Immigrant, investor and serial entrepreneur. https://everipedia.org/wiki/lang_en/kirill-bensonoff
>> This article is for informational purposes only and is not financial advice. The information does not constitute investment advice or an offer to invest.
What makes crypto so great?
There are many possible answers to that question, but I think most of you would say ‘decentralization.’
Since the beginning, when Satoshi Nakamoto first published his groundbreaking Bitcoin whitepaper, decentralization, along with anonymity and security, have been cornerstones of the cryptocurrency value proposition.
But sentiment may be changing. Many argue that, instead of helping crypto, decentralization is holding the sector back, relegating it to the fringes of finance and slowing mass adoption.
Money talks. And when it comes to money, people like protection. We like rules, we like a process, and we want a neck to choke if things go wrong.
So, is decentralization on its way out? I believe it is, partially.
Is Decentralization Falling Out of Favor with Blockchain Startups?
Berry Silbert, a crypto venture capitalist who founded The Digital Currency Group, addressed the issue of decentralization in a recent interview with Forbes.
Silbert, who runs the Digital Currency Group (a VC and holding company), believes ICOs and other fundraising should be managed by a centralized authority. He suggests disintermediating the funding process, arguing that too many fundraisers back projects with no practical purpose in the real world.
Silbert’s skepticism isn’t unfounded, and the numbers paint a bleak picture. According to data from Investopedia, ICO fundraisers raised a whopping $6.3 billion in the first quarter of 2018 alone. These startups range from the revolutionary to the silly. They include projects like Golem, a network that aims to create a global market for idle computational power, alongside projects like TrumpCoin, a value token designed to support the American president by paying users to write weekly Facebook posts in his favor.
You may laugh now, but at its’ peak, TrumpCoin had a market cap of $3.38 million. That’s a “YUGE” amount of cash to put behind an obvious joke.
The decentralized ICO system is great because it lets regular people from all over the world participate in a process that was previously reserved for large institutions. It also allows money to flow to projects that would otherwise never see the light of day. But as the cryptocurrency market matures, cracks are beginning to show in this process, calling its’ decentralized structure into question.
Let’s look at the numbers.
According to ICOdata.com, there have been over 1,110 ICOs so far in 2018, and they have raised a little over $7.14 billion. This is a big jump from last year’s figure. But when we zoom in on the monthly data for 2018, a different picture emerges. Starting in January, when $1.52 billion was raised, the market has experienced a precipitous decline in the total funds raised through ICOs. In September only $163.88 million was raised, and in October, the figure is a paltry $54 million.
Is Centralized Funding the solution?
The numbers paint a bleak picture for decentralized fundraising in its current form. But what does the data say about centralized raises, like venture capital?
Let’s look at the numbers.
In February, Crunchbase News published a report on venture capital funding in the crypto space using a proprietary dataset. The report analyzed blockchain and blockchain-adjacent startups in the sector using data from 2012 to February 2018.
In 2017, 300 venture capital funded blockchain projects raised over $900 million while ICOs raised $6.21 billion in the same period.
More recent data highlights a similar disparity. In January and February of 2018, around 60 raises generated approximately $400 million in capital. ICOs generated almost $2.8 billion in the same time frame. However, as we know, the ICO trend has slowed drastically in the latter half of 2018.
To be fair, the trend changes (a lot!) when you start adding other, non blockchain related raises, which collected over $80 billion in 2017, and over $57 billion in the first half of 2018, according to Pitchbook. These amounts dwarf even the billions raised during the “ICO boom” of 2017 and early 2018. So centralization still rules the fundraising game, at least in the United States.
Balancing the Tradeoffs Between Centralization and Decentralization
Okay, so there is a clear negative tradeoff between decentralized raises and their centralized, venture capital driven counterparts. But love them or hate them, ICOs still generate a huge amount of money. They also create opportunities for a variety of unique startups that would have otherwise never had a chance to enter the market. And they are global.
Centrally funded startups aren’t close to perfect either.
These raises are exclusive (for “accredited investors” only) and do not allow the general public to participate in the raise, nor reap the rewards of a possible successful exit. This model is inherently flawed, it benefits only the top-tier VCs and creates classes of people who are treated differently, while perpetuating “the rich are getting richer” paradigm. The market, and the regulators, must find a way to be more inclusive. This would be a win-win for everyone — larger pool of investors and potential liquidity for startups, and more opportunities to those that want to invest and earn a return.
Decentralized Exchanges vs. Centralized Exchanges
The story of decentralization does not end with ICOs.
Cryptocurrency exchanges provide an even more compelling case study on the tradeoffs between centralization and decentralization. Decentralized exchanges (DEXs) allow counterparties to locate each other and trade directly on the blockchain without any intermediary. The benefit of this system is that traders don’t have to entrust their crypto to an exchange wallet and face the risk of being hacked or having funds stolen. There are lots of different decentralized exchanges, employing varying degrees of decentralization in their structures, but the most successful DEX platforms seem to rely on a synergy of centralization and decentralization.
Let’s look at the numbers.
IDEX, the most popular decentralized exchange, currently ranks in at 100th place on Coinmarketcap’s trade volume ranking. Compare this to Binance, its’ centralized counterpart, which claims the top spot on the list.
While IDEX hosts a mere $2.45 million in daily trade volume, Binance handles around 340x more with approximately $829.15 million worth of cryptocurrency changing hands in the same time frame. IDEX also hosts 447 currency pairs, which is significantly more than most other decentralized exchanges — it is also more than Binance can claim with only 385 pairs hosted on its platform.
While the Waves Exchange hosts $1.58 million in daily trade volume, OKEx tops that by around 450x with $712.34 million worth of crypto changing hands in the same time frame. On top of the massive volume disparity, OKEx also hosts way more markets than Waves with 512 currency pairs compared to 72.
This trend continues, but the point is clear: the top exchanges by trade volume are highly centralized.
Crypto Lending — The New Frontier
Lending is the new frontier in crypto, and the market already indicates a preference for centralization. Let’s compare Genesis Capital, a centralized lender, with its decentralized counterparts.
Right now, Genesis Capital has $130M in active loans according to the latest YTD data for 2018. Let’s compare that to Dharma, a decentralized lending protocol. According to Loanscan, Dharma issued approximately $10,000 worth of loans in the past 30 days.
There are also “decentralized” marketplaces like SALT, however, they are a centralized business that simply utilize the blockchain for a specific purpose. I would not attribute their balance to the decentralized side, because they are not.
While Genesis and other centralized lenders are increasing their loan volume by the month, their decentralized competitors are lagging behind.
What Is the Future of Decentralization?
Has the dream of decentralization disappeared into a centrally-managed reality? No. At the end of the day, decentralization is still one of blockchain’s core value propositions. Its’ benefits range from immutable records, democratic governance, privacy, and security.
Decentralized organizations have to evolve. They must learn from past mistakes and develop ways to integrate decentralized organizational structures more seamlessly into real-world use cases. Going fully decentralized via protocols like Aragon is one solution. Another is to bring decentralization to enterprises, like what Dharma is doing with its’ new Lever offering (over $10 million of loan volume has been requested in its’ alpha version).
Whatever the solution is, we know that when it comes to money, people want to feel secure. And still the best way to accomplish that is to continue to build trustless protocols to enable exchanges of value without a central intermediary. As we all know, even the “nicest” companies can take wrong unilateral actions, just ask Mr. Pompliano.
Disclaimer: Virtual currency is not legal tender, is not backed by the government, and accounts and value balances are not subject to consumer protections. This article is for informational purposes only, and is not financial advice. The information does not constitute investment advice or an offer to invest.
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