Earlier this week, Chris Dixon wrote an excellent piece on why decentralization matters. There was one paragraph, however, that particularly stood out to me (emphasis mine).
Decentralization is a commonly misunderstood concept. For example, it is sometimes said that the reason cryptonetwork advocates favor decentralization is to resist government censorship, or because of libertarian political views. These are not the main reasons decentralization is important.
I bolded the last sentence for a reason. I believe Chris slightly overstepped in explaining what makes decentralization important. To be sure, decentralization is a loaded term. Part of the definition can refer to the transfer of power from the company to the individual (e.g., in the future, Facebook won’t own your data; it will be yours to move around from platform to platform).
But part of the definition can also refer to the transfer of power from the government to the individual (e.g., having the option to use bitcoin instead of fiat). These are just some of the definitions of decentralization, but there are certainly more of them. Others are probably better equipped than I am at explaining what goes into the idea of decentralization, but the point remains: the ideas behind decentralization are vast, full of subtleties, and are ultimately subjective. Truth, after all, is in the eyes of the beholder.
Recently, I have noticed two simultaneous decentralization narratives — which have a striking resemblance to reality tunnels — playing out. The first narrative surrounds Bitcoin. The second surrounds Ethereum. Each narrative has its own supporters who often lambaste the competing narrative. My aim for this post is to reconcile these two narratives, ultimately showing they have little overlap.
Bitcoin provides sovereign-grade censorship resistance
Contrary to what Chris wrote, Bitcoin’s government-grade censorship resistance is very important. The critical piece I think Chris may be missing is that government-grade censorship resistance is important, but not to him.
A question I often ask myself is what problem is this project solving, and who is it solving the problem for? Bitcoin, for example, broadly solves the self-sovereign sound money problem for folks that fall under three broad camps: (i) libertarians, rebels, and unconventionals, (ii) cypherpunks, and (iii) people living in corrupt and economically frail regimes (some argue the underclass of America falls in this camp, and I tend to agree).
For these three generalized groups, bitcoin provides a sovereign-grade censorship resistance enabled through the forces of decentralization. Make no mistake, however: sovereign-grade censorship resistance is expensive. In fact, Bitcoin is so censorship resistance, and consequently expensive, that it leads to a performance oversupply for many practical applications. (Although bitcoin transaction fees have been falling recently, few applications can work with an average transaction fee of roughly $7).
What do applications that don’t require the expensive, sovereign-grade censorship resistance do? They use platforms such as Ethereum.
Ethereum provides platform-grade censorship resistance
Let’s return to the question we asked earlier. What problem is the project solving, and who is it solving the problem for?
If you haven’t noticed, many developers — especially those in Silicon Valley — have been tickled fancy by Ethereum. But anyone following the tech world closely shouldn’t be surprised by developers and their preoccupation with Ethereum.
With the rise of the Internet, platforms and applications have increasingly fallen under the control of the behemoth internet companies. For example, Facebook and Google now account for over 50% of the U.S. digital advertising market. Similarly, the lion’s share of smartphone industry profits go to one company: Apple. (In 2016, Apple captured 79% of global smartphone profits). With its notorious walled garden, Apple has App Store developers in a tight headlock, taking a portion of developer revenues, in addition to acting as a gatekeeper as to what gets listed on the App Store. Even Twitter, everyone’s favorite social network, was at once notorious for rate limiting applications that built on top of its platform.
Even more frightening is what these Internet companies do with your data. Instead of allowing individuals to own their data (i.e., allowing users to take their Facebook data and move it to a competing social network), these companies lock it down, and ultimately, profit from selling it. As the old-timer’s say, if it’s free, you are the product.
Ethereum plays very nicely into this current state of affairs, which is why I suspect it’s much more popular in Silicon Valley than Bitcoin is. The problem Ethereum solves for developers is platform-grade censorship resistance. Notice that the problem that Bitcoin solves — self-sovereign sound money — provides little utility to developers.
Unlike Facebook, Google, Twitter, Apple, and the rest of the tech giants, Ethereum will not censor your application, nor will it take a slice of your profits. It also allows you to move your identity around from one platform to another, although the implementation of that hasn’t practically been demonstrated yet. In a way, Ethereum is similar to a credit union for developers. All developers can use it, but they own a piece of it too.
A Tale of Two Narratives
I find that viewing the cryptoasset world through the lens of problem statements (what is the problem and who is it being solved for) is revealing. If one believes blockchains work through consensus, answering the question accurately gives you a sense for the direction the project is headed in.
The questions don’t end there, however. Some second and third order questions that have been on my mind lately include:
- How censorship resistant do platforms such as Ethereum need to be? As we discussed earlier, censorship resistance is expensive, leading to a performance oversupply for many applications. Can the tradeoffs be tweaked to be “just right?”
- What use-cases require sovereign-grade censorship resistance?
- What use-cases require platform-grade censorship resistance?
- What is the price we pay for decentralization?
Until next time, friends.