FinanceTech

Crypto winters: Is decentralization a myth?

Crypto winters: Is decentralization a myth?

Crypto winters

In recent times, bitcoin and cryptocurrencies have dominated much of the news, with the clamor to ‘buy the dip’, as the currency continues its plunge. Even amidst the urge to HODle, a more significant skepticism is growing in financial circles that supersedes the fear of missing out (FOMO) that characterizes the crypto fever. The concept of decentralization of global finance has come into greater focus, with many questioning the truth of that claim.

How much more can the currency dip further? The winter seems to be deepening.

This is the question on the minds of many bitcoin investors as the market is reeling with distrust in the wake of the recent slump of the currency by over 50 percent of its value since late 2021, to drop below $30,000. In 2018, the currency faced a similar devastating winter, losing over 80 percent of its value. This crash makes the sixth time that the currency has undergone deep plunges, each time coming back to a remarkable high after some years. Already, crypto’s biggest heavyweights have lost a collective $60 billion in recent weeks following the currency’s fall.

The concern of decentralization of cryptocurrency is one that reoccurs considerably - Startup Lagos
Bitcoin has hit its lowest in recent years (Jan 2019 – May 2022). Source: CoinMarketCap, 2022

A great deal of these winters has come from the major shake-ups that the public and private markets are facing presently, as well as the growing tensions in global markets. It appears that following its increasing adoption in financial circles, and popularity in hedge funds, the currency is now dancing to the tune of global market forces.

For Africa, cryptocurrencies are a going concern, for a number of reasons. Firstly, Africa is reckoned as the fastest-growing cryptocurrency market among developing economies, and the third-fastest growing market globally. According to Chainalysis, Africa has recorded over 1,200 percent increase in cryptocurrency payments from 2020 to 2021. Within the continent, Kenya, South Africa and Nigeria are ranked among the top 10 countries in the world for cryptocurrency use. This is in spite of the meagre 2 percent of the global value of all cryptocurrencies that the continent receives.

Within the continent, the adoption of cryptocurrencies are growing remarkably as a stimulant for remittance payments in Africa. Through the resource, countries within the continent can bridge the gaps in financial inclusion better through fully digital, quick and low-cost cross-border payments between users. This helps a lot of crypto users to bypass challenges with traditional banking infrastructure within their countries. According to Chainalysis, over $562 million of the entire $48 billion remitted to sub-Saharan Africa in 2019 were facilitated through cryptocurrencies. Coupled with this, a lot of startups are growing on the continent with a specific focus on the use of cryptocurrencies. Likewise, investment into ventures within the African tech ecosystem are getting greater redirection to cypto-driven platforms.

Decentralization: How decentralized is crypto?

Money is a generally held as the exchange value of an item, serving as a medium of exchange, a store of changing value, or a unit of account. As such, traditionally, asides from commodity money that possesses its own intrinsic use and value, fiat money or legal tender, of its own accord has little or no value or use. The Naira, for example, cannot be consumed directly or utilized to serve a need other than the exchange of goods or services. With the advent of technology, the internet of things, and blockchain platforms, the world had begun to reinvent the age-old culture of money. Given that the value of money was built on the fiat/trust of two transacting parties and the creditworthiness of a third mediating party, money necessarily does not require a physical form. This third party, being the government, carries out the responsibility of regulating and governing the value of the currency, as well as the nature of transactions with the legal tender.

And so, in 2009, Satoshi Nakamoto (a pseudonym representing a person or group of persons) birthed the first decentralized cryptocurrency, bitcoin, that was built on this basic principle of trust, however with a decentralizing element. The initial reception of this widely circulated tokenized form of exchange was slow and skeptical, with a lot of persons raising brows at the safety and reliability of this platform. Nonetheless, there has been a growing clamor, especially with the spread of web 3.0, for newer decentralized and open-source alternatives to knowledge and tools. These are what have, over time, popularized the use of cryptocurrencies. The hope was that through these seamless platforms, cross-border payments could be easily facilitated, with the offer of even better security, as all transactions are digital and encrypted.

This focus on decentralization is what has been held by many circles as a measure very difficult to hold to account. Decentralization here implies the technical inability for one party to have monopoly of control on a system. Apart from this metric of dispossessed power, there is also the element of distribution of wealth that is accorded the concept of decentralization. Still, this latter concept is hinged on the former, as the process of democratizing access to wealth in the concept of crypto usage, implies the dispossession of financial power from the few plutocrats, to increase the ranks of the nouveau riche. While this view of decentralization may appear very practical, in terms of the inability of any governing body to allocate control over the system through monetary policy, it may be mistaken on what the true nature of decentralization implies.

Generally, it is held that the blockchain allows for a system of high security, preventing the devastating effects of the game theory of competing choices. As no single individual is able to hold too much control beyond what has been equitably shared, the platform becomes secure through the contribution of a number of different actors working hand in glove. Explaining this concept, Jay Hao, CEO of OKEx says:

Decentralization is a spectrum and process in evolution, which is backed by separate blockchain networks and crypto protocols. Such consensus algorithms and tokenomic designs both shape the level of decentralization and allow direct transactions to take place without the need for an intermediary.

In spite of this power of crypto and decentralized finance, there is still a measure of centralization that is required for the operation of crypto, even as concerns security. Data oracles would still require external input, from whence hackers can gain control of the system. Even where there are different actors, as in DeFi, acting separately and together in protecting the system, they invariably act as a team, which in itself is some form of centralization around a group. Given the challenges with purchasing and managing mining equipment, only few mining groups emerged, which are generally centralized. As Dr. Nouriel Roubini, American economist, claims, the top five mining pools globally control over 70% of all the mining of crypto.

In the context of financial decentralization, it becomes even more complex, as once the cryptocurrency approaches the exchange. This is because the exchanges themselves, like development teams as stated above, are centralized. In this effect, the currency is still susceptible to manipulations by the market. And these generally account for how the currency is playing to the challenging dynamics of market forces, especially in recent times.

In the face of the collapse of the currency, Coinbase had told its investors that in the event of bankruptcy, the court may treat its customer assets as Coinbase’s assets, implying that they would pay less attention to repaying them, as against its other stakeholders. Coinbase holds in its custody, over $256 billion of people’s investments, as of March 31. What these imply is that customers on the platform are not even guaranteed the security that decentralized finance promises.

The future of DeFi

As crypto continues to gain prominence in various countries especially in Africa, and its adoption increases, there are ways through which the currency can grow in its value. On the one hand, the concept of decentralization appears to be mere myth. Understanding the peculiarity of human behavior and how humans seek to control, it is easy to see why the nature of decentralization would be difficult to achieve. The challenge of decentralization is closely similar to the tensions in claims between objectivity and subjectivity. One realizes that there can be no ‘real’ objectivity in a world like ours with so many individual forces, and the tense relationship between causes and effects. Individuals would inadvertently project their subjectivity on the world around them. In the way, money and control happens, people would necessarily find ways of exerting control through these platforms, whether as individuals or as groups. What can be most realistic would be a claim to inter-subjectivity that aims at checkmating excesses through a balance of transactional relationships on the platform. This is the best model at reducing the negative effects of centralization.

The increasing value and popularity of cryptocurrencies have generated effects in different traditional and centralized institutions. Furthermore, various centralized crypto exchanges want to become cryptocurrency banks. This hints at a possible merger of the conventional banking system and cryptocurrencies. Central banks and individual governments will possibly utilize blockchain solutions to restructure the inefficient and antiquated global financial system. While centralization could be a good thing, uninformed guesswork and knee-jerk regulations could threaten the growth of crypto and decentralized finance.

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