The hyper-normalization of decentralization

Leo Zhang

By Leo Zhang


Editor's note

The cryptocurrency market is a complex phenomenon.

The long path to Bitcoin was littered with failed technical experiments. In Bitcoin's Academic Pedigree, Arvind Narayanan and Jeremy Clark outline a map of the 20 years of preceding ideas that went into Bitcoin's architecture. Its birth resembles the fruit of the original dream of cyberspace, a "civilization of the mind... more humane and fair than the world your governments have made before." (John Barlow, A Declaration of Independence of Cyberspace).

It's been almost a decade since Satoshi Nakamoto engraved "The Times 03/Jan/2009 Chancellor on brink of second bailout for banks" in Bitcoin's genesis block, wryly alluding to itself as the solution to runaway monetary policy: an alternative to the world of fiat money, it seemed to pose itself as financial infrastructure for a pirate utopia where central bankers didn't exist.

It has gone through many changes and transformations - from "criminal money of the dark web", to "blockchain not Bitcoin", to "rat poison", to "a modern miracle" (see recap below).

Today, alternative cryptocurrency projects are absorbing monstrous amounts of capital, all while simultaneously losing over a billion to hacking and theft. Projects like EOS managed to raise $4 billion before showing as much as a working prototype. And shortly after the mainnet launched, the network went offline due to critical bugs.

What is happening?

Blame the rallying cry of "decentralization!" If all things decentralized must be somehow "good," then the market will flood with decentralized startups of all sorts--startups which are confused about the original value proposition of Bitcoin. This confusion is about to get worse.

This week, the SEC announced that ether, the cryptocurrency of the Ethereum network, is not a security, calling it "sufficiently decentralized" (see recap below). This seems to be the first time decentralization has been used as a criteria for securities classification by the SEC. But are these projects actually decentralized? Those who are close to the mining scene will likely tell a very different story (see recap below).

In his film Hypernormalisation, BBC documentarian Adam Curtis wades through a series of inexplicable and chaotic major events in recent history, which have served to disorient the public; he defines the phenomenon as the process by which people, in the face of increasing political and cultural chaos, retreat into simplified constructs of reality--which in turn make them vulnerable to the acceptance of absurdities. In the digital capital markets, "decentralization!" has been hypernormalized.

The macro environment is now beginning to shift (see recap below). Without the fuel of excess liquidity, we will see how the "decentralization!" revolution holds together.

This week's news recap

Monday: A "modern miracle" full of bugs
Tuesday: Can this "ASIC launchpad" create a new generation of PoW networks?
Wednesday: Fed gets hawkish, perhaps for fear of inflation
Thursday: SEC: Ether is OK, but ICOs are toast

Further readings this week

The deluded world of crypto
(Hackernoon, by Peter McCormack)

"Over the next few years we will see a high failure rate with these projects, either the tech won’t scale, the projects won’t find traction or these unproven tokenised economies just don’t work."

Ether is not a security?
(Preston Byrne)

"This way of thinking about token transactions is elegant in its simplicity; e.g., it is hard to argue that a mined coin on a chain where no tokens have ever been sold or distributed by the issuer to the public is an investment contract, as there is no valuable consideration moving between the user and the blockchain’s creator, ergo no investment of money, ergo no investment contract. Tokens that are not sold are made, through mining or similar processes. Last time I checked, cryptocurrency mining was perfectly legal."

Commentary on the efficiency of ASIC improvement leads to mining decentralization

Considering miner centralization as an Axiom

"Since there are places which will have obvious advantages in regard to the cost of producing blocks it seems geographically (or perhaps geopolitically) there would be some sort of a convergence. It may or may not be difficult to predict; there are many factors including electricity costs, geopolitics, cooling needs/cost etc."

The time value of Bitcoin
(Nik Bhatia)

"Lightning Network provides a framework to measure the time-value of bitcoin, a precursor for a capital market and reserve currency status. Observable variables in Hashed Time Locked Contracts can be used to calculate the interest rate received on bitcoin held in payment channels, allowing investors to measure their opportunity cost of capital. Lightning Network wallet software should include ways to calculate interest and prove the rate received in a trust-minimized way."