“ fixes this.” I cringe every time I see this popular meme. I find it worse than nails on a chalkboard. Bitcoin and other cryptocurrencies (crypto) supporters seem to wheel this tired trope out for every problem they see, particularly at economic ones. To their credit, they genuinely want to fix the financial system’s problems. I do too! However, crypto’s supporters have their subjects completely reversed.
To be sure, our modern-day financial system has problems. It’s plagued by “Too Big to Fail”, embarrassingly slow innovation, poor user experiences, and recurrent cronyism (real and perceived). Like the crypto-crowd, I see centralization as the root cause. We agree: decentralization is the only cure. We need to decentralize finance (DeFi).
Yet, I see crypto as a sideshow. It’s a distraction from the main event—truly decentralizing the financial system. While these innovative tools are worthy of admiration, crypto simply doesn’t address the root causes; and quite frankly, it can’t. Thus, from an investment perspective, I’m cautious when it comes to crypto (at least from a fundamental thesis). Crypto’s best chance for utility is in a decentralized financial system, not the other way around.
Decentralized systems are more stable than centralized ones. This broad principle applies to all situations from investment portfolios, to supply chains, to insect colonies. Decentralization ensures that risks don’t concentrate such that a single failure point can bring the whole system down. Centralization breeds instability and fragility. This is all too evident in our financial system.
Unfortunately, there are several modern-day examples of centralized risks threatening entire economies. “Too Big to Fail” banks in 2008 and Long-Term Capital Management’s epic collapse in 1998 are notable ones. Here, the failure of, literally, a handful of institutions endangered the entire economy. How could this possibly be? The global economy is enormous. That we all were thrust into a no-win situation—to foot the bill for these actors’ mistakes or suffer hefty consequences by no fault of our own—is as astonishing as it is unjust. Yet it happened and centralization is to blame.