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The Best Opportunities In Crypto Aren't Decentralized

Luis Aureliano

Blockchain enthusiasts dream of a day when the services they enjoy most are offered courtesy of a purely peer-to-peer infrastructure. On the backs of participants’ bandwidth, decentralized cryptocurrency exchanges (DEXs) already provide cross-border, feeless transactions to literally anyone who signs up and connects their blockchain wallet. Bitcoin itself is very decentralized, which is a security advantage due to the immense power it would require to usurp the network for malicious purposes. However, decentralized blockchains are far from perfect, and aren’t producing innovations as quickly as anticipated.

Most people now realize that swapping between an ever-expanding array of tokens online isn’t what will bring blockchain into the mainstream, so the rise of DEX products isn’t seen as especially bullish or optimistic. The universal pipe dream for blockchain now entails real decentralized applications, for which Ethereum leads the charge, but progress is slow and an endless series of roadblocks (scaling, governance, environmental impact and more) continue to force us to move the goalposts.

Decentralization Exhibits Technical and Social Troubles

The most pioneering financial products of our time almost unanimously prefer centralized administration of blockchain, as they are better able to achieve their vision without compromising on speed or reliability. This idea is illustrated simply by the sheer number of unique, groundbreaking blockchain products already on the market, which have chosen to serve users from a single point of origin rather than many.

Even blockchain’s definitive competency—finance—is now the realm of centralized services rather than the alternative. A pertinent example is to examine how the simple idea of leverage is administered to traders in a centralized environment versus a decentralized one--not only the technical concept but also its oversight. One of the most exciting products to come from blockchain in years is called MakerDAO—a decentralized smart contract system where users can collateralize their Ethereum in order to issue stablecoin (DAI) loans.

However, Maker has experienced continual difficulties maintaining a static, reliable dollar peg to its DAI stablecoin and amid these troubles, MKR holders have voted to increase the stability fee four times in 2019 alone. This has worked to control the peg to an extent, but tensions remain high in the Maker community because no one knows the identity of MakerDAO Ecosystem Growth Foundation board members (who own 27% of all MKR tokens). A token few were revealed recently, but only because they left then sued Maker over pressures to resign, due to their difference in opinion on how the Foundation’s $200 million would be spent.

Centralization Does Not Harm Consumers

Clearly, even the most lauded decentralized solution has issues delivering on its technical ambitions. More importantly, Maker is less distributed than it seems, highlighted by its aim of increasing centralization with its recently revealed plan to purchase a broker-dealer license and open a for-profit arm. Maker has come full circle, thus highlighting the simple efficacy of the blockchain-enabled leverage attainable on centralized platforms instead. Cryptocurrency leverage is infinitely more convenient and attainable on exchanges like FTX, for example, which employs a powerful and centrally-administered array of financial utilities.

One of the most interesting concepts that FTX traders can enjoy is its leveraged Bull and Bear tokens. Instead of dealing with margin calls or funding a collateralized debt position, the Bitcoin3x Bull token, for example, is simply a token that obtains a return corresponding to three times the daily return of Bitcoin. On the other side of the equation, those who wish to short Bitcoin can buy the Bitcoin3x Bear token. FTX supports a comprehensive market for these tokens, both short and long on popular cryptocurrencies like Bitcoin, Binance Coin, Ethereum, and many more.

Other centralized ideas also serve as further evidence surrounding the inability of decentralization to deliver the same functionality. IBM’s (NYSE: IBM) World Wire service, for instance, is itself a middleman providing worldwide payments between any two currencies in existence. Any company or person wishing to pay another (no matter the size of the transaction) can simply send it through IWW, which does a fee-free exchange on blockchain and then remits payment to the correct wallet. IBM’s custodianship and direction are the reasons that this solution can exist safely, effectively, and accessibly.

Centralized Blockchains Are How It Hits Mainstream

The world is experiencing a sea change when it comes to blockchain, and though it’s only a handful of years old, this span of time is long enough to indicate that centralization is the way to go. We need no further proof than the planned onset of JPM Coin—a stablecoin created by Bitcoin-basher Jamie Dimon’s J.P. Morgan Chase Bank (NYSE: JPM)—but this is supplemented by the proposed integration of stablecoins into WhatsApp by Facebook Inc (NASDAQ: FB).

Transplanting finance to the ledger is sufficient disintermediation, even if it’s done at the behest of a single concentrated entity rather than a disparate group of blockchain enthusiasts. This is a model which accomplishes one of the ambitions Bitcoin set out to accomplish 10 years ago: efficient, real-time international payments. Getting hung up on any single tool’s level of decentralization is no longer valid, because decentralized projects (no matter how ambitious or well-funded by the community) suffer when they rely on what is essentially a body of volunteers.

This is the same reason that highly-functional societies choose a leader—a person who represents the place where the “buck stops”. Though this leader may be the result of a popular vote, efficient systems need singular direction and execution in order to progress reliably, and to pick a path among the many possible. Blockchain is no exception, and the battle between centralized and decentralized versions will result in the former’s victory within just a few years.

Image sourced from Pixabay

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