We need Cardano and other projects to fully utilize the potential of decentralization
From a social point of view, decentralization is a significant paradigm shift. It can be perceived as at least partial refusal of centralization and gradual inclination to decentralization. In the real world, it means that people are less willing to trust authorities and institutions. Instead of that, they will rather trust decentralized currencies, assets, and services. If the concept is going to succeed and a significant part of the population will find out that it is beneficial for them to use decentralized projects, then the adoption will continue spreading into the infrastructures of industries, businesses, and governments. Put it simply, for example, if we adopt Bitcoin as a store of value, then the decentralization will not stop by that. Right the opposite is more probable. If we have a decentralized store of value, we will want to have decentralized money, stocks, bonds, game items, entrance tickets, property, and many other things. And not only that. We will also need decentralized services and the ability to make decisions without centralized authorities. That will be logical and expected people’s demand if decentralization becomes a new paradigm. Cryptocurrencies have been adopted by a small group of people all around the world. When the number of adopters grows then new expectations and requirements will appear.
With higher adoption, a clash between the old and the new paradigm is inevitable. Fiat currencies are surrounded by the legal system and governments. Governments and central banks use monetary policy to drive national economies. People and companies are obliged to pay taxes. We need banks to take a loan. Ledgers must be maintained in national currencies. All institutions have to use national currencies and that is true also in cases when people have to pay fines. Currencies are used as a means of interaction with the surroundings. The interactions are required by governments and law dictate how to use currencies and how to resolve disputes. Fiat currencies cannot be easily fully replaced by cryptocurrencies. Avoiding the usage of fiat currencies basically means that an individual would leave the social system of a given state or country. For example, the legal system has bank accounts under control. Cryptocurrencies cannot be controlled by states. While it is easy to freeze a bank account it is impossible to do so with cryptocurrencies. Thus, governments would lose control of people when they would allow them to use cryptocurrencies. Using cryptocurrencies is a kind of revolt against the governments and it can be hardly imagined that this way has a chance to succeed. Collaboration with governments has a higher chance and we have already seen that some governments are not afraid of cryptocurrencies and they even accept them as a means for paying taxes.
For the purpose of the article, do not consider the volatility of cryptocurrencies as a problem. It is highly probable that some form of stable coins will be adopted before it will be possible to use volatile assets for payments. There are rules and infrastructure around fiat currencies to which people trust for many years. The same will have to exist also around cryptocurrencies. By the word infrastructure, we mean the current centralized networks and also rules and institutions. For example, you can use the current infrastructure to pay taxes. The payment can be realized from your bank account to an account of an institution that has the right to collect it as the law of a given country dictates.
We can see basically three possible ways of how new decentralized infrastructure can be connected or adopted by the current infrastructure. Let’s consider only the positive scenarios from the point of view of cryptocurrencies:
- Governments adopt cryptocurrencies and provide the legal system and rules to solve disputes.
- A trusted infrastructure layer and rules will be created in a decentralized way. Thus, the current infrastructure can be completely substituted. Governments let it exist as a parallel system.
- Something between the two points above. Governments will adopt the whole decentralized infrastructure. The old and new infrastructures will be merged.
Note that the approach can be different from country to country. Let’s deep into details. That can help us to find out which scenario is the most probable one.
Cryptocurrency transactions are irreversible and we can see privacy tendencies. Governments do not want to completely lose control of money and the current legal system is not able to deal with disputes in the blockchain world. The court may consider a transaction or record invalid or fraudulent, but it has no way of enforcing anything in the world of blockchain. This is a significant technical obstacle for the current social system that uses centralized infrastructure. If a decentralized infrastructure was allowed in a given country, governments would have to trust people that they pay taxes honestly and correctly. The government would not know how much money people have and earn. It would be also very difficult to force somebody to pay a fine or apply some legal orders related to money. The building of decentralized infrastructure for cryptocurrencies is much smarter. Not only will it be required by people if decentralization succeeds as a new paradigm, but it will also be easier for governments to use it as a whole. Decentralization is about less reliance on human decisions and more about strict following rules that are written in the source code. The main focus will be put on the definition of rules that are written in the code. It is easier to harmonize the current infrastructure with the decentralized one than try to use cryptocurrencies with the old infrastructure.
Let’s have a look at some practical examples. Buying stock is currently a centralized process that is surrounded by old infrastructure. Makes it sense to buy “paper” stocks for cryptocurrencies? When people get used to taking over the responsibility for their wealth then they will want to own stock in a digital way. In the same way, as they own cryptocurrencies. People using cryptocurrencies might want it but governments might want to keep the current infrastructure. Obviously, it will not be possible to buy stock via cryptocurrencies (without fiat currencies) in a fully decentralized way if governments will be against it. The only possible way to achieve it is to cooperate with governments. Let’s add another example. Make it sense to use cryptocurrencies and be forced to take a loan in a traditional bank? Should traditional banks work with cryptocurrencies? No. This service should be also decentralized and in some cases, it even must be decentralized. The advantages of decentralization would be lost if we had to use old infrastructure and trust people and institutions. Decentralization must become standard in all financial and social interactions. On the other hand, the crypto community must think about whether it is really realistic to take over the whole power that governments have and whether the majority of people really want decentralization without any participation of governments. Regulation and cooperation can be a faster way to achieve a higher level of adoption of decentralized technologies than making a revolution that would lead to direct clashes with governments.
If you realize how big change can decentralization bring then it is clear that the crypto-space has a lot of work to do. We need to improve scalability, have a secure and reliable smart contract technology, ability to create tokens that would represent assets, stable coins, Oracle services, digital identity management, and many other things. Many of those are still under construction or already available technologies have not been tested by time. We have seen many failures in the DeFi space. All these functionalities cannot be built and handled by a single project. It is more probable that many decentralized projects will succeed and Cardano can be one of the most significant players in the playground.
50 shades of decentralization
Decentralization is a scale. We can have a very secure network consensus with worse decentralization or scalability. We can also have a highly scalable network with low security. We can even have a network with balanced properties. We will need all combinations of decentralization for different purposes. For that, we definitely need more networks with different consensus algorithms and the ability to transfer values from one network to other networks.
Bitcoin is currently considered as a store of value by the crypto community. The consensus is very secure but the scalability is being solved as a second-layer solution. What does that technically mean? It must be technically possible to transfer the BTC value from the first layer into a second layer solution like Lightning Network (LN). After the transfer, users can use BTC only within the second layer and not in the first layer. Once the value is transferred to LN users cannot send transactions in the first layer and use the same value. If it was possible then users could spend BTC twice (it would allow spending the same coin twice). The transfer of coins into LN has the consequences. The BTC value is not protected by the PoW any longer. Users must rely on the security that LN can offer. If users somehow lose BTC in LN then it is not possible to restore it again in the Bitcoin network. It means that users should be interested in the security and decentralization properties of a given network before they will send any value into it.
People need to transfer their wealth into the other networks if they want to send coins fast and cheaply in order to pay in the physical world in a decentralized fashion. Cardano can provide this service better than LN. In our opinion, Cardano is more reliable, decentralized, and secure than LN. Moreover, users can utilize smart contracts that can establish trust between parties that do not trust each other. It is needed in the digital world where people might not know each other or wish to stay anonymous. Users can buy stocks securely and reliably via smart contracts. Cardano will be able to offer many decentralized services and connections to other networks. So in the end, it will be smarter to transfer value to the Cardano network than to LN. There will be many competitive networks but transfer within them will cost something. In the future, people will not be probably willing to pay excessive fees for value transfer just to have a chance to consume other services. It could be cheaper to consume services within one network then jump from one network to another. It is hard to predict the future but one thing is certain. People from poor countries will not be willing to pay one or more dollars for network fees. For these people, it can be economically more suitable to avoid the usage of Bitcoin completely. They do not need to store value in a digital way since they might not have anything to store. On the other hand, they could need to use decentralized financial services since their current infrastructures often do not work well. Moreover, they need to communicate with the world and establish trust between them and governments. In poor countries, a smart contract platform like Cardano can be much more useful than Bitcoin. The store of value is not a use-case that poor people need. Still, decentralization can be very useful for them. People can use decentralized services to directly sell their products without middlemen. They can start to create new financial services that do not exist in many countries. That will bring them the social value that Bitcoin cannot offer. Bitcoin is not needed even as a means of exchange. Stable coins will be used for that in the foreseeable future.
Second layer networks often lack the advantages of blockchain. These networks are not ledgers in the sense of reliable accountancy. For some use-cases, we do not need to have everything in a ledger, but for some other use-cases, we need exactly that. For example, if we want to build a transparent form of some institution, or just have a transparent account, then we need a ledger that will be reliable and transparent. Maybe transparent only for a selected group of people, not to everybody in the world. Privacy and transparency can have different levels and we need to continue with the development of these technologies. There will definitely be use-cases when we will need a blockchain with fast and cheap transactions. Exactly what Cardano with its PoS consensus algorithm can offer. Scalability on the first layer can be a problem for many years but we need to continue trying to improve it. We do not need custody services that allow you to pay by crypto if you do not mind sacrificing the decentralization. These services basically give you a fiat payment card that allows you to pay nearly everywhere. You just need to send them your crypto. In reality, you pay by fiat currencies and the service will charge you later. These services are against all principles of decentralization. Custody services exist for two major reasons. Merchants do not accept cryptocurrencies and technology is not ready for fast and cheap transactions. Both these issues are solvable.
Technology must be able to change the quality of life to be really useful. It can be a digital store of value in western countries and financial infrastructure in developing countries. Some people often believe that Bitcoin is the only sensible project that will be able to cover all functionalities. We consider this form of maximalism as a wrong perception of the world and its needs. The usage of technology must be cheap to be available to everybody. It cannot be the privilege of the rich. Moreover, the technology should not be related to price speculation. Highly volatile digital assets are not interesting for poor people and that cannot improve their lives. One of the most interesting missions of the Cardano project is to bank the bankless in poor countries. Financial infrastructure, stable coins, digital identity management are functionalities and services that these people really need. Regarding adoption, people will not hesitate to adopt these services if they can improve their lives and governments will support that. The adoption of Cardano can be higher than the adoption of Bitcoin or other projects in a few years. The only prerequisite is to have the technology really ready for adoption. We do not need experimental projects. We need projects like Cardano that are built with care and that are based on math and science.
The more networks, the more decentralization
Blockchain will always struggle with scalability and we will need maybe a few decades then we will be able to resolve it in a satisfactory way. It is smart to rely on more blockchains projects in the beginning. The adoption of blockchain technology can be faster and if one project fails there will be others that can replace it. We can also make more experiments and test more approaches. For example, we would not have a running PoS project in the top 20 without Cardano. The Bitcoin team would never experiment with PoS. If Cardano will work 10 years reliably, we will know that we do not need PoW since we will have discovered a better consensus. From the adoption point of view, some green governments can hesitate to adopt PoW projects but they can like PoS. We can even imagine that some assets can exist or be replicated on more blockchains to ensure their existence in the case that one blockchain project fails.
No project can fully satisfy the needs and preferences of all people on the planet. People will probably adopt more projects or they will use more of them for different purposes. Even if there would be only a single project in the beginning the project can split into two separate chains in the future. There can be a change in the project that some people will love and other hate. When a hard-fork occurs then part of the former users will follow one chain and the rest a new chain. It can happen that the majority of people, let’s say 90%, will follow the old chain and only 10% will follow the new one. What if it is 50% to 50%? Then two separate chains with a similar amount of users will exist. Time will show whether both chains remain relevant or one of them wins. Disputes in the community can always result in a split of the community and there is nothing that could prevent disputes in the physical world. It might not be seen at the first glance but there is a strong social contract behind the crypto projects. You might follow one chain and hold coins of that chain. You have to realize that your coins depend on the opinions and decisions of the majority of the people. If your opinions are different from the opinions of the majority and there will be a hard-fork, you might finish with following a chain that is supported by the minority. That is not bad at all. It happens in the real world every day. It could be wrong to think that there will always be only one blockchain that everybody will want to use. Anyway, hard-fork can be perceived as a failure of governance. In the ideal case, democratic voting should decide which change will be implemented. Splitting a project is probably the worst solution when disputes appear in the community.
Disputes in the physical world will be more frequent with higher adoption of a given blockchain project. The link between the community and a blockchain network is actually very strong. 100% decentralization is probably a myth since we have to consider the link between the digital and physical worlds. A network itself cannot exist without a team of developers that would maintain and improve the technology. It is the community and users who have some wishes and opinions regarding the abilities and features of the protocol. A community can use a decentralized technology but the community itself can be centralized around some group of developers, leaders, or strong persons that might want to push some change. Any decentralized technology will always depend on a team and the team will always depend on communities. If we really want to build a decentralized technology we should strive to build a decentralized social layer that would surround the protocol and the team.
Having just one single blockchain network for everything would basically be a form of centralization and maybe even a form of authoritarianism. All users would need to basically agree with one version of the rules. These rules could be beneficial for one group of people but disadvantageous for others. What to do then? Should part of the population be excluded just because they would wish to follow different rules? It makes no sense and having more blockchain projects is the resolution. The Cardano project has an advantage that the team realizes a need to build decentralized governance. The Voltaire era is dedicated to the topic and part of it will be a mechanism for decentralized voting. The network cannot be in the hands of a team but in the hands of the community. It will be a challenge to explain to people the importance of voting and teach them how to participate in such voting. Nevertheless, it is needed to start with that and improve the process over time. We consider it as an inevitable part of decentralization. The importance will be more obvious with higher adoption.
What is ahead of us
The majority of people will not probably say goodbye to governments and start living in a new decentralized world. A more realistic scenario is that governments will adopt the technology when it is technologically ready for that. It means that transaction fees will not fluctuate from cents to tens of dollars, the smart contract technology will be reliable and secure, second-layer solutions will be reliable and adopted by users, there will be privacy features and other things. In our view, Cardano is a project that will have everything we need for mass adoption. Not only from the technology point of view but also from the adoption point of view. The teams behind Cardano communicate with governments, regulators, and many other institutions. Governments in poor countries are interested in blockchain technologies and collaborate with Cardano teams. Adoption of blockchain technologies can come from the bottom up. On the other hand, creating a financial infrastructure in cooperation with governments is a smart approach in poor countries.
The potential of smart contract technology is still underestimated and the qualities might be shadowed by many failed ICO projects and many issues in DeFi. ICO and DeFi are good concepts in general but like any technology, people can misuse it. We are persuaded that the technology will have a higher impact on society than a decentralized transaction network. Smart contract technology will allow us to create programmable trust services. In the real world, there are still many centralized middlemen. Smart contract technology will allow us to create alternatives that can be faster, cheaper, more secure, and more reliable. It is smart to make the current processes more effective and people will require more decentralized services with higher adoption of blockchain anyway. We definitely do not think that smart contract technology is a blind branch of blockchain technology. We are sure that the opposite is true and smart contract technology will play an important role in the adoption of decentralized technologies.
Cryptocurrencies need one thing the most and it is adoption. It is hard to predict the future and estimate paths of adoption. Thus, we do not even know which features we will need and how long it will take for governments to adopt decentralized services. We can assume that developing countries will adopt blockchain sooner than in developed countries. We believe that Cardano will succeed in poor countries since it is well prepared for that from a technological point of view and the teams behind Cardano already communicate with these countries. When cryptocurrencies go mainstream, we assume that there will be a higher demand for using smart contracts and Cardano will be ready to satisfy the demand. Old infrastructures will have to deal with the new decentralized infrastructures and some form of merging is the most probable scenario. We expect that the next decade will be very interesting regarding the adoption of decentralized technologies and we are looking forward to that.