Bitcoin, Crypto & Blockchain
Between the promise of decentralisation and the reality of concentration.
In 2008, largely in response to the financial crisis, Satoshi Nakamoto introduced Bitcoin to the world. The scholars Primavera De Filippi and Benjamin Loveluck (2016) described it as a project that “radicalises Friedrich Hayek’s and Milton Friedman’s ambition to end the monopoly of nation-states” and their central banks, and as “libertarian dream” aiming to reduce the control of governments on the economy. Bitcoin was hailed to bring “greater social justice by undermining oligopolistic and anti-democratic arrangements between big capital and governments” – a promise popular on either side of the socio-political spectrum.
Fundamentally, Bitcoin is a distributed database, a means to effectuate and record financial transactions. However, instead of relying on a centralised intermediate to do so (e.g., banks, credit institutions or fintech’s), Bitcoin relies on a peer-to-peer network that verifies, records, and effectuates these. This network is economically incentivised (by game theoretic principles) and kept secure by a so-called consensus mechanism, requiring members of the network to verify transactions and solve computational puzzles for a new block to be added to the publicly viewable and immutable chain of blocks (the blockchain). Thereby, an agreed upon record – a single version of history – is created, allowing the validity of all transactions to be publicly checked.
The technology works, no question about it, but issues remain. In the space, the benchmark for all things is ‘decentralisation’. Decentralisation is something to thrive for, and according to proponents of blockchain, it is desirable in any sense of the word, in any setting. It is an equivocal term: it can refer to socio-political ideals, the elusion of centralised authorities and detachment from legal legitimacy, and the technical features of distributed computing systems.
Besides its inherent technical features and legally (sometimes) ambiguous status, Bitcoin mostly failed at decentralisation. It is saturated by personal politics and the concentration of power, it is de facto subordinated to a material political economy, the consensus is controlled by few parties, and it is permeated by numerous systemic failures. In the end, we have to admit that Bitcoin’s promises are “vanilla libertarianism” – in the words of Donald A. MacKenzie (2019).
Following the introduction of Bitcoin other protocols emerged, always with the goal of ‘decentralisation’ in mind. The most famous amongst the lot is Ethereum, which goes beyond the financial application of Bitcoin: it provides developers with modularity, with the ability to develop their own decentralised applications and to run software code templated under the logic of ‘if-then’. Think of Airbnb without the company organising rentals and taking profits, but a blockchain-based system beefed up with software code that does the job. The whole thing is, of course, peer-to-peer and can be set up using said logic. Same could go for Uber, Ebay, or any other two sided market maker. Powerful ideas that would fuel the 2016-2017 hype were the promise of blockchain to bring a (r)evolution in institutions, organisations and governance – of centralisation to decentralisation.
The given examples point towards major flaws: what about issues of liability? How to trust either side of the market? Can all information asymmetries be bridged? It is needless to say that platforms provide certain guarantees because they are liable: if I get harassed by my Uber driver, if my Airbnb booking goes wrong, the platform jumps in. The reputation system used to rank drivers (although problematic in itself), provides a degree of trust in the anonymous and impersonal space that the Internet is.
On 11 March 2021, a so-called non-fungible token (NFT) was sold for $69 million at Christie's. This headline spearheaded the newest promise of blockchain: artists could finally be empowered, undermine big organisations, and make a living out of their art in a peer-to-peer way. Digital artists flocked to marketplaces like OpenSea, accessible through a mere add-on on their browser, to sell ownership rights to digital items – from JPGs and GIFs to swords and property in some metaverse. The artist could go out and sell an item directly to a holder, at (now) little cost. Needless to say, the platform could not stop copyright infringements; in other words, stop people from taking screenshots of the items.
Sure, OpenSea is a neat platform and sales skyrocketed during the pandemic, benefitting one or the other up-and-coming digital artist along the way; still, let us also remember that Christie’s is one of the most reputable auction houses in the world, having sold $8.4 billion worth of items in 2022 alone. OpenSea makes markets, as was shown in a study published in Nature: collections tend to be visually homogeneous, and historical prices are the best predictor for those today. Those who make profits are those that scored or were associated with high sales in the past. Today, amongst the top-10 sellers by volume on OpenSea, we find traditional artists and sellers endorsed by Nike, as well as two collections by the ‘inventors’ of NFT’s, Larva Labs. Much decentralised… much empowering…
The NFT hype overshadowed that of a space which would grow exponentially in 2022: Decentralised Finance (DeFi). In simple terms: DeFi refers to financial services and products that use public distributed ledgers (e.g., Ethereum) and crypto-assets rather than existing financial infrastructures (e.g., Visa, Nasdaq) and sovereign currencies. In the same fashion as the decentralised version of Airbnb and Uber, the idea of DeFi is to bring cryptocurrency based exchange, lending or derivatives services directly to the masses (i.e., in a manner that is peer-to-peer). The peculiarity in DeFi is that the cryptocurrency, or rather the individual token beyond its use on the application, also grants voting rights to its holder. Good idea one might think, power to the people!
In essence, pseudonymous individuals, scattered across the Internet, take part in collective decision-making by voting on issues as trivial as the logo of the project to more pressing issues, such as collateralization. However, and as commonly observed with other cryptocurrencies, in most applications the tokens are held by the few. The implications from a political, electoral perspective are dire; a minority of holders can swing elections, and they have done so in the past. Take a project like Aave, that at its peak, had a market capitalization of approx. $8 billion. This means that effectively, a small minority of pseudonymous holders controls an organisation valued at that number. Much decentralised… much empowering…
The French philosopher Alexis de Tocqueville studied the fall of the monarchy and advent of the First Republic. He noted that at first, as the former, centralised system of power dissolve it does give rise to a truly distributed form. However, after power is dissolved and decentralised, it is reassembled and re-centralised. As Tocqueville stated, “all authorities by nature lean towards unity”; hence, if power is decentralised, “it automatically hurtles towards centralisation”. This adage would go on to echo in the works of Vilfredo Pareto, and the world of cryptocurrencies provide another neat demonstration.
Please consider carefully whether trading or holding cryptocurrencies is suitable for you given your financial situation. The information provided in this article are not, and should not be construed as, professional investment, legal, tax or other advice or service. Before making any decision or taking any action that may affect your finances or your business, you should consult a qualified professional adviser. This material is strictly for illustrative, educational, or informational purposes.