Centralized Vs Decentralized

Mike Maloney stated recently when referring to current world economics that Capitalism does not exist. All formerly assumed Capitalism is, instead, Cronyism. That is a problem! The underlying issue is that Central Banking Systems are only in place for self-serving interests. Their purpose is to effectively transfer all global wealth from “Main Street to Wall Street”.

Centralization of authority is defined as the systematic and consistent concentration of authority at a central point or in a person within the organization. Under a centralized system of money and economics, the Banks govern the Government. To get a firm grip on the impact of Central Banking systems, one could refer back to President Andrew Jackson in his 1832 Veto Message Regarding the Bank of the United States. In that he wrote, “I cannot perceive the justice or policy of this course.”1

Decentralization, then, is the process by which the activities of an organization, particularly those regarding planning and decision making, are distributed or delegated away from a central, authoritative location or group. Rohit Khare‘s definition of decentralization, familiar to programmers, is “a decentralized system is one which requires multiple parties to make their own independent decisions”. This applies to Peer-to-peer software creation and journalism, particularly.

Having expounded on the differences in Central and Decentral systems, where does Cryptocurrency fit into the equation? For now, the world exists in a sort of duality; centralized and decentralized. The two cohabitate on many levels. There are both central and decentral currencies, exchanges, trading platforms, networks. While we deeply rely on central governance in daily life for goods and services, the trend is opposing in Fintech.3 Much like the last Great Revolution, we are entering a new age. We are arriving at a new paradigm and what has been dubbed by many as the Fourth Industrial Revolution, or the Digital Revolution.

There are a plethora of ideas and activists moving us toward separating from central authority. Call them Anarcho-Capitalists, Voluntaryists, Austrian Economists, Economic Permaculturalists, or any number of terms. In fact, these visionaries and futurists are Revolutionary Thinkers. It has been a fair bit of time since we had those in society. There are two distinct force at play. The former, the Revolutionaries. The latter, the financial leviathans clinging to the only system we have known in a generation or two. Central Banking and governance. The power struggle is leading to massive amounts of wealth being transferred and incentivizing the technologically savvy to participate in creating dominant central digital currencies. Ripple (symbol XRP) comes to mind.

Ripple technology was designed to replace the institutional system for international payments, the SWIFT network, used by banks and other major financial institutions. This is a prime example of a centrally controlled cryptocurrency. Basically, it is central. It is a private Blockchain all its own. The danger is that XRP can quickly centralize toward a few megabanks and that is no different than the current central banking financial system.

It is also worth discussing exchanges at a surface level. On a decentralized exchange or platform (Shapeshift for example), an individual cannot enter a trade from fiat to crypto. They can transfer a cryptocurrency from a centrally governed exchange and perform a swap or trade between two different crypto currencies. However, on a centralized exchange such as Coinbase, Kraken, or Binance, fiat or cash money can be deposited from a central bank in exchange for a select cryptocurrency. This generates a fee for the transaction, since the exchange will be using that revenue generated to control entry and exit points on the Blockchain.

The move toward decentralization involves a distributed ledger, a distributed Blockchain. This uses a peer to peer protocol on an open ledger to facilitate trust and confirmation of transactions between hundreds of different nodes not aligned with a central authority. Basically, this keeps the middle man out of business and the cost of doing business much lower.

As an example of advantages decentralization can apply, it is worth looking at how money is moved between countries and across borders. An easy example is an individual working on a Green Card or VISA in the United States who hails from New Delhi. In New Delhi, the poverty rate is astronomical and families live on much less money than those in the first world. But the good son working on foreign soil still wishes to help his parents and siblings. So, he sends money every month to his mother and father. If he wishes to send $1000 US each time he collects a paycheck, the cost of that transaction to simply send money Western Union (old school Remittance Market) is a globally averaged 15%, or $150. That only leaves $850 for his family. This is rather criminal since he already had taxes and fees taken off the top. It also could mean the difference between having to choose between eating and paying bills for his loved ones. Fortunately, he can afford this, so he figures in an additional fifteen percent with each transaction.

Think about it! If 2.5 Billion people around the world are dislocated and unbanked a hypothetical since there are over 7.5 Billion of us, then it is no secret this is a common occurrence. The annual global Remittance Market in 2016 was $441 Billion. It is estimated to be above $550 Billion today.2

Forward to the middle aged father living in Yemen. At the moment, Yemen is ravaged by war. This man has no papers to identify himself since his country has been bombed and his government is unstable. There are not really many central services or places of recordkeeping, as many have been destroyed. So, without papers, he has no proof of an education, no proof of age, no birth certificate and no identification except the name he knows is his. He has no criminal record since records are not well kept. He could be a great guy with no criminal history, but everyone is treated as untrustworthy, given the same lack of benefit of the doubt. So he cannot have a bank account and therefore must rely on cash and whatever job he can get. He has nowhere to store his money if he has any, no deed to his property.

At any moment, this man could lose it all and there is not a single entity that can help him recover a loss. Yet, this man must provide for his family. So, you can see where a decentralized money system could help him. He could also be one generation away from solving some of these issues for his own family. If he could simply transfer fiat national currency into Bitcoin, obtain a wallet, beg or borrow or work toward a hardware ledger, he could keep that on his person with his own private key and retain or collect enough assets to either leave the country or to enter another level of the social class system in that country. This is not unthinkable. Banking the unbanked is a big issue. But for it to work, it is most effective and impactful done in a decentralized manner.

Money and Governments go hand in hand.  When money is devalued, government is corrupt and when money is corrupt, a country is devalued.
There is evidence of this truth repeatedly in Latin America, South America, Asia, Africa and many Island Nations.

There are currently several pioneer projects taking on this challenge. Those would include, to name a few, SureRemit5, a Nigerian remittance service with no-fee transactions. MPesa6 phone platform that services over 30 million from Kenya to Old Khazaria. Also, Rebit7 in the Philippines facilitates no-fee Bitcoin transactions.

Decentralized money and economies can also overcome one critically important and overlooked factor, inflation. In very recent world memory, Venezuela has seen an almost 4,000,000% inflation rate, leaving power off, sewage and water services obliterated, medical facilities shuttered, and the cost of food beyond what the gross majority can bear. Inflation like that occurs when the currency is devalued and money becomes worthless, while all power in concentrated at the helm of a central government frought with corruption at every level. For the savvy, Venezuela has offered its position as an oil baron for cheap energy, leading some to mine Bitcoin, which is very profitable.

Centralization has notable failures in cryptocurrency such as Mt. Gox, Quadriga CX and Bitfinex, Huobi, Binance, Tether. These are easily controlled at a top point by a creator, organizational CEO or programmer/group of few decision makers. Centralization is a risk to the Blockchain and it is alive and well. These risks exist in the rawest form in APIs, centralized exchanges and decentralized apps (DAPPS). APIs, Application Programming Interfaces, set up nodes on behalf of end users. These APIs require a third party. A third party requires trust. But with the aforementioned failures, similar to the Equifax9 hack that caught millions off guard, who can be trusted? As for DAPPS, if the application has an interface, how certain is a user that the application is decentralized? There must be more work on the part of DAPPS for those to be trustworthy.

The problem was that Mt. Gox tried to recentralize bitcoin. They actually centralized control over the keys for accounts on the exchange. Mt. Gox handled 70% of bitcoin transactions worldwide at one point, overwhelmingly with what is supposed to be a decentralized currency. They lost well over 400 million dollars’ worth of Bitcoin.

Decentralization in money offers crypto-lending and crypto-banking with lower fees and better rates of return. Rest assured, there is always some place in the world in turmoil that understands the power a central authority can have, but the greater force in decentralized existence!

Blockchain is a ledger. But the Bitcoin Blockchain is a decentralized, distributed ledger. Every central bank has a ledger. But no central bank has a Bitcoin Blockchain distributed ledger. The whole database is shared with every user. Every connected computer (or node) to the network runs the same database, verifies, and regulates all transactions on the Blockchain. The cryptography of connecting node to node, sharing nodes and IP addresses to access multiple nodes to confirm each transaction performs the function akin to sharing a burden.

The sharing of information transparently enforces transfers and transaction confirmation. Each confirmation updates the ledger and everyone connected knows about it. Cryptography implies that each individual has private keys that allow a sovereign individual access to their money. While a central bank will marry access with the requirement to verify identification with a password or government issued identification, cryptography overcomes this. Private keys give access and the associated public key allows for anonymity while a personal account is transparent in presence, but not associated with a person’s name or any other traditional identifiers.

Decentralized Solutions4 include sound crypto projects like Waves go a long way to represent the values of decentralization that the ecosystem requires. The two tout solid decentralized projects. Stellar, while a sort of XRP (Ripple) underling, focuses on peer to peer payments and an effective way to bypass cross-border fiat exchange. Many in the cannabis industry, a chiefly unbanked booming market sector are currently using Waves to tokenize their products and create an inventory tracking and point of sale system with great efficiency and transparent recordkeeping capabilities. When it comes to Blockchain there will always be a centralized solution. It may be easier, but the safest thing for the technology and the world of commerce is to start adopting more decentralized options.

Decentralization is really the secret weapon of Blockchain technology. Evan Van Ness sums all of this up in one coherent thought: “Centralization is power. And power corrupts.”

Decentralization overcomes the crisis of legitimacy that a central system of control leaves in its wake. Not your keys, not your crypto. Hold tightly to your private keys. That is what keeps you, the end user, decentralized!

REFERENCE/RESOURCES:

  1. https://www.zerohedge.com/article/andrew-jackson-repealing-central-bank
  2. https://news.ibinex.com/2018/10/08/how-cryptocurrency-can-help-the-developing-world/
  3. Chris Dixon, “Why Decentralization Matters”, February, 2018. http://fintechranking.com/2018/02/20/why-decentralization-matters/
  4. Charles Hoskinson, “The Future Will Be Decentralized”, TEDxBermuda https://www.youtube.com/watch?v=97ufCT6lQcY&feature=youtu.be
  5. https://www.sureremit.co/
  6. https://www.worldremit.com/en/kenya/mobile-money/m-pesa
  7. https://bitpinas.com/cryptocurrency/remit-money-philippines-using-bitcoin-rebit/
  8. https://globalcoinchain.com/bullish-on-stellar-lumens/
  9. https://www.cnet.com/news/equifaxs-hack-one-year-later-a-look-back-at-how-it-happened-and-whats-changed/