To be or not to be: The paradox of crypto adoption and decentralization

Original article by Daniel Kuhn, CoinDesk

Original translation: BitpushNews an

Cryptocurrencies are better off remaining a niche market.

The biggest crisis the cryptocurrency industry has faced so far is undoubtedly the rapid decline and collapse of FTX. Sam Bankman-Fried’s personal vault was the world’s third-largest cryptocurrency exchange at the time of its collapse. The incident had a huge impact on the entire industry, causing not only a sharp drop in cryptocurrency prices, but also affecting many related companies.

At the end of 2022, it was unclear whether the concept of cryptocurrency would be able to make a comeback - at that time, the apparent fraud of one of the most consumer-savvy and trusted cryptocurrency companies seemed to confirm the widespread belief that it was all just a cover for fraud.

Today, however, things appear to be improving, despite widespread concerns that the industry is repeating past mistakes and could face punishment again.For seasoned cryptocurrency investors and observers, this has been the norm: Cyclic market fluctuations have become part of daily life since the 2014 Bitcoin market crash and subsequent recovery following the collapse of the Mt. Gox exchange.

But isn’t it strange that this maturing industry has come to accept these boom-and-bust cycles as the norm? In my opinion, the widespread adoption of any Blockchain technology or consumer application depends largely on the fact that its token price — or the industry as a whole — shouldn’t always be at risk of impending collapse.

The biggest challenge for cryptocurrency is its own growth. The cycle of extreme optimism during market booms and extreme pessimism during market downturns occurs approximately every four years, which is exactly what cryptocurrency brings about in its quest for widespread adoption.

Rough popularization process

The process was a clear example of what economist Robert Shiller describes as “irrational exuberance.” The promise of radically changing core values, from money to the internet itself, fueled interest. People were drawn to the idea of decentralization (or, for many, the promise of quick profits). As popularity grew, so did prices, which in turn encouraged even more people to invest—until something went wrong.

Almost without exception, the things that failed were the things that blockchain was designed to replace. And those things are almost always designed to make cryptocurrencies more accessible and usable. There is a common argument that “the masses” might not choose to self-custody their assets. But without self-custody, what is the point of an asset like Bitcoin?

Alex Thorn, head of research at investment bank Galaxy Digital, said, “As the number of users increases, one risk is that new users may not understand the core principles of Bitcoin, such as decentralization, self-custody, hard currency and other concepts. If these new entrants do not learn, understand and support these core concepts, then over time, the protocol features that enable these concepts may not be maintained.”

Adopting cryptocurrencies means complying with laws (which often conflict with cryptocurrencies’ values) and establishing easy-to-use logins (which can be attacked). There is a tension between the goal of decentralization and mass adoption. If cryptocurrencies are allowed to grow too large, they may undermine their truly valuable functions. Nathan Schneider, a professor of media studies at the University of Colorado Boulder and author of Governable Spaces, noted that “simply being integrated into the mainstream financial system will ultimately miss out on many of the important opportunities that this technology offers.”

Paul Dillon-Ennis, a lecturer at University College Dublin, expressed a similar sentiment, saying: “Crypto is a subculture that doesn’t want to admit it’s a subculture. Many of the problems we face stem from discussions about ‘getting the next billion people on board’, which leads to a gradual degradation of our values.”

The “killer app” that already exists

There is an irony in the fact that developers, founders, and investors have spent 15 years and billions of dollars searching for blockchain’s “killer app,” but it already exists. Satoshi Nakamoto, and those who truly followed in his footsteps, had already created a digital bearer tool that can be freely used and cannot be easily taken away.

This is the core of cryptocurrency.

That’s why, while almost no one uses Bitcoin to buy coffee, many people use the privacy coin Monero (XMR) to buy all kinds of goods on the dark web. If you look at how cryptocurrency is connected to the real economy, you’ll find that it mainly plays a role in a few specific areas, including the black or gray market, stablecoin remittance channels, and hobbyist activities.

Mind you, these markets are massive. But today, when cryptocurrencies seem to be on the verge of a breakout, this type of usage pales in comparison to the speculative use of cryptocurrencies, where capital is pumped in, jumping from one coin to another, or one protocol to another, driving the numbers ever higher — essentially creating a circular economy.

There’s nothing wrong with that. Gambling is a use case to a certain extent. But if people want cryptocurrencies to be used productively, developers, founders, and investors should build products for those who actually need censorship-resistant money and tools. Basically, that means only a small group of people will be interested.

This is just my opinion, many people would disagree.

Other Views

Molly White, author of the crypto-critical news Web3 IsGoingGreat and Citation Needed, believes that cryptocurrencies have become mainstream. She said in a private message, Although there are still some projects that are smaller and belong to niche markets, when Brian Armstrong and Sam Bankman-Fried communicated with each other in Congress and BlackRock and Fidelity launched Bitcoin ETFs, I think the trend of mainstreaming cryptocurrencies is irreversible.

SethforPrivacy, a privacy advocate, educator, and veteran Monero user, holds the opposite view. He said, Unfortunately, most people do not yet recognize the importance of Bitcoin and are not willing to take so much personal responsibility, so we must focus our efforts on improving Bitcoin for those who do recognize this need today.

There is also an argument that decentralization is precisely the reason why cryptocurrencies have achieved global popularity.

Alex Gladstein, chief strategy officer of the Human Rights Foundation, said, The only reason why Bitcoin has been able to rise globally is because of its most cyberpunk attribute: it does not belong to anyone and is operated by users, not controlled by countries or companies.

However, it is not entirely clear what the general public actually wants. Ethereum supporter Emmanuel Awosika gave an example, “While we believe that everyone wants privacy protection, censorship resistance, and the ability to resist state attacks, some people are already satisfied with products that solve problems and have a good user experience.”

Awosika added that while not everyone needs, let alone wants, privacy, censorship resistance, and maximum decentralization, “we should strive to get as many people as possible into cryptocurrency.”

Similarly, Roko Mijic, of “Roko’s basilisk” fame, believes that it is actually scale that gives decentralized tools their power, which is particularly evident in Bitcoin, where miners are spread all over the world, making it difficult to attack. “In a smaller crypto network, you cannot resist censorship because the government can easily destroy the entire network,” Mijic said.

Justin Ehrenhofer, founder of Moonstone Research in Chicago, echoed that sentiment, noting that a currency is only useful if it is widely accepted, so “cyberpunks should focus on building systems that attract outsiders to participate.” However, he added that the ethos of cryptocurrency has degraded somewhat “with mass adoption” as regular users store their assets in custodial exchanges.

I think the real question here is, how important is the core value of cryptocurrency?