The purpose of this post is not to enrage you or be negative or “bearish”; rather part of an ongoing attempt to discover the fundamental properties of blockchains from first principles, so that we can gain a better understanding, and get the very best of public blockchains. A lot of things are simplified as I’m trying to write a blog post, not a book.

So, first, “decentralization” - what is it? According to Google’s Oxford dictionary, it is:

the transfer of control of an activity or organization to several local offices or authorities rather than one single one.

I could post many other variants of this, but the first thing to note is it’s a relative measure.

First, let’s get a basic reality out of the way.

Following centuries of history, we have overwhelming evidence that free markets are very effective, and has led to unprecedented prosperity for our collective civilisation.

However, free markets have a fundamental trade-off. Due to economies of scale, wealth concentration effects, network & consolidation effects, so on and so forth, there’s a tendency towards monopolies and oligopolies, inequality, and unfairness; not to mention a disregard for things capital cannot measure - environment, happiness, mental health etc. Markets can grow widely in early stages, but past maturity, these effects tend to kick in.

The solution to minimize these trade-offs, while retaining the benefits of free markets, is, obviously, regulations. Over the centuries, millions of economists and policy makers have worked to find a balance between the two.

Of course, things can get political and subjective here, but I believe many people in the world would agree freedom is not that anyone can do anything; but rather, a society that collectively offers equal opportunity to all. We’ll revisit this topic, but it should be obvious now that blockchains cannot find this balance due to a lack of subjectivity, and will always stray far away from equal opportunity and fairness.

Let’s start with the paragon of “decentralization” - Bitcoin. Roughly ~5% of all BTC is held by Satoshi. This would be like Elon Musk’s net worth being >100x what it is. The second largest holder, Microstrategy, would still be over an order of magnitude more than Elon Musk.

It used to be that anyone could be a Bitcoin miner. Today, it’s a highly industrialised process that can only be done by entrenched players. Not to mention, 2 mining pools effectively control the Bitcoin network. Yes, there are nuances, but it’s pretty clear Bitcoin mining has centralized over time, and it’ll only get more centralized as economies of scale ramp up, and the dwindling subsidies push all but a handful of players out of business.

Let’s look at Ethereum, then. The software is more actively developed, by a larger base of developers - but it’s still a few hundred at most. Validators are assigned by proof-of-stake, which while not as cripplingly centralizing as proof-of-work mining, is still effectively a plutocracy. Given the lack of redistributive or welfare mechanisms, it will always be highly concentrated. Let’s not even talk about the newer VC-backed L1s, which often have a few VCs, insiders, and whales effectively controlling the network.

But, of course, validators are not the end-all, be-all, rather the first line of defense. So, let’s look at the last line of defense, then - end users running nodes. That sounds nice in theory, but in practice, there are only 20,000-25,000 unsubsidized, independent nodes worldwide across Ethereum, and Bitcoin combined. The barrier is high, effectively the most “decentralized” public blockchains as a plutocracy at worst, a technocracy at best - but either way, an oligarchy. Once again, let’s not even talk about some hardware intensive L1s that require you to run in a datacenter, with the expertise to do so. Fortunately, unlike industrialization of mining or wealth concentration in staking, node running can be improved.

There’s a larger reality here we cannot ignore, though. Most users of crypto - hundreds of millions - either use it as a store-of-value, speculative vehicle, or to store/exchange stablecoins, and do so on or via centralized exchanges. The CEX world has consolidated around a few big players, and in some of the most useful usecases such as stablecoins in countries with unstable currencies, Binance has established a near monopoly. These CEXs have an outsized influence, as they should - given they represent a vast majority of crypto users.

There’s also the social layer that upgrades the protocols, coordinates forks etc. - it is also a technocracy.

So, this is the reality, then - Bitcoin and Ethereum are effectively controlled by a handful of entities, no matter which way you look at it.

Now, let’s consider DAOs and applications built on top of Ethereum. They too have very centralized token distributions, where a small handful of whales effectively control the applications. You get the point, so now it’s time for a comparison.

The largest democracy in the world is Republic of India. It has 12 public sector banks, 22 private sector banks, 40+ foreign banks, 1,500 urban cooperative banks, and nearly 100,000 rural cooperative banks. All of these banks have multiple state regulatory bodies, which answer to multiple federal regulatory bodies, who are ultimately answerable to the will of 1.43 billion people. Not to mention, there are a 100 other democratic nations around the world. This is decentralization in its truest sense.

Obviously, obviously, a public blockchain is not comparable to a democratic nation. But that’s the whole point - crypto people do compare them, and often the democratic government is demonized as “centralized” whereas blockchains are deified as the “decentralized” ideal. So, please, let’s not do that. Blockchains do not have subjective systems, no legal protections, no welfare systems, so on and so forth - they are absolutely in no way comparable.

Another common misnomer is how blockchains can “fight big tech” or “fight web2”. To the contrary, it is blockchain applications that have tended towards monopolies and oligopolies. The public ownership structures are also basically the same between crypto orgs and trad orgs, at best. Indeed, the traditional world has seen much more decentralized and democratic structures like cooperatives.

But unlike traditional big tech, there are no antitrust regulations, so they will remain monopolies and continue to consolidate. As a recent example, Apple has been forced into many compromises this year - moving to USB-C, opening up apps for sideloading, moving iMessage to RCS etc. The best-known mechanism today to “fight big tech” is through antitrust and regulatory bodies in democracies. Meanwhile, in crypto, we can moan about Lido’s >85% marketshare in LSDs all we want, but their tokenholders don’t care.

So, blockchains are a centralizing force, effectively oligarchies, which result in monopolies, oligopolies, and tremendous wealth concentration - as indeed anyone would expect for a pure free market with no antitrust, fairness, or democratic mechanisms. It’s almost as if billions of people around the world have been refining these over the centuries.

Yet, this is perfectly fine for the niche blockchains are aiming towards, and indeed, trying to “fix” those trade-offs will compromise the unique property of blockchains. For example, yeah, sure, Ethereum’s social layer can decide to take action against Lido in some way - but this makes Ethereum no different to an antitrust government body. Now, it should be noted that there can be organisations or communities that use blockchains as one tool in many, but I’m talking specifically about public blockchains here.

So, IMO, blockchains should accept and embrace its trade-offs, while focusing on what makes it unique.

Blockchains may be centralized, but they have unique properties - a global system that is neutral, transparent, and accessible.

Let’s consider Norway, for example. It is one of the wealthiest countries on the planet, with a sovereign wealth fund worth $260K/capita. It also has one of the highest taxation rates, but few leave because of the strong civil rights, comprehensive welfare systems, and of course - being ranked #2 by HDI and near the top of the (flawed-but-representative) World Happiness Index. Of course, it’s impossible to satisfy everyone, so Norwegians are free to move to any of the diverse countries across the Schengen Area, yet few do. Crypto has very little to offer anyone in Norway, outside of being a speculative hedge.

Of course, few are lucky to be born in Norway, or indeed, the other dozens of developed democratic nations. Over the last century, the world has made tremendous progress, and continues to do so. But there are still countries with unstable currencies, broken economies, and poor financial infrastructure; or undemocratic governments.

This is where crypto is invaluable - filling in the gaps where traditional incumbents are failing or lagging, or have inadequate regulations. But it’s also important to note 99.99% of the things people think of “crypto fixes this” do in fact have 0% to do with crypto. So, it’s important to analyse where blockchains can actually help - mostly objective money & objective identity. And gambling. Mostly gambling.

I have a lot more to say, like the lack of transaction reversibility, but this is too long already, so let’s wrap things up.

If we want to make the most of blockchains, we must understand and accept its trade-offs, and focus on its unique properties.

The key trade-off is a lack of subjectivity, but here’s a thought... As previously mentioned, a vast majority of crypto users do so on regulated exchanges. This gets us the best of both worlds - the regulations of tradfi, and the neutrality of blockchains. Public blockchains are already an integral part of traditional finance, and the synergies will continue.

The solution, as is often the case, is not to pander to false dichotomies. Traditional incumbents are very flawed, and the solution for them is to keep getting better at it, as they have for centuries. There’s no alternative anyway, as blockchains cannot do 99% of the things due to a lack of subjectivity. Meanwhile, blockchains can also keep getting better and integrated in traditional venues, to the point it becomes one whole that’s better than what came before.

Lastly, choice is great. To each their own. I don’t have the confidence to self-custody, like 99% of the world’s population, so I’m perfectly happy to assess and choose one of many regulated entities. If you prefer self-custody and accept the risks, that’s great too!

The purpose of this post is not to enrage you or be negative or “bearish”; rather part of an ongoing attempt to discover the fundamental properties of blockchains from first principles, so that we can gain a better understanding, and get the very best of public blockchains. A lot of things are simplified as I’m trying to write a blog post, not a book.

So, first, “decentralization” - what is it? According to Google’s Oxford dictionary, it is:

the transfer of control of an activity or organization to several local offices or authorities rather than one single one.

I could post many other variants of this, but the first thing to note is it’s a relative measure.

First, let’s get a basic reality out of the way.

Following centuries of history, we have overwhelming evidence that free markets are very effective, and has led to unprecedented prosperity for our collective civilisation.

However, free markets have a fundamental trade-off. Due to economies of scale, wealth concentration effects, network & consolidation effects, so on and so forth, there’s a tendency towards monopolies and oligopolies, inequality, and unfairness; not to mention a disregard for things capital cannot measure - environment, happiness, mental health etc. Markets can grow widely in early stages, but past maturity, these effects tend to kick in.

The solution to minimize these trade-offs, while retaining the benefits of free markets, is, obviously, regulations. Over the centuries, millions of economists and policy makers have worked to find a balance between the two.

Of course, things can get political and subjective here, but I believe many people in the world would agree freedom is not that anyone can do anything; but rather, a society that collectively offers equal opportunity to all. We’ll revisit this topic, but it should be obvious now that blockchains cannot find this balance due to a lack of subjectivity, and will always stray far away from equal opportunity and fairness.

Let’s start with the paragon of “decentralization” - Bitcoin. Roughly ~5% of all BTC is held by Satoshi. This would be like Elon Musk’s net worth being >100x what it is. The second largest holder, Microstrategy, would still be over an order of magnitude more than Elon Musk.

It used to be that anyone could be a Bitcoin miner. Today, it’s a highly industrialised process that can only be done by entrenched players. Not to mention, 2 mining pools effectively control the Bitcoin network. Yes, there are nuances, but it’s pretty clear Bitcoin mining has centralized over time, and it’ll only get more centralized as economies of scale ramp up, and the dwindling subsidies push all but a handful of players out of business.

Let’s look at Ethereum, then. The software is more actively developed, by a larger base of developers - but it’s still a few hundred at most. Validators are assigned by proof-of-stake, which while not as cripplingly centralizing as proof-of-work mining, is still effectively a plutocracy. Given the lack of redistributive or welfare mechanisms, it will always be highly concentrated. Let’s not even talk about the newer VC-backed L1s, which often have a few VCs, insiders, and whales effectively controlling the network.

But, of course, validators are not the end-all, be-all, rather the first line of defense. So, let’s look at the last line of defense, then - end users running nodes. That sounds nice in theory, but in practice, there are only 20,000-25,000 unsubsidized, independent nodes worldwide across Ethereum, and Bitcoin combined. The barrier is high, effectively the most “decentralized” public blockchains as a plutocracy at worst, a technocracy at best - but either way, an oligarchy. Once again, let’s not even talk about some hardware intensive L1s that require you to run in a datacenter, with the expertise to do so. Fortunately, unlike industrialization of mining or wealth concentration in staking, node running can be improved.

There’s a larger reality here we cannot ignore, though. Most users of crypto - hundreds of millions - either use it as a store-of-value, speculative vehicle, or to store/exchange stablecoins, and do so on or via centralized exchanges. The CEX world has consolidated around a few big players, and in some of the most useful usecases such as stablecoins in countries with unstable currencies, Binance has established a near monopoly. These CEXs have an outsized influence, as they should - given they represent a vast majority of crypto users.

There’s also the social layer that upgrades the protocols, coordinates forks etc. - it is also a technocracy.

So, this is the reality, then - Bitcoin and Ethereum are effectively controlled by a handful of entities, no matter which way you look at it.

Now, let’s consider DAOs and applications built on top of Ethereum. They too have very centralized token distributions, where a small handful of whales effectively control the applications. You get the point, so now it’s time for a comparison.

The largest democracy in the world is Republic of India. It has 12 public sector banks, 22 private sector banks, 40+ foreign banks, 1,500 urban cooperative banks, and nearly 100,000 rural cooperative banks. All of these banks have multiple state regulatory bodies, which answer to multiple federal regulatory bodies, who are ultimately answerable to the will of 1.43 billion people. Not to mention, there are a 100 other democratic nations around the world. This is decentralization in its truest sense.

Obviously, obviously, a public blockchain is not comparable to a democratic nation. But that’s the whole point - crypto people do compare them, and often the democratic government is demonized as “centralized” whereas blockchains are deified as the “decentralized” ideal. So, please, let’s not do that. Blockchains do not have subjective systems, no legal protections, no welfare systems, so on and so forth - they are absolutely in no way comparable.

Another common misnomer is how blockchains can “fight big tech” or “fight web2”. To the contrary, it is blockchain applications that have tended towards monopolies and oligopolies. The public ownership structures are also basically the same between crypto orgs and trad orgs, at best. Indeed, the traditional world has seen much more decentralized and democratic structures like cooperatives.

But unlike traditional big tech, there are no antitrust regulations, so they will remain monopolies and continue to consolidate. As a recent example, Apple has been forced into many compromises this year - moving to USB-C, opening up apps for sideloading, moving iMessage to RCS etc. The best-known mechanism today to “fight big tech” is through antitrust and regulatory bodies in democracies. Meanwhile, in crypto, we can moan about Lido’s >85% marketshare in LSDs all we want, but their tokenholders don’t care.

So, blockchains are a centralizing force, effectively oligarchies, which result in monopolies, oligopolies, and tremendous wealth concentration - as indeed anyone would expect for a pure free market with no antitrust, fairness, or democratic mechanisms. It’s almost as if billions of people around the world have been refining these over the centuries.

Yet, this is perfectly fine for the niche blockchains are aiming towards, and indeed, trying to “fix” those trade-offs will compromise the unique property of blockchains. For example, yeah, sure, Ethereum’s social layer can decide to take action against Lido in some way - but this makes Ethereum no different to an antitrust government body. Now, it should be noted that there can be organisations or communities that use blockchains as one tool in many, but I’m talking specifically about public blockchains here.

So, IMO, blockchains should accept and embrace its trade-offs, while focusing on what makes it unique.

Blockchains may be centralized, but they have unique properties - a global system that is neutral, transparent, and accessible.

Let’s consider Norway, for example. It is one of the wealthiest countries on the planet, with a sovereign wealth fund worth $260K/capita. It also has one of the highest taxation rates, but few leave because of the strong civil rights, comprehensive welfare systems, and of course - being ranked #2 by HDI and near the top of the (flawed-but-representative) World Happiness Index. Of course, it’s impossible to satisfy everyone, so Norwegians are free to move to any of the diverse countries across the Schengen Area, yet few do. Crypto has very little to offer anyone in Norway, outside of being a speculative hedge.

Of course, few are lucky to be born in Norway, or indeed, the other dozens of developed democratic nations. Over the last century, the world has made tremendous progress, and continues to do so. But there are still countries with unstable currencies, broken economies, and poor financial infrastructure; or undemocratic governments.

This is where crypto is invaluable - filling in the gaps where traditional incumbents are failing or lagging, or have inadequate regulations. But it’s also important to note 99.99% of the things people think of “crypto fixes this” do in fact have 0% to do with crypto. So, it’s important to analyse where blockchains can actually help - mostly objective money & objective identity. And gambling. Mostly gambling.

I have a lot more to say, like the lack of transaction reversibility, but this is too long already, so let’s wrap things up.

If we want to make the most of blockchains, we must understand and accept its trade-offs, and focus on its unique properties.

The key trade-off is a lack of subjectivity, but here’s a thought... As previously mentioned, a vast majority of crypto users do so on regulated exchanges. This gets us the best of both worlds - the regulations of tradfi, and the neutrality of blockchains. Public blockchains are already an integral part of traditional finance, and the synergies will continue.

The solution, as is often the case, is not to pander to false dichotomies. Traditional incumbents are very flawed, and the solution for them is to keep getting better at it, as they have for centuries. There’s no alternative anyway, as blockchains cannot do 99% of the things due to a lack of subjectivity. Meanwhile, blockchains can also keep getting better and integrated in traditional venues, to the point it becomes one whole that’s better than what came before.

Lastly, choice is great. To each their own. I don’t have the confidence to self-custody, like 99% of the world’s population, so I’m perfectly happy to assess and choose one of many regulated entities. If you prefer self-custody and accept the risks, that’s great too!