November 7, 2016

Straight Talk About Decentralization

Decentralization is an important, key concept in bitcoin/blockchain areas. In the course of our marketing projects, we deal with many ordinary merchants who are interested in distributed/crypto POS and shopping software. We have found that many crypto-community members seem to lack an understanding or have forgotten this key concept, decentralization. We suggest that the problem is neither: 1) based on our perception nor 2) that crypto-people are living in the future while merchants are simply trying to catch-up. The fact is that these both exist in parallel and in present time. We’re writing this post because we are seeing more and more crypto-people turning their noses up to such a degree that they can no longer see their feet much less the foundation those feet stand upon.

Deconstructing Decentralization

The decentralization trend is very important and worth studying, at least because it has already become a large part of reality for many Bitcoin and altcoin users. There’s also an obvious technical truth that decentralization strengthens any system’s stability and decreases maintenance costs. No one can argue decentralization is cool and influential but how important is it exactly, how much would that be in figures? And where should it end? Or, where should it start in areas it is yet absent?

Let’s start by taking a step back and reminding ourselves that the trend toward decentralization parallels and is strongly intertwined with trends toward globalization. In an effort to expound upon this idea, let’s look at the three most important aspects of the life of any society:

1] Physical Energy Level

Societies, like individuals, have foundational physiological needs per Maslow’s hierarchy. A large group of people first of all depends on physical energy (electricity and fuel as its most common forms) and food. Currently, entire energy sectors — power generation and distribution — are being decentralized. Much can be attributed to the influence of “green initiatives” but the bottom line is that the number of plants in the US grew almost 50% from 2004 to 2014, from 5288 to 7677. And, that is is only the traditional part of the equation.

Tesla’s roof tiles and e-cars selling electricity back to the network, Google’s grid, shale carbons, wind and — maybe in the near future — small transportable nuclear plants, and other innovations lower business thresholds and definitely move the industry towards decentralization and networking. At the same time, food production seems to be more and more globalized while conglomerates maintain centralization.

2] Security & Power Level

Within the same analogy of Maslow’s hierarchy, personal safety involves political power when we consider society at-large. Power systems are based on various combinations of ideology/religion, media/intellectual influence, brute (police) force, and monetary/currency emission power. If the past hundred years have taught us anything, only in the latter arm of power’s future is worth investing. The former three have been in an irreversible and monotonous decline for decades already. The number of states on Earth has been increasing for many years — another example of the decentralization effect. More importantly, control of money emission — which is at least half of the whole deal when you talk about political power — has been infiltrated by decentralization too with every monetary and financial aspect being seriously targeted by crypto innovations. That pressure is not going away ever; in fact, it will only grow progressively stronger.

There’s a strong counter-current of globalization in this field too. It penetrates traditionally “local” markets such as payments, it attempts to unite banks on a new level, but let’s finish the Maslow’s level and talk about how money is decentralizing a bit later.

3] Communication Level

This is the third level in Maslow’s pyramid (translated from “self esteem and love” as implied for an individual) and it is already as decentralized as we could never imagine. Don’t let Facebook-like oligopolies or dicator states’ propaganda fool you. The future is here 100%. And of course, it is yet again accompanied by the globalization counter-currents of total surveillance and unification of cultural templates.

Attempting to Calculate the Importance of Decentralization

Many complex trends can be better understood by way of comparison. The fintech and crypto communities devote attention to a vast array of related issues: there’s anonymity, fungibility, there’s obviously lots of talks on scaling; there’s the issue of overcoming the high costs of incumbent payments and increasing security of transactions. People talk a lot about crowds of unbanked people in Africa, blockchain-icizing securities, smart contracts, and lot’s of other stuff. Fintech people discuss on a daily basis the adoption of bitcoin and prices of all Ethereum currency units. They worry whether bitcoin regulation will be reasonable or if it be at all.

The small calculative illustration above helps to understand that stuff is not even nearly as important to our life as decentralization and the ways it proceeds. What’s more, “normal” ordinary merchants share that view, they don’t care about issues the fintech startup world is swimming in but, surprisingly, they do care about decentralization. Let’s see why and in what ways. But, before that, let’s remind ourselves what decentralization is. In common parlance, it is comprised of two parts:

  1. More nodes. Decentralization is when there’s a growing number of participating nodes in an interconnected system maintained by constant resources. Like thirty governments participating in European governance instead of one emperor.
  2. More roads. Also, decentralization is a change happening to a system which results in growing number of node-to-node connections. Like an ability to sell your photos to thousands of places online instead of few local magazines.
But, what is a node when we discuss money and financial services? Is a person a node? Is a business a node? It turns out that no, neither definition reflects the reality well enough.

Bitcoin is worth mentioning here because it is the thing that was long believed to fulfil the promise of decentralization on the individual level. The main reason for that faith is probably in the very first words of the Satoshi’s white paper that read “A purely peer-to-peer version of electronic cash would allow online payments to be sent directly from one party to another without going through a financial institution.”

That faith has been challenged by claims of a future-reality where Lightning Network providers and sidechain patent-holders replace Visas and Citibanks. Unfortunately, expectations of anonymityconvenience and speed are being compromised and back-tracked by certain factions within that community.

But let’s leave Bitcoin alone for now; should it manage to return to the path of “a purely peer-to-peer version of electronic cash” we might want to look at it again. Currently we see much more significance in the finding that…

Nodes of a real-life financial network are not people or businesses. They are better understood as categorized financial needs and services.

To illustrate the prevailing false agenda in the fintech sector — one that is too complex to be blamed on particular individuals or factions, let’s consider what is a “direct person-to-person payment”. When does such an activity take place? Probably when you give your children some pocket money. Or when you borrow few bucks from a friend. Well, maybe you need to send some money to your relative in Mexico. So, how big is that whole issue of p2p? Is that really important to you or the economy such that it needs to be improved in any way? We doubt it. Are you and I, each one of us, the functioning nodes of the financial system? Do we — personally each one of us — constitute the primary level of the network that needs to be improved through decentralization? Probably not. Maybe in some utopian future but definitely not today or tomorrow.

A truly important financial transaction, however, is signing a mortgage or completing a business restructuring agreement. These kind of standardized acts — both from demand and supply sides — build up the network. And it is this network that can be improved with decentralization. In a manner similar to what is happening in the energy sector.

Your local small bank’s business credit line offer is a node of the grassroot financial network. Your mortgage deal is a node. You are not a node. Neither is your business’ cashier or POS. Neither is your crypto wallet or a PayPal server.

In the mid to late 20th century you would have never heard an articulated need for improving payments. Then, the oligopoly of centralized payment networks arrived via the brute forces of marketing and lobbying. It took decades. It usurped a lot of business and profit from banks. Local banks (and people too) were fine with “slow” payments. When you are the owner of money and you make a payment that is serious enough to constitute a part of our economy, speed is not among your top priorities. You should care much more about the trust incorporated into your transaction. You should care much more about how well you and your banker know where your money is being sent.

Now we hear mottos like “Bitcoin will replace banks”. Why banks? Why always banks? What’s wrong with banks, themselves? The companies that are being bailed out by the government have stolen the name from banks. Those are not banks, they are something else.

It is interesting to observe the deviation of senses. “We need trustless payment system!”, they say. Ok, but whence cometh that need to trust a central authority in the first place? How did we arrive at the point where a central VISA, PayPal server, or a single federal clearing service is required for doing business? What were the necessary conditions that made us need these institutions, just to be able to live, in the first place?

On top of those conditions, we somehow created an artificial problem called, “the undesired need for trust in payments” a few decades ago. Now the entire world is trying to solve it — totally ignoring the source of the problem. We first put the burden of centralized (fast but expensive) networks on our shoulders, then we spent resources looking for roundabout answers like “the blockchain”. Never forgetting to maintain a healthy attitude of “blame the banks for all their sins” along the way. There was no “trustless” issue before we created it ourselves.

Payments were already decentralized when we payed through our local bank cheques. This natural level, based on the professional ability of the officers at your local bank. By artificially downgrading the lowest possible node to an e-wallet of a potential financially irresponsible individual the network does not thereby necessarily gain anything positive, despite being “decentralized”.

It is generally agreed within the fintech community that payments need to be decentralized. Now again, do we have to go all the way down to the atomic level of particular individuals and their e-wallets to do that? Or maybe it makes sense to study whether we can decentralize payments using the reverse path, at least partially.

What are we seeking from this round of decentralization? How to proceed with it? What system looks most healthy in given economic and political realities? The answers depend on who is asking and who is being asked, of course. When you look at the industry landscape as an independent (and indifferent) observer you only feel some discomfort produced by the chaos. Exactly what and whose needs do initiatives like R3CEV or Hyperledger solve? Why should I change a trust in PayPal to trust in Colu or Everex? Questions like that make indifferent theoretical observers (as ourselves, for example) feel some vexation. Worse, they make ordinary merchants angry. It is a false agenda to them and amounts to little more than a new spiral of global corporate fraud.

The Bottomline

So here’s the few new truths we’ve learnt from merchants we tend to accept.

Importance of Local Services

Only a professional local banker has the complete moral right to promise “financial services” to an end-user. Only someone familiar with the local situation and their client’s individual situation is capable of delivering the right service. Global or federal online services can not do this. They rarely even try, though. Large centralized services in this industry sector have a greater degree of providing an inferior quality product. Financial services are not something a person can afford to try to save few pennies on. A node of a financial network is a set of well understood particular needs and service packages offered in return. We live under a totally false agenda. We’re not getting what we should be getting from our financial providers — namely, the feeling of financial security. Payment improvement is a non-starter. They’re fine. And they were fine long ago. Who needs to pay rent or apply for a mortgage instantly or p2p? Large services that “make it faster and cheaper” worsen the summary of risk/return for an end-user. Their costs reductions are illusory.

The Devil is in the Details

Media and industry experts highlight the services with the biggest promise to become lucrative source of income for their founders, which is perfectly normal unless it is being embossed with false agendas about “innovations” such as decentralization. True decentralization initiatives actually suffer from these false supporters who steal attention from what might actually generate support and funding.

Be Honest About the Blockchain

The Blockchain is a great invention — a super cloud server everyone can trust with no prerequisites. It is very hard to not abuse it, though. No good service should attach financially sensitive components to a blockchain-based product. It stops being blockchain after that. No “side-chain” or any other type of metadata dependent on particular infrastructure owners should contaminate the blockchain. It can only be used as transport of information. Services using it should not claim its level of security or any other property.