Trade-Offs and Compromises

A decentralized world is not merely the opposite of a centralized world. It’s a different world. What do we mean by not opposite but different? It means that you won’t be able to

(cont.)

_______________________________

⁵⁸ End-user license agreement.

⁵⁹ Credit default swap and Subprime and mortgage crisis.

_________________________________________________24_________________________________________________

(cont.)

build a decentralized counterpart of things from the familiar centralized world. This realization

has profound ramifications for mechanism design in a decentralized environment.

Many in the blockchain developers community felt this all the time. It is a never ending struggle of self-contradiction and trade-offs. Trade-offs are nothing new in the world of engineering and computing – but traditionally old trade-offs can always be overcome by tomorrow’s computer – size solves everything in a centralized world. Centralization flattens the world into one-dimensional problems. If we take centralization for granted, engineers can always ask the finance department to help solve problems – they can simply ask for a bigger hammer next time – since everything, everybody, and every potential problem has already been pre-shaped into a nail by centralization. Hammers always work in a centralized world.

To be honest blockchain developers really miss their hammers from the centralized world. Who can blame them? Hammers are all we know a mere decade ago. It is no wonder there are big relapses of the reverting-to-hammers approach in solving decentralized mechanism design problems: e.g., centralized cryptocurrency exchanges, delegated POS, governance DAO.

We’ll have to admit that our thinking is deeply mired in the ways of centralization. Centralization is not just a simple, self-contained conceptual entity – it is actually a genotype embedded in many other conceptual entities. Let’s take a deeper look at some fundamental concepts that had troubled us in designing decentralized systems. First is the notion of security.

Traditional computer systems, whether independent or networked, do not see security as a fundamental feature. It is important, actually much more important today in the age of hackers – still system designers can separate security concerns from other major functionalities (many still see security as an afterthought). Not so lucky for decentralized systems – security is the first, most crucial concern for designing a decentralized system. Without security a decentralized system can’t even exist in the first place. However, we have to ask ourselves – can the notion of security that we got ourselves so accustomed to from centralized systems be fully applied to decentralized systems? Well, we are still very much befuddled today after over a decade of investigation.

It appears that one of decentralized systems’ fundamental characteristics, permissionless network (open access to everyone) or participation, is in direct conflict with centralized security realization – that we can defend the system against rational players/opponents. The implication is that an open system cannot generally be secure if all participants are either Byzantine or rational⁶⁰.

Because of this fundamental conflict between openness and security, the blockchain community is often split into different groups of people:

(a) those who can’t resist the urge to revert to a permissioned system;

(cont.)

_______________________________

⁶⁰ Rationality is Self-Defeating in Permissionless Systems.

_________________________________________________25_________________________________________________

(cont.)

(b) those who indulge themselves with the illusion that openness and the traditional notion of security based on rationality can coexist and hold indefinitely (to infinity and the moon) – the status quo;

(c) those who have freed themselves and broken away with the traditional, centralized ways of thinking and accepted new notions of decentralized concepts, including security, identity and more – the DAC developers for DAC economy.

Let’s talk about them. For people in group (a), a grand compromise with the traditional centralized system could be a goal – in reality a generational shift is to be expected and some FinTech[4] people who favor the technical superiority of cryptocurrency over old monetary system will infiltrate traditional financial institutions and gradually new digital sovereign currencies rebuilt on top of cryptocurrency compatible infrastructure will replace old fiat money, e.g., CBDC⁶¹. Be noted that this grand compromise for now is still far from reality and the conceptual origin of CBDC has nothing to do with cryptocurrency. Yet we can see the cracks open. No doubt strong identity will be implemented on CBDC compatible cryptocurrencies to satisfy financial regulations as part of the compromise.

Call it acculturation or assimilation – the grand compromise and CBDC are the end of road for cryptocurrency. For those who wish to continue the resistance, stay off-road in the jungles, please.