One of the key aspects of the crypto boom that keeps bothering me is the inherent conflict between centralized entities and decentralized entities.¹ For instance, let’s think about Bitcoin. Bitcoin is a supposedly useful form of money because it’s decentralized and no one can manipulate it. Then again, I’ve argued that Bitcoin’s biggest weakness is its decentralized nature because:
- It cannot act as a stable form of money (because money that settles at par does so because a trustworthy centralized entity sets the price)
- It cannot act as a form of credit (which is what most money is) because credit requires counterparty risk.
Of course, there are times (like hyperinflations) where a decentralized money will increase in value so decentralized money has a place in the monetary system even if it’s at the margin. Bitcoin (or some version of it) is very unlikely to go away or go to $0 because there will always be demand for it in places where governments destroy their currencies.
But Bitcoin is not an ideal example here because I don’t think currency is the most useful aspect of the crypto boom and the blockchain more generally. The more useful aspect is in decentralizing basic services. The coin attached to various decentralized services isn’t a “currency” as much as it becomes a means of rewarding those who validate the decentralized ledgers that track various services. The coins basically become ways of paying people for whatever service they’re providing in much the same way that equity is issued to employees of firms as a means of payment.
Interestingly, this area is ripe for corporations to crash the party. For instance, although it was widely mocked, I thought the KodakCoin announcement was fascinating for several reasons:
- Corporations can decentralize specific services through the blockchain.
- Corporations have no need to use an existing decentralized coin to decentralize part of their operations.
This is not a small development. It is essentially a public company IPOing part of its company. For instance, KodakCoin offers a way for Kodak to decentralize the copyright of photographs. So KodakCoin is worth whatever the ledger is worth to its users so if it’s widely used then the coin is how KodakCoin miners are paid for validating the ledger. Think about that for a second:
- Kodak is offering a new service that they don’t have to pay a single employee to maintain because the coin itself is how miners will get paid.
- Kodak gets to keep some equity in the decentralized service because they will be the primary issuer of the coins.
This makes all the sense in the world. Why would Kodak use someone else’s coin when they could benefit from issuing their own coin? Of course, there is absolutely no need for Kodak to decentralize such a service. They are fully capable of doing this via existing centralized technologies. But if it generates more trust then it will attract more users to Kodak’s various platforms and that could benefit all of Kodak’s businesses in the long-run.
This has potentially important ramifications for the future of the crypto space. There is a non-trivial chance that many of the existing decentralized coins will be rendered worthless because centralized entities will decentralize competing services. In doing so centralized entities will capture most of the value creation in the space by using decentralized technologies in ways that create a symbiotic relationship that exists on neither extreme of the spectrum.
¹ – There’s a lot of weird Libertarian utopian style thinking that surrounds this space. Some of this ideologically driven thinking seems to misunderstand that there’s a useful need for centralization in modern human life. It almost feels like we took an extremist centralized theme, threw it out the window and are now sitting at the other end of the extremist decentralized end of the spectrum.
Mr. Roche is the Founder and Chief Investment Officer of Discipline Funds.Discipline Funds is a low fee financial advisory firm with a focus on helping people be more disciplined with their finances.
He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.