The Issue With Centralization In Crypto And How We Can Solve It

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Table of Contents

Intro

Legitimate decentralization is a topic that has been weighing heavy on our minds and has often been the topic of contention within the crypto industry. True believers of the industry think that we should operate in the true spirit of decentralization. Government officials and regulators argue that the space is the digital version of the Wild Wild West that must be regulated and controlled. There are countless cases to be made as to why we should continue to strive for a more decentralized landscape. Some of the cases include, but are not limited to:

  • Manipulation
  • Censorship
  • Security Breaches
  • Custodial Capabilities
  • Unnecessary Intervention

The main case being made for true decentralization is that it’s needed to combat the constant threats of a regulatory crackdown from the government.


The Current Landscape Of Crypto Centralization

  • Aside from centralization being prevalent in the cryptoverse, one of the main issues is that it’s not as easily identifiable to the untrained eye. Oftentimes, investors have no idea that certain platforms and blockchains are overly centralized until it’s too late.
  • We witnessed firsthand the consequence of a centralized NFT marketplace when an OpenSea executive was exposed for front-running NFT listings. We covered this in detail earlier this week (here’s the link if you need to be refreshed: link).
  • The buck doesn’t just stop there. On September 14th, Solana suffered a DoS attack that is believed to be the result of the L1 being so centralized.
Source: FX Street
  • Gavin Wood – founder of Polkadot – made sure to use the attack as a teachable moment and offer some words of wisdom.
  • Solana is not the only L1 that runs the risk of being too centralized. Even the client diversity for ETH 2.0 looks a little shaky. Let’s not forget that the King of Crypto – Bitcoin – was thought to be centralized until China recently banned BTC mining. Which caused miners to disperse, therefore making Bitcoin more decentralized by default.
  • As we can see, Teku is responsible for approximately 64% of the validators. Though I expect this number to decrease as the network becomes fully active, it is still something to pay attention to.
  • In other recent news, Chainalysis has come under fire for quietly scraping users IP addresses to assist law enforcement.
  • Last but certainly not least, the biggest nemesis to true decentralization and cryptocurrency in general has been Gary Gensler and the SEC.
  • Gensler sent one of the first shots heard around the cryptoverse when he stated that DeFi isn’t as decentralized as we think it is.
“Former MIT blockchain professor Gary Gensler, who has been Chair of the SEC since April of this year, stated earlier this month that DeFi projects, which exist on Ethereum and other smart contract trading platforms, have features that are similar to the types of entities that the SEC oversees, which could make the space subject to the same regulation that non-DeFi cryptocurrency platforms are trying to avoid.” - Sygna
  • Since then, Gensler has launched a continued attack on the entire crypto industry.


United St Securities and Commission, or SEC, chair Gary Gensler has doubled down on his “Wild West” analogy for cryptocurrencies, calling stablecoins instruments for gambling at old-timey casinos.
Speaking to Washington Post columnist David Ignatius on Tuesday, Gensler said most projects in the crypto space dealt with securities that fall under the regulatory purview of the SEC, while the Commodity Futures Trading Commission, or CFTC, was better suited for enforcement for others. The SEC chair described the authority of both agencies as “robust” but said there were gaps in the coverage, particularly for stablecoins, which “may have attributes of investment contracts.” - CoinTelegraph
  • Gary has repeatedly spoken out against cryptocurrency and the freedom it provides the community to act as custodians over their own finances.
  • So, we’ve detailed the problems with centralization and have given some examples of how it is currently wreaking havoc on this industry that we’ve grown to be so passionate about. What solutions can be implemented to combat centralization?




Solutions To Combat Centralization

  • One solution that helps overcome the threat of censorship is decentralizing the frontend and backend of DeFi applications.
  • Stani, Gabriel, and David Vorwick shared some valuable insights about the importance of decentralized frontends.

 

  • Bartek Kiepuszewski created the perfect thread detailing how decentralized back ends can play a pivotal role in providing Censorship Resistance.
  • In the thread above, Bartek also does us the favor of listing out the most popular projects that use proofs as a validation method.
  • Censorship Resistance is important, but what about being your own custodian? That is where DEXs are essential.
  • While DEXs are the best solution for transactional freedom, they have both their pros and cons:
  • When it comes to the freedom to control your own finances, most of the cons listed are nothing more than a drop in the bucket.
  • However, there are instances where we’ve seen Decentralized Exchanges operate just like Centralized Exchanges. A great example to reference is Uniswap delisting tokens without including the community.
The list of “censored” assets includes Synthetix’s synths and inverse synths, UMA’s option token, Mirror protocol mirrored tokens, Tether Gold, and others. A fascinating list, although one no one can make much sense of. Uniswap doesn’t explain why these tokens are now censored, other than a vague mention of “regulatory concerns”. A strange sentiment for a decentralized exchange.
This incident is an example of how decentralized technology has a long way to go. While the Uniswap Protocol remains autonomous, the front end is in the hands of the developers. That degree of centralization can prevent users from conveniently accessing tokens. Far from an ideal development and one that creates a perilous precedent for the future. - CryptoMode
  • DAOs (Decentralized Autonomous Organizations) may be our best hope for combatting regulation and redefining traditional organizations and governing bodies.
Source: Foundation
  • In addition to DAOs being a tool against regulation, we need a more robust solution. Anthony Sassano has an extreme solution:
“Though I’m not just talking about decentralizing by becoming a DAO and issuing a token, I’m also talking decentralizing the entire stack. The team, the front-ends, the supporting infrastructure - all of it needs to be as decentralized as possible to resist any adverse regulations and law enforcement action.” - The Daily Gwei

Conclusion

  • As issues related to centralization worsen, the crypto community will continue to find solutions to protect the space. Problems lead to innovation, and no industry is more innovative than the crypto industry.
  • Although I’m not a fan of anon founders, Sassano may be on to something. If Gensler and the SEC continue to push for harsh regulations, the space will continue to become more decentralized. However things play out, I’m confident that the community will do what it does best….adapt.