Who Will Take Control of Cryptocurrencies in the Decentralization Revolution?

Original title: "Who will control crypto?"

Original author: Saffron Huang, Josh Stark

Original compilation: Block unicorn

Assuming Ethereum succeeds, blockchains are widely used for global commerce and coordination. Anyone with an internet connection and a mobile phone can gain direct access to the global network for money, value and identity. Every day, billions of people interact with the L2 chain ecosystem secured by Ethereum. Security practices have improved at every layer of the stack, and major hacks are largely non-existent. It is very common for companies and individuals to create encrypted Tokens, and legal tenders of various countries are issued on the blockchain.

Society's legal, social and economic normative codes already exist in pervasive new organisations, interaction patterns and complete reconfiguration of digital objects (NFT, etc.); Blockchain's "API" as default.

But over time, things change behind the scenes. The decentralized protocols that started this revolution slowly lost market share and were replaced by more centralized alternatives.

Against the backdrop of success, libertarian sentiment within today's vast crypto community is on the decline. Convenience and cost become more important. Governments and central banks have had time to catch up and launch their own centralized blockchains on which to issue their fiat currencies and bonds exclusively, which draws economic activity onto these “national chains”. Businesses and individuals use them to pay taxes. In some countries, the government requires that its national chain be the only legally usable blockchain for its citizens.

National chains are used by many people and there is very little friction in doing so; they are different from the heavy paperwork and bank letter verification systems of the past. People can do most of the same things with the wallets they are used to in decentralized blockchains. Governments could even require the most popular wallets to only allow access to chains of their choice, just as some countries today require large internet companies to restrict access to certain content.

Every application on the open blockchain will eventually be deployed on the national chain. Your favorite decentralized exchange, token and NFT games are all available in this enclosed garden. The government provides a tax relief program to attract users to transfer assets to the national chain. Other benefits of using the national chain include automatic tax calculation and value-added tax deduction.

Under pressure from the government, the world's largest technology company is urging users to migrate to the national chain. The most popular mobile phones are installed with state-approved blockchain wallets, with simple instructions and an intuitive user interface to set up wallets, transfer open chain assets to national chains, and tax calculations. While one could use an open chain wallet or use a third-party client to interact with the national chain, it's really easy not to.

These national chains provide governments with enormous influence over their national economies and the activities of their citizens. How they use that power varies around the world, with sweeping financial oversight and occasional scrutiny becoming the norm in some places. In others, this power becomes political; factions compete to influence the character and parameters of the chain of states. They add whitelist or blacklist addresses, add or remove privacy enhancements, or introduce new automatically enforced taxes. Economic reform, gender and sexuality, foreign affairs, and other issues become debates about whether to revise the chain of states to execute effectively.

In some countries, laws have been introduced in an attempt to limit government control over national chains. But for the most part, giving states easy access to personal transactional data has slowly become an (sometimes grudgingly) accepted privacy norm, even as debates about the merits of privacy versus security are revived.

Even if there are legal limits to government control over state-owned chains, laws can change in unpredictable ways. There are times and places where it is legal to switch back to a centralized chain, but not always. When activities are banned, almost everyone's complete transaction history is on the national chain. There is almost no way to erase these large amounts of data. Everything in the past will be unearthed by powerful hackers in amazing ways.

National chains are better maintained than open chains because they are centralized. This allows core engineers to easily and quickly upgrade the national chain, which facilitates domestic and international mass adoption. Open chains are considered less reliable and become less trusted. Conventional wisdom holds that hacking does not actually exist in state chains; the force of law and authority would swiftly crack down on any hacking. On a decentralized blockchain, hackers can easily rewrite the blockchain state, and consumers are less protected. Some say privately that it is possible that powerful actors deliberately challenge decentralized protocols by devoting resources to small-scale disruptions and attacks — not to destroy them, but to prove their unreliability and Splitting their ever-shrinking communities affirmed to citizens their right to freely choose the chain of state.

As time goes by, the decentralized network gradually fades from people's sight.

Master Control and Cycles

The forces that determine who and how a technology is controlled are turmoil of. The open web that started the crypto revolution probably won't last until the end of the century. The national chain scenario is one of many possible future trajectories in which some or all of the blockchain ecosystem will eventually be under the control of one or a few players. We think this is similar to what legal scholar Tim Wu calls a "cycle" process.

Tim Wu proposed in his book "The Master Switch" (2011) that there is a phenomenon in the information industry, an initially new, An open medium of communication becomes a controlled, closed system. Using examples from 19th- and 20th-century American industries, including telephone, radio, film, and television, Wu creates stories where open heroes often lose out to power controls and villains. Although he does not provide clear criteria for the final phase of the cycle, the cycle can be viewed as a general process of capturing and controlling information technology. One or a few entities extract most of the industry's revenues, block new entrants, and tightly control the media.

What caused this cycle? Tim Wu does not theorize for a clear, consistent causal mechanism for this process; each industry analyzed in the book experiences very different ways in which it becomes closed and dominated by one or a few entities . In the phone business, AT&T's mission of consolidating power owed much to the capital it secured through JPMorgan Chase; Use vertical integration to destroy independent theater owners.

However, this does not mean that some causal mechanism does not exist. For example, regardless of the method of capture, once an industry is captured, it is difficult to capture again (especially when antitrust laws are weak and network effects make scale profitable). If crypto is decentralized and power is distributed simply because it is new and unregulated, then the arrow of time will surely bring attempts to capture power and money; some of which will be successful, and very It is difficult to reverse.

In other words, different mediums are susceptible to different modes of capture, which can be discovered and exploited by interested parties. The best way to capture a blockchain ecosystem is likely to be very different from what is best for TV or radio, especially as many open chains are designed explicitly for this outcome.

Before we continue, what do we mean when we talk about the loops that occur in cryptocurrencies? Concentration”; both terms have pros and cons. " capturing " defines the process as a rather deliberate, even nefarious one;  "centralization" may have more vague intentions as to why some entities may have more control, but this is A controversial and ill-defined term. Now, let's define centralization or capture as: "One or a few entities can indeed exercise excessive control over the medium, and the free flow of competitors and users, in and out of the ecosystem."

Our definition is broad because we consider not only the centralization of the blockchain itself, but also the broader ecosystem and environment that affect how blockchains are used. There are at least three "layers" where centralization can occur: the protocol layer, the application layer, and the social layer.

For example, a blockchain may be will be centralized at the protocol layer. This is the type of centralization risk that people in the blockchain ecosystem tend to focus on.

However, even a decentralized blockchain ecosystem at the protocol layer may be centralized in other ways. For example, if a small number of centralized applications end up having disproportionate control—perhaps because they effectively control how most users interact with the blockchain. This would be similar to the web today, where even though the internet is built on “decentralized protocols,” a lot of traffic is controlled by Google and Facebook.

In the end, even if the protocol layer and application layer are still decentralized, there is a bigger world outside of encryption.  The "social layer" refers to everything else - how people, communities, ideologies, governments, legal systems and other aspects affect cryptocurrencies.

Our national chain program focuses on social dimension capture. Even though Ethereum itself may remain decentralized, nation-states can use their considerable power to influence people's actions - by creating incentives to use national chains and disincentives to use decentralized blockchains. Blockchains can remain decentralized while the global marketplace for digital value creation and transfer slowly falls under the control of a few centralized entities. If a blockchain remains decentralized forever, but no one uses it, is it still useful?

Ways Cryptocurrencies Can Be Captured

True , even with definitions and a layer-by-layer breakdown, it’s hard to imagine what a centralized or captive cryptocurrency would look like because the current environment is so diverse, new, and rapidly evolving. To gain some insight, we can look at historical and cryptocurrency-specific factors.

In The Master Switch, Tim Wu talks about many online industries becoming centralized as existing powers exert regulatory, financial or physical new medium to dominate or destroy it.

Regulatory pressure

Regulatory action played out during previous centralization of the Internet industry It works a lot. For the radio industry, the U.S. government has passed laws that favor the reduction of high-power stations if radio interference makes it necessary (Wu, 2011, p. 83). In the film industry, the Edison Trust relied heavily on the use of patents, pricing, litigation, and other legal tactics to do things like prevent independent filmmakers and distributors from importing foreign films, and ban certain stars (pp. 66-72 ).

By design, cryptocurrencies are harder to regulate and control than movies or broadcasting. It was built to be decentralized, global, and in many ways anonymous. In previous industries, incumbents and incumbent-friendly governments used regulation and enforcement to slow down or shut down competing inventors and businesses. Targeting any one institution or group responsible for cryptocurrency governance is challenging because most of its code is not "owned" by anyone. Regulation can lead to more centralization by pushing people towards more centralized chains because they are easier to regulate. Governments can exert this pressure by unequally regulating assets on different chains, so that people will move to chains with fewer nodes or more centralized consensus mechanisms.

In any case, regulation is likely to significantly affect how cryptocurrencies appear in people's lives, for example through restrictions on fiat currencies, securities and trading platform regulations . Countries will largely determine whether there is enough social, regulatory, and technical infrastructure in place to allow people to use cryptocurrencies for payment settlements or to buy real estate; this is a great opportunity for the crypto community to talk to and engage policymakers reason.

Financing

Another way that cycles have historically occurred is when larger competitors Smaller competitors have better money. In some respects, cryptocurrencies are markedly different. One of the first things that cryptocurrencies bring to the table is decentralized crowdfunding and the creation of new speculative assets that help bypass the limitations of traditional funding sources. (Of course, regulation can change this.)

Nevertheless, centralized players may tip the scales in favor of one project or another. Money helps advocate for policymakers. Additionally, it is easy to invest in new crypto projects, blurring the line between old and new industries; traditional VCs hold many tokens in new protocols. Especially when the web 2.0 giants are rebranding themselves as "Meta" or "Block" to get a new piece of the pie, we shouldn't ignore the power and influence of private companies to shape the fate of cryptocurrencies.

Controlling infrastructure

Another factor in past cycles has been infrastructure, Continued control of infrastructure helps established giants like AT&T maintain their dominance. Building on top of a fundamentally centralized infrastructure or protocol gives the controllers of that protocol various advantages in the future. AT&T kept rising from the ashes and regaining power as its control of telephone and cable TV lines gave it a huge voice not only in telephony but also in emerging industries such as radio, television and the Internet.

Crypto is not built on top of some basic centralized protocol. It uses a very decentralized network, it is not governed by any one authority, they can shut down or change the protocol at any time. The TCP/IP protocol transmits data along different routes in a decentralized manner, without prioritizing or relying on any single path or node. If an ISP were to try to block access to a specific encrypted web application or data packet transmission, it would require a lot of international coordination to have an effect (barring a 51% attack, which is highly unlikely). Plus, the most successful protocols—Bitcoin and Ethereum—are specifically designed to prevent any particular actor from gaining majority control.

However, there are still factors related to the physical infrastructure that can lead to centralization.

Although the Internet Protocol is decentralized, the Internet still relies on physical infrastructure that can be controlled by powerful actors such as states ( or destroy). Many countries have established a large degree of control over how their citizens use the internet, and they can prevent users from accessing encrypted applications. This can be extremely restrictive for many people, even if they don't completely shut down the blockchain network.

The protocol itself will be weakened due to excessive reliance on centralized services, such as cloud computing platforms such as AWS. The Ethereum ecosystem is often criticized because many popular applications rely on the services of a handful of specialized nodes. Users and applications can exit to other node providers at any time, which means that AWS has no hard power over the network, but reliance on services such as AWS introduces subtle means of influence. People may be censored without their knowledge; platforms may accumulate political or social influence that may not rise to the idea that users need to migrate, and other entities may use these services as weaknesses affecting the cryptocurrency ecosystem .

Operating more generally, the need for specialized equipment means that those who supply or own it have enormous control. Bitcoin mining has to be done on specialized hardware, made by only a few suppliers, which is a big barrier to entry. Start-up costs and operating knowledge can be prohibitive, and while companies that manufacture and distribute such equipment can control, directly or indirectly, who gets it and how, this geographic concentration of physical infrastructure can mean vulnerability to certain The impact of national policy and geopolitical manipulation.

Quality of service

Customer needs for quality and scale also contribute to centralization. In Master Switch, AT&T has an early advantage in radio because they own the long-distance telephone infrastructure -- which also happens to be good for delivering radio programming. It was the only company capable of producing broadcast networks; economies of scale meant it could produce a show for 16 stations, pooling those revenues to create a single, higher-quality product (p. 76).

The novelty of technology can become obsolete, which can lead to consumer dissatisfaction with the quality, reliability and safety of the service. This is where crypto can learn, it's a very new and exciting technology, but it's slow and expensive, DAPPs are often bogged down by poor user experience, and developers find it difficult to build on top of certain protocols . This prevents people who are not interested in crypto from using blockchain services. Even for those who are excited about the promise of crypto, many may leave crypto and return to enterprise platforms if quality remains low.

When it comes to the issue of cryptocurrencies being destroyed by centralized entities, we have to ask - what is the motivation for others to shut down cryptocurrencies? In the past, Dynamics like market cannibalization lead to suppression of new technologies. Considering the threat of FM radio to AM, RCA tried its best to suppress and oppose FM radio invented by Edwin Armonstrong (Edwin Armonstrong), and its cruelty even led to Armstrong's death (Wu, 2011, p.134) . The tape never made it out of Bell Labs because AT&T worried it would affect their answering machine business (p. 106).

For encryption technology, it seems easy for existing private companies to invest in and reap the benefits of new technology by purchasing Token or marketing nft, which mitigates disruption some motives.

Even so, in the long run, a future of widespread integration of blockchain technology could prove devastating to many incumbents who cannot avoid being displaced . Banks are a clear example of how an industry can be threatened or forced to transform through new innovations such as encrypted payments, financing, and securities. The automation of “governance” structures using smart contracts could threaten any industry that brokers agreements between people, including lawyers and traditional business managers. This is a large group of people who may be motivated to unite, dominate or shut down the decentralized crypto world.

But in many ways, the crypto genie is out of the bottle. At this point, it is almost impossible for the incumbents to beat blockchain technology, so we will see how they adapt and respond to this new future.

How can cryptocurrencies withstand economic cycles?

Satoshi Nakamoto's great leap was to create a protocol that was highly resistant to capture through the use of cryptography and economic incentives. The point of a blockchain is to maintain a fair and widely decentralized/decentralized relationship between the entities that maintain and participate in that blockchain. Only then does its content—assets, smart contracts, data of all kinds—have the necessary persistence or hardness for humans to depend on it. Capturability at the protocol layer is the foundation of trusted neutrality; protecting it is necessary for the success of a cryptocurrency ecosystem.

Other network technologies, such as broadcasting or the Internet, are very different. Their basic design and value proposition do not take into account who controls the underlying infrastructure. Radio waves, or packets of information, travel at the same speed, providing the same user experience regardless of who owns the wires.

Credible neutrality at the protocol layer is necessary - but not sufficient to resist capture more broadly. The crypto community can learn from the experiences of others: Web technologies have had a history of success or failure over the centuries, what can we learn from the past?

Maintain a financial edge

Previous technological changes have failed because they cost more than incumbents spend. Open source work is critical to encryption, but often underfunded. So far, the crypto ecosystem has been able to solve this problem by allowing centralized markets to bet on their own future and creating new funding mechanisms.

New funding and innovation models can create the space, resources, and flexibility to foster continuous creative progress so decentralized networks can not only survive, but Stay ahead in terms of quality and newness of use cases at the application layer. If these use cases can generate significant economic and social value in a decentralized way, especially because of decentralization, people will use decentralized blockchains, migrate to them, and support them.

The financial advantages of open source need to be preserved for the long term, and history tells us that the fight for the future of encryption will be decades, not quarterly fiscals.

Growing a global community for cryptocurrencies

Given that the Internet has already been established, blockchain may be The first true post-Internet technology movement. The cryptocurrency community has an advantage that the early broadcast or film industries did not have: a way to reach every corner of the globe where free internet access exists.

Many threats to cryptocurrencies are nation-state specific. This includes draconian regulatory measures or actions by strong incumbents, often limited to certain countries or regions. But cryptocurrencies built on top of the internet are the default global currency, and it would be beneficial to deepen that advantage. Nurturing many independent, self-sufficient communities in different parts of the world will strengthen the ecosystem at every level.

Cryptocurrencies must be an option

In our national chain scenario, we The assumption is that most people will prioritize convenience and ease of use. It takes for granted that people will only be exposed to blockchain as consumers, what if they are exposed to cryptocurrencies more as citizens?

Crypto A big difference from previous network technologies is that there is a strong imprint of specific value in the process of creating the ecosystem. Encryption has always been a decidedly political movement as well as a technological project.

Decentralized blockchains are being used to give humanity something different from the big centralized systems that dominate our world today. If people start to recognize and value this difference, we can start to create an ecosystem that makes it possible for large numbers of people to opt in and prioritizes those values over mere convenience. Democracy itself is rarely the most convenient or expedient way of governing a society. But democracy survived for hundreds of years because large numbers of people valued its ideals and were willing to fight to defend it.

In order for people to choose and support blockchain as they support democracy, people must understand blockchain and what it stands for. If we ask people to vote for their choice - what exactly are they voting for? What will we say and show to developers, businesses and users when the state chain goes live and they are asked to make a choice?

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