Finding the Centralization Sweet Spot

We talk to Erik Voorhees about crypto reaching 'maximum decentralization'.
Jan 3, 20234 min read

Dear Bankless Nation,

Happy New Year! For our first Monday of the year, we dig into a fun podcast conversation with Erik Voorhees on why we’re all still here in 2023 and how crypto can realize more of its potential.

- Bankless team

Bankless is starting the year off right, widely releasing our latest interview with the Erik Voorhees. Yes — that same Voorhees who was roundly considered the victor in his legendary crypto regulation debate with now-accused felon Sam Bankman-Fried, shortly before the implosion of FTX.

Erik tells Bankless listeners why he's in crypto and provides a veteran’s POV on crypto’s most recent market cycle. This episode is abound with alpha, first principles, and mental models.

A libertarian at heart, Voorhees serves up an impassioned defense on why money MUST be separated from the state, but why total decentralization won’t meet society’s needs.

Today, we’ll dive into why extremes on the centralization spectrum FAIL to provide positive outcomes, why crypto WILL converge on a state of maximum decentralization, and WHAT you can do to help create a decentralized future.

Centralization is a Spectrum: Both Ends are Bad

A delicate balance of structure and decentralization must be achieved to create efficient systems that do not impose excessive control on participants.

Full Centralization

In his Bankless podcast conversation, Erik uses the example of an all-powerful, one world government as an example of extreme centralization: it's a repressive entity with no checks to its authority.

Two distinct forms of power exist: voluntary and coercive. Voluntary power is held by leaders in social hierarchies and corporate structures. Many heavily centralized governments rely on coercive power to direct their citizens.

Individuals may subject themselves to voluntary power. While concerns around Amazon's labor practices exist, the company does not appear to con employees to work in their warehouses via force and the employment relationship is at-will for both parties.

Coercive power is exercised through violence, the threat of legal consequence, or deception. The IRS uses coercive power and threat of wage garnishment or imprisonment to compel the payment of taxes. Simply moving to a foreign country is not enough to avoid the reach of the tax man. For American citizens, there are only two ways to avoid paying taxes to Uncle Sam: die or renounce your citizenship (for a fee). Additionally, you may be unable to renounce your citizenship if the IRS determines you are doing so to avoid taxes.

Full Decentralization

The absence of centralization is impossible and unnatural: the resulting system would be marked by chaos and inefficiency.

Just as mammals require skeletal structures to function, society requires centralization. Without it, we lose all benefits of coordination, collaboration, and order. The success of the corporation and the state can be attributed to their unique abilities to effectively organize large numbers of individuals for a common purpose.

Centralized structures benefit from economies of scale and specialization. The Industrial Revolution displayed the power of the corporate hierarchy. Intensive capital outlays were required to purchase equipment and funded by a small group of owners, who would delegate tasks to laborers. Commercial outfits, as a result, were able to offer higher quantities at lower prices than their competitors.

Venturing to Maximum Decentralization

Custodial crypto exchanges represent centralization points for crypto capital.

Just as imbuing a monarch with divine power can spread war and chaos across the globe, providing an exchange CEO with your keys can spread memes and chaos across the globe.

Having previously witnessed the collapse of Mt. Gox, Voorhees is no stranger to corrupt exchange CEOs striving to obtain wealth through coercive power. He notes that while the lessons of self-custody are not new, it is one that the core crypto community MUST teach every cycle.

What is the easiest solution to getting more crypto users off of exchanges? Better UX!

While dApps are typically associated with an inferior user experience, there is no denying that trad banking and financial systems are the WOAT. MetaMask has pilled millions of crypto users on self custody solutions, without them even knowing it: they simply made a user-friendly wallet that lets people conveniently do all of their DeFi things.

Voorhees anticipates that the limitlessness experienced by users of decentralized monies and networks will serve as the antidote to CBDCs. Restrictions present on a CBDC chain will be even more painful after users experience true DeFi!

Crafting the Future

While crypto cynics and statists alike prophesy the demise of decentralized blockchains, Voorhees has a much different take: like a liquid, capital will flow down the path of least resistance.

TradFi regulations and restrictions present on CBDC chains will cause friction for the flow of capital into these ecosystems and incentivize investment on alternative, decentralized blockchains. Sheer economic force will incentivize the flow of capital, and thus adoption, towards decentralized protocols.

Did the bear market wipe out your savings? Can’t vote with your dollar? You can still help the cause! Start talking about crypto values and the first principles of our industry!

Worry less about calling out the abundant noise and scams of the crypto industry. Instead direct your efforts towards calling out virtue when you see it!

Pain will always occur in the crypto. While misery is never enjoyable, experiencing it on occasion will lead to better outcomes, and we should embrace this! Evolution in nature is a violent and difficult process. The maturation of a fledgling industry attempting to replace the legacy global financial system will face similar obstacles. What remains will be  stronger, hardier, and more fit-for-purpose.

While the pain is unavoidable, good actors in the space, partially motivated by the prospects of profit and return, will always attempt to minimize it!

From the burgeoning Ethereum Layer 2 ecosystem to the non-custodial hot wallet created by MetaMask, to the asset management protocols capitalizing on GLP yields, to NFT projects pushing the limits of community, to the projects we haven’t even heard of — progress is happening.

The bear market is temporary, but the alpha you generate in the bear market will give you a leg up on the ride up. Stick it out, anon.

Watch the full interview.

Not financial or tax advice. This newsletter is strictly educational and is not investment advice or a solicitation to buy or sell any assets or to make any financial decisions. This newsletter is not tax advice. Talk to your accountant. Do your own research.

Disclosure. From time-to-time I may add links in this newsletter to products I use. I may receive commission if you make a purchase through one of these links. Additionally, the Bankless writers hold crypto assets. See our investment disclosures here.

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