Pros and Cons of Centralization

One of the subjects that many in the crypto universe speak of is centralization. Most speak of it as something that must be destroyed. But it does provide services. Here are my thoughts:

Pros of Centralization

I have several bank and investment accounts. The majority of them are insured by either FDIC or SIPC. While the US government does not explicitly say they back these insurance institutions, these are (IMO) truly “too big to fail”.

That means that the cash I have deposited is “mostly” secure against the bank failing. The (very) small percentage chance that the FDIC or SIPC fails is small enough that I do not worry about it. Should they fail, the world will have bigger problems than money.

Another pro is security. We rely on the fact that banks know how to secure the deposited funds. They take on the risk of the funds I deposit. The bank will fail if the risks they take fail. So they put guards in place to prevent their own failure. They are basically in the business of protecting my money so they can make money with it.

You can say “that is not fair. They are charging a much higher percentage interest than what they are paying me.” True. But if you think you can do better, check out the real returns of some of the P2P lending platforms out there. I believe you will find that the due diligence of a risk-averse lender can easily be a full-time job.

To me, the biggest benefit is the lack of threat of robbery. If I kept all my money in my home, someone is eventually going to know about it. That opens me up to a physical threat of someone taking it. I realize someone can always attempt a robbery, regardless of if they know I store money there. But should they learn that I keep all my money there greatly increases the risk of me being robbed.

Also, contrary to the belief of many, the central bankers (a.k.a “The Fed” in the US) do perform a vital service. They have powerful tools at their disposal to manipulate the market. Without those tools, the US economy would have completely failed many times over. So, preventing crashes is a good thing, right? Well…

Cons of centralization

I am not advocating that crypto is worthless because the banks perform a service. I believe the technology is great. But there are some trends in crypto that remove the advantages of banks because they too are becoming more centralized. More on that a little later.

In the secular world, the “golden rule” changes to “he who hath the gold makes the rules.” And for societies that run on some form of money (in other words, practically all society), controlling the money supply puts power into the hands of few.

Throughout history, centralization of power has always lead to problems (the lack of centralization has also lead to problems, but I digress). Having money is an easy, powerful, and (often) legal form to control others. Centralization is not always bad, but it easily leads to abuse of power.

So we go back to The Fed. When they push buttons and pull levers to attempt to steer the US economy, their effects ripple through the world economy. Those bankers are not concerned about any economy other than the US economy. The US government is (arguably) concerned with world stability, but not The Fed. Remember, the decisions of The Fed are (arguably) not controlled by politicians. So while they may serve a purpose for the US, they affect the world. And the majority of the world is not their concern.

Concluding thoughts

I have many more thoughts on the matter. But the above forms the crux of what is right and wrong with crypto IMO.

Providing the security without the centralization is a near impossible task. When you have something someone wants, you risk having it taken by force. If it is a government you worry about, a decentralized cryptocurrency may be the answer. Just remember that at that point, you are now responsible for all the services that banks provide.

Do you want to get involved? Great! Do you not know where to start? Be careful! Remember, you are now your own bank. You need to protect your own money. Start small, learn carefully. Things will continue to move fast. But that does not mean you are forced to take unnecessary risks.

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