Why The Future Of The Token Economy Will Not Be Fully Decentralized

In theory, the idea of a completely decentralized economy sounds great. It evokes images of a world in which corruption is impossible, and no centralized institution is ever deemed “too big to fail.”

But dreams of an entirely decentralized economy are unrealistic. Anyone who believes the opposite is discounting certain realities such as human nature, the impact of behavioral economics, the unstoppable constraints of nation states and regulators, and our need for leadership in achieving progress.

Psychologically, there’s a reason the idea is attractive. People lust after innovations that promise revolution — that aim to upend our limited and imperfect present and replace it with something better, something more honest. This idealism is what inspired so many people to “invest” in Bitcoin, after all. Bitcoin promised freedom. Bitcoin promised utopia. In the midst of the world’s economic collapse and the 2008 financial crisis, Bitcoin was the fuel that ignited a new method of thinking that would forever change the face of finance and the internet; but its ingenuity was far from the perfect solution. Don’t get me wrong, I’m a crypto enthusiast and a blockchain technologist, but I think that future innovations seldom looks like their initial past representations. The internet, for example, begins as a research project by ARPANET with its innovative TCP/IP technology in 1983. However, it wasn’t until the 1990’s that the “network of networks” took the shape of the world wide web and in its new form the internet would develop into the global innovation medium that it is today — democratizing access to information and bringing globalization and connectivity to new heights.

Unfortunately and similarly, Bitcoin’s utopia is something that realistically will never reach its potential at its original vision.

Why? Pure decentralization doesn’t work.

Companies governed communally, with too many chefs in the kitchen, don’t work — yet that’s precisely what full decentralization demands.

In a Utopian society where human nature and behavior economics don’t exist, decentralization works extraordinarily well — in theory. It’s like Communism. But as soon as you factor in free will, human ambition, emotions, and all the rest, decentralization crumbles.

Bitcoin serves as a great example of this. Despite the fact that Bitcoin is the most established cryptocurrency, its development, and growth as a technology — not just a speculative asset — has slowed to a crawl.

The reason? Bitcoin is entirely decentralized, possessing of no singular leader who can drive it toward success. It’s also wholly democratized — which, like complete decentralization, sounds great, but proves unmanageable in practice. This structure makes it impossible to generate consensus. The result is stagnation.

It has now gotten to the point where Bitcoin hardly works as a payment mechanism because the fees are so high, and the network is so slow. Bitcoin went from being the future of payments to simply a form of digital gold. That’s why people are creating technologies like Bitcoin Cash and Litecoin — there’s a need for a better version.

If there’s a lesson to be learned from Bitcoin, it’s this: economies and the companies that comprise them need some amount of centralization to drive progress and growth. They need centralized leadership and an entity that accepts ultimate responsibility for the enterprise.

That’s why the future of the token economy lies in semi-decentralization.

For blockchain companies to succeed, they need to be operate like a startup, consisting of structure and managed by a leader who can will the company forward.

Take Ethereum and Ripple, for example.

Ripple catches a fair amount of criticism in the blockchain community because they’re not genuinely decentralized. But their semi-decentralization is the reason they’ve been able to do things like establish relationships with top financial institutions and hire the best engineers. Their structure lends them a sense of legitimacy and purpose that successful companies require.

The most talented people don’t want to work for — or partner with — entirely decentralized companies. They don’t want to take orders from a clamor of competing views.

Ethereum’s success, meanwhile, stems mainly from the ambition of its founder, Vutalik Buterin. He’s the one who designed Ethereum’s strategy for gaining utility, and he retains the autonomy required to ensure that vision gets executed correctly.

The fact that his vision has come to fruition, and that Ethereum is thriving, exemplifies why blockchain companies need some kind of centralized, corporate governance to succeed.

The good news is, actualizing a balance of centralization and decentralization is not as hard, or counterintuitive, as it might seem.

The future of tokens and cryptocurrencies as regulation increases = semi-decentralized token governance. Future blockchain companies should issue tokens that grant holders equity and voting shares.

This new structure is what we’re going to start seeing in the next wave of ICOs.

A centralized entity will retain responsibility for developing partnerships and realizing the company’s vision, but owners of company tokens will have a say in the direction of the company and its ethos. For example, token holders might require company leaders to obtain X percent approval from the decentralized community before implementing a new strategy or idea — an agreement which could even be written into a smart contract. In another scenario, majority token holders could elect an independent board member to represent the rights of token holders.

A hybrid model of decentralization amounts to a much-needed compromise. We’ve seen that blockchain companies run communistically simply aren’t effective from an utility perspective unless they are treated as true “currencies” or “commodities.” But at the same time, we know that a world of fully centralized authorities — maintaining siloed, private databases of information — is unreliable and often dangerous. The two methods are not mutually exclusive. As CFTC Chairman, J. Christopher Giancarlo described in his Senate testimony: “What a difference it would have made on the eve of the financial crisis in 2008 if regulators had access to the real-time trading ledgers, rather than trying to assemble piecemeal data to recreate complex, individual trading portfolios.”

Semi-decentralization offers a more balanced way forward.

The blockchain is here to stay, and that’s a good thing. It will prove an integral part of a more transparent and efficient future.

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