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Caution: Can two companies actually be responsible for the fate of Crypto projects?

Date: 2022-08-24

Seems crazy but it’s true, and the solution isn’t close

Crypto projects crossroads

Photo by Pablo García Saldaña on Unsplash

You were told that crypto represents the ultimate sure-fire path to financial freedom, where no central entity can decide your fate and the fate of your wealth.

Well, it is safe to say that this is not how things are today, and central entities will have the power to decide not only the fate of your portfolio but the survival of the entire crypto space.

In a conference this month, Vitalik Buterin (founder of the Ethereum blockchain) confessed that centralized USDC could decide the future of contentious — contentious being not supported by 100% of the community — ETH hard forks.

Now, unless you are a tech-savvy crypto enthusiast, that sentence made absolutely no sense at all. Yet, the implications are very scary — and that’s using an extremely light euphemism.

Thus, you need to understand the implications. What’s more…

Not understanding these implications and investing in crypto is like entering a battlefield blindfolded.

Consequently, if you want to feel more protected and prepared to better manage your crypto investments or, to the very least, have a better thought process to test your exposure to cryptocurrencies, read on.

Now, if I still have you around, you’ll be wondering…how on earth is this possible and what can I do about it?

But first, what is the nature of the problem

This was very beautifully explained by Vitalik:

“At the moment of the merge, you will have two [separate] networks […] and then you have exchanges, you have Oracle providers, you have stablecoin providers that are kind of deciding in a way, which one they respect.”

In other words, exchanges, oracles — elements that enable outside-world data to be used by blockchain’s smart contracts, and stablecoin providers, have to decide which of the two versions of the blockchain they now respect and support.

The Merge, in case you aren’t aware of it, is the transition of the Ethereum blockchain from a Proof-of-Work (PoW) control mechanism to a Proof-of-Stake (PoS) one.

This transition essentially means that the rules of participation in the blockchain change, and with PoS energy consumption will decrease by 99% and $ETH issuance (how much Ether is distributed) will drop by 90%, making the Ether cryptocurrency potentially deflationary, which would mean a higher monetary value per your Ether coins.

By the way, those who define PoW and PoS as ‘consensus mechanisms’ are wrong. They aren’t used to achieve consensus but to define rules of participation. This is a strikingly common mistake made by even the most knowledgeable experts, but it’s still a reckless way to describe them.

Hard forks and supporting actors

To carry out said transition, blockchains need to implement what is known as a ‘hard fork’, which is creating a new version of the blockchain.

However, as blockchains are distributed — each node has a full copy of the blockchain — we essentially find ourselves with two versions of the blockchain, the old version and the new one (each with its own cryptocurrency).

Therefore, in order for the new version to succeed, a majority of nodes, protocols, exchanges, oracles, and stablecoin providers need to support the new version instead of the old one.

To be strictly clear, the blockchain those actors support is the blockchain that survives.

Broadly speaking, depending on which blockchain these actors support, will determine the value of the underlying cryptocurrency that you, my friend, have in your portfolio.

Consequently, this choice completely determines if your coins survive or go to zero.

This decision, however, will be done by two companies

Although support for the new PoS Ethereum blockchain is widely assumed and accepted, and the vast majority of aforementioned actors are decentralized, there is a concerning issue regarding stablecoin providers.

Out of the top 3 stablecoins, all them are governed by centralized entities. These are:

  • Tether: Owned by Tether Holdings Limited, a centralized company. Market capitalization of $68 billion.
  • USD Coin: Owned by Circle, another centralized company. Market capitalization of $52 billion.
  • Binance USD: Owned by, surprise! Binance. Market capitalization of $19 billion.

Not until the fourth place that we see a decentralized stablecoin, DAI, owned by the DAO-governed Maker protocol. However, they have a market capitalization of just below $7 billion.

For example, the moment the Merge goes live, cryptographically speaking, there will be 100 billion USDC in both chains, the old PoW version, and the new PoS version, thereby forcing Circle, the company behind USDC, to decide between one of the two.

This decision cannot be understated, as by choosing one of the two versions, owners of USDC coins will no longer be available to use them in the other, unsupported version.

Considering they both account for a total market capitalization of more than $100 billion — third and fourth biggest in market capitalization out of all cryptocurrencies in crypto — it is safe to say that USDT or USDC-unsupported blockchains are doomed and will most likely disappear, and, with them, the cryptocurrency that is sitting in your portfolio.

The fate of decentralized systems in the hands of the few

How are we supposed to trust blockchains to be decentralized, if their fate depends on a decision, probably coerced at times, of two companies located in Hong Kong — potentially coerced by the Chinese government — and the U.S. — potentially coerced by the U.S. government?

I’ll help you out, this is far from being decentralized.

Actually, in the case of Ethereum, Vitalik is always clear in demanding broader support for decentralized stablecoins, thereby acknowledging the centralization problem with stablecoin providers in the first place.

Adding insult to injury, both companies are heavily monitored and pressured by the aforementioned governments, with examples like the Tornado Cash blacklisting, on which Circle, without explicit demand from the U.S. government, adamantly blacklisted any USDC address somehow related to the Tornado Cash protocol.

If any of those governments suddenly blacklist the Ethereum blockchain, would Circle and Tether blacklist any address related to that blockchain?

Seems extremely improbable, almost impossible, but it just goes to prove how potentially hazardous the dependence on these companies is for crypto and its crusade toward a distributed world.

(De)centralization is the core ‘raison d’être’ of crypto

People just don’t give decentralization enough credit.

But let me tell you something, if someone tells you “decentralization isn’t important”, that is the easiest way to detect people who don’t understand crypto, and, more probably than not, will eventually drown in losses.

Decentralization is the end goal of crypto, the ultimate reason for existing, the key differentiator.

Without decentralization, Crypto is a pile of over-complicated terms and pointless ‘innovations’ that eventually lead nowhere.

Let me be clear, centralized cryptocurrencies are the worst investment you will ever make, glorified sh*tcoins that fuel a centralized database that, ironically, doesn’t need a cryptocurrency in the first place.

It’s no better than an SQL database. In fact, it’s worse, as it is far more complicated to manage and run.

My point here isn’t that SQL databases are bad, what I’m trying to say is that centralized crypto projects not only don’t improve the status quo, they worsen it.

While making you poorer.

Why is decentralization is so important

Decentralization’s importance is paramount for three main reasons:

  • It is the core security feature. Without decentralization, and security, crypto’s biggest competitive advantage, is lost. The more distributed your system is, the harder is to hack it, as you must possess a much higher degree of assets (computational power in PoW blockchains or token equity in the case of PoS) to even attempt such feat. This is why highly distributed blockchains like Bitcoin have never been hacked.
  • It is a regulatory weapon. Crypto protocols are in a never-ending battle with regulation. Recently, lawmakers and other regulatory entities have increased the pressure on the space, with many arguing that the majority of cryptocurrencies should be considered securities (thereby implying that they are centralized, which would mean the death of the whole industry). Upcoming regulation, however, seems to imply that the more decentralized a crypto project is, the easier it will be for the underlying cryptocurrency to evade tight regulation, and, thus, thrive.
  • Crypto just doesn’t make sense without it. Decentralization is what permits crypto to comply with the initial vision of creating truly trustless, permissionless, highly available data ecosystems on which anyone, from anywhere, can participate. Centralization reduces availability, enforces censoring, and prevents freedom.

Decentralization is crypto’s battle-horse. We must embrace it, fight for it, and protect it, because without it, we are fighting a pointless war, a war we cannot win. Value decentralization, and make sure the cryptocurrencies you invest in are decentralized or, to the very least, have a clear roadmap toward decentralization.

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