical reaction to their payments mechanism.
Decentralization is the key difference between Facebook’s centralized “cryptocurrency” and true cryptocurrency alternatives. And it’s more than just a matter of terminology, as we will see.
Central vs. Free
To understand the major differences between centralization and decentralization – at least from an economic perspective – think back to your time in high school. You might remember learning about different kinds of economies; free market economies, central economies, and economies that are a mix of the two.
Free Market 101
On one side of the argument, you have free market, or for the sake of this illustration, decentralized economies.
Free market economies are intended to allow the “invisible hand” of supply and demand to move the value of any given product. Competition is incentivized by the “profit-motive” — merchants make more money if people choose their superior product. Due to the natural desire to compete for profit in the ideal free market system, the consumer should get a better product at a better price.
Centralized Economy 101
On the flip side, you have the central economy. In this system, a few (presumably wise) members of the population decide what is important to have available in society, and then consider what must be produced at a given cost.
These elite few determine a reasonable price and eventually pass this on to consumers. Little or no competition exists, but everyone, ideally, has access to a given product. Relatively cheap prices can be maintained, as quality and quantity are dictated by the powers-that-be and paid equally to all suppliers.
Of course, this centralized system has some pretty obvious problems. Firstly, if the powers-that-be miscalculate the need for a given product, supplies may run short. Secondly, there is little reason to compete; to be efficient and make enough of a product, or to try to make a better product for consumers to enjoy, since the reward is the same, regardless.
Both types of economies have pros and cons. Neither is perfect, and neither of these brief descriptions truly encapsulates the competing economic ideologies of capitalism and communism. But let’s use these as a starting point.
Who’s in charge of the bread?
There is a humorous anecdote about life in England, from the perspective of a central economist.
Mikhail Gorbachev, the last president of the Communist-era Soviet Union, sent an aide to London, who made a stunning observation. There was not a single breadline to be found anywhere in the city! Back in the Soviet Union, central agencies had been struggling to solve this problem – how to create a more efficient “bread supply system” for all people to have easy and affordable access to bread. They were amazed to see the efficiency of London’s system. Gorbachev’s aide exclaimed, “Please take me to meet the person in charge of supplying bread to London. I must learn his secret.”
Of course, nobody was in charge of London’s bread supply system: or, everybody was, more accurately. This is the great advantage of a decentralized system, or a free market. Bread is supplied by market demands. It is not controlled by any one central agency, and that is precisely why it works so well… for a while.
Ironically, the similarities between an unfettered free market economy and crony communism are remarkable, which suggests that all politics are, indeed, circular. The less regulation there is in a capitalist society, the more power is centralized in the form of a corpocracy; the more regulation there is in a communist society, the more power is centralized in the form of an oligarchy.
Net result in both cases: a tiny fraction of the population have undue influence and power over the vast majority.
It seems that a regulated free market is a pretty good thing. A balance between decentralized economic authority, and centralized social organization. In fact, this very argument is the basis for new experiments in cryptocurrency governance, experiments that may eventually lead to a better economic system for all participants.
The general, simplistic theory illustrates why decentralization is so important. But how does this apply to cryptocurrency?
A decentralized currency is, like London’s bread supply system, not controlled by any one entity. It is controlled organically by everyone who participates in its production, transaction, and integrity. Every user who connects a miner and a core wallet serves as a part of this decentralized economy that can not be “turned off” or altered by any single individual.
If a cryptocurrency is controlled by a single large group, such as an ASIC manufacturer who decides to dedicate all of their machines to a given currency and who thereby controls a large percentage of the blockchain, the integrity and value of that entire blockchain is threatened.
In the case of Facebook’s Libra currency, this could pose an even greater problem.
Libra was created, from the onset, to be controlled by a central power. Despite the company’s statements to the contrary, the social media corporate behemoth seems likely to use cryptocurrency to monitor and control every step in the movement of value between users and merchants on its platform. We can choose to believe those statements at face value. Or we can look at Facebook’s history, and judge whether to trust them.
The utility and value of such a centralized cryptocurrency is, clearly, severely flawed.
Unlike Facebook’s Libra, a decentralized cryptocurrency is not centrally controlled. It is not designed to enrich a few individuals who sell, leak, and control your data.
It is instead controlled collectively by all participants, much like the ideal free market economy. It can not be corrupted or manipulated by any small group. It remains accessible to all users and retains its integrity through the collective efforts of its freely competing community.
Instead of having one person or business in charge of this “bread supply system”, all participants are in charge, propelled by their own intrinsic motivations.
No single individual is in charge of a decentralized cryptocurrency. Instead, everybody is in charge.
This is why decentralization is so effective… and so important.