Decentralization is not idealism

Author: Omid Malekan, former Citigroup crypto expert, professor at Columbia Business School

Compiled by: Jiahua, ChainCatcher

In this world filled with power and greed, people have tried various blockchains. No one thinks Ethereum is perfect or all-powerful. It could even be said that Ethereum is the worst blockchain—it's just that other blockchains are worse.

I have spent a lot of time debating with people in the crypto industry, some of whom are friends. Our biggest disagreement is about how important decentralization is in the core protocol design.

They think it is just one of many important features, while I believe it is the only truly important one. They think scalability is more urgent, while I think that is a side issue. They believe that success relies on business development and partnerships, but I don’t see it that way. They think having a lot of money helps a protocol succeed, while I believe that too much money is destined to fail. They think permissioned networks can work, and I just smile.

The worst part is that they think my views are too idealistic and unrealistic; that is where our real disagreement lies. I am not a naive person who wishes for a harmonious future.

On the contrary, I am a cynical person. I have spent a lot of time studying history and how various human systems have evolved. I have also seen firsthand how powerful organizations will go to great lengths to maintain their power and profits.

My views are actually closer to Machiavelli (referring here to not relying on institutional goodwill, but rather starting from the actual operation of power and interests). If you truly understand how the real world operates, you will realize that the real idealists are those who are fooled by empty slogans like "tokenization on the company database."

To believe in their narrative, you must also believe in these: for-profit companies care about innovation more than their own profits; the "innovator's dilemma" does not apply to platform technologies; those executives who are familiar with the status quo and earn seven-figure salaries are all hoping for the status quo to be broken.

I do not believe that. I believe in the power of corporate inertia, and I also believe that only the most decentralized crypto systems can achieve "escape velocity." Everything else will be co-opted and corrupted until it becomes useless.

A sufficiently large network is always incentivizing its own corruption

Believing in crypto is essentially believing in the power of incentives. Any blockchain that attracts millions of users and settles trillions in value will forever incentivize people to corrupt it. For the largest companies (and even governments), not attempting to hijack it would be foolish. For some of them, ignoring it could even be a matter of life and death.

Ten years ago, they claimed Bitcoin was a scam; today they tell you that tokenization only counts if it follows their rules—it's the same reasoning. This is very Machiavellian: first, find a way to stop it; if you can't stop it, then co-opt it. The only crypto systems that have a chance of surviving under such threats are those that have deliberately remained open and neutral from day one.

When we talk about protocol security, we often start from the perspective of external attacks, such as 51% reorganization attacks. But internal takeovers are equally worthy of vigilance, and even more so, especially today when the oldest protocols are already quite robust.

Almost every mainstream traditional financial exchange, settlement system, and even social media platform still operating today has a history of internal takeovers. Visa and Mastercard are examples: they started as nonprofit alliance networks, similar to today's tokenized consortium chains, but gradually turned into money-printing machines. Google is the same; it went from opposing advertising as a business model for search to becoming the strongest advertising company in history.

This is the trajectory of "platform corruption," the inevitable result of the well-known venture capitalists' S-curve.

For a Layer-1 blockchain, the risk of being taken over is greater than that of any card organization, clearinghouse, or social platform. The reason is that a programmable settlement system capable of carrying all types of assets has a potential market size larger than most existing networks combined.

A general-purpose L1 can handle payments, securities settlement, social networking, gaming, art, ticketing, identity, and more. There are simply too many things available for "corruption."

Who is the truly naive person

From this perspective, the truly naive ones are those who believe in permissioned networks. These networks are essentially databases that can be dismantled at the push of a button.

Equally naive are those who believe in "permissionless Layer-1s with highly concentrated validators" and those who believe in "public Layer-2s that lack proof and have only a single sequencer." Believing in such systems is akin to believing that individuals will not be corrupted, institutions never act maliciously, and governments will always exercise self-restraint.

To be more specific, it means believing that Visa wants Mastercard to succeed.

And today, the takeover scenarios I describe are not hypothetical. Take the leading provider in the realm of "databases that can be controlled at the push of a button," for example; the CEO of this company is ambitiously trying to "make existing giants and intermediaries great again."

In a recent interview, he (referring to the CEO of Digital Asset) spoke eloquently about how running a closed enterprise network with proof of authority (PoA) is fairer than running an open network with proof of stake (PoS). What is his logic? Joining Ethereum's consensus costs money (around $60,000 at today's prices), while joining his network only requires potential participants to "prove their value" to existing members.

Coincidentally, Visa is already a participant in this network, while Mastercard is not. How can one company "prove value" to its biggest competitor? Or further: what if Visa and Mastercard collude, both join this network, and never allow any competitors in, thus forever solidifying their duopoly at the top of Western payments?

How can a fintech company aiming to completely disrupt payments "prove its value" to this trillion-dollar behemoth?

By asking nicely?

If you were the CEO, what would you do

If you think I am being too harsh, it only shows that you have not seriously studied the history of payment and settlement systems. However, you don't have to believe me. Ask small and medium-sized banks and credit unions in the U.S. how they view The Clearing House, a clearing institution controlled by large commercial banks; or ask those banks that do not hold shares in EWS how they view Zelle, the instant payment network operated by EWS.

Then ask Robinhood how it viewed the National Securities Clearing Corporation (NSCC) during the meme stock frenzy; ask Custodia, a digital asset bank that sued the Federal Reserve after its account application was rejected, how it views the Federal Reserve; and ask fintech companies how they view the instant payment system FedNow launched by the Federal Reserve.

Now, imagine yourself as the CEO of a highly profitable payment company with high commission rates and high gross margins. You have come this far because you understand how important "controlling the network" is; it is almost ingrained in your bones.

Before crypto emerged, all settlement systems were either operated by existing giants or by the government (which was influenced by these giants). Now, a new thing called "public permissionless blockchain" has appeared, and some very smart people tell you: this is a settlement system that no one can control, yet everyone can use. The "everyone" here includes your biggest competitors and any startup that sees your profit margins as their opportunity.

Let me test you, smart person: what would you do? Would you open your arms to embrace it?

Or would you look for some kind of "hybrid" alternative: a solution that claims to provide some benefits of blockchain while allowing you to maintain control and pricing power? Then instruct your PR team to craft a compelling narrative about regulation, responsibility, and illegal use?

The answer is obvious. From this perspective, the takeover scenarios I have painted are not particularly "Machiavellian"; they are merely standard operating procedure. Competitive companies will seize every advantage they can grasp, and "owning" (or at least "controlling") the means of settlement is the ultimate advantage.

They will certainly attempt to take over every network they are allowed to co-opt, and then use fabricated accusations and legal pressure to undermine those networks that they are not allowed to.

But this approach will not work in the long run

However, to be clear, in the long run, these tactics will not work. The reason is not that these companies are bad at playing this game, but that "pseudo-decentralization" is objectively inferior to the status quo. It is neither as efficient as the systems running in traditional finance today nor as secure as true decentralization.

In enterprise networks, cryptography is a burden, and consensus is a farce. Fake decentralization only works in venture capital roadshows and conference roundtables; it fails in the real world.

From my Machiavellian perspective, I can't help but wonder: do the banks and brokerages playing this game actually understand this point? If they do understand, then this embrace of "fake crypto" is a clever smokescreen aimed at slowing down progress and influencing legislators.

From a human perspective, this strategy is understandable. These companies are run by older individuals who are closer to the end of their careers than the beginning. They have reputations to maintain and luxurious lifestyles to support in the Hamptons.

But their delaying tactics can only work for a while. The world will ultimately find the most decentralized system, just as water will eventually flow to the lowest point. A significant portion of the profits in the centralized world comes from the delays and frictions of the old ways, and these profits are precisely the opportunities for others.

This is also very Machiavellian. A fully decentralized settlement system is a powerful tool against competitors, especially when you do not carry the historical burdens of their technologies and business models. Coupled with the declining trust in existing institutions, this process will only accelerate.

Water will eventually flow to the lowest point, and assets will ultimately flow to the safest infrastructure. This is the Nash equilibrium of the world we live in. So it is best to be a realist like me.

Decentralized systems like Ethereum have many flaws, and resisting capture is both expensive and troublesome. But it is still better than the corporate and company solutions that people talk about today. Many idealists will have to learn this lesson at a painful cost.