CZ on Centralization Vs. Decentralization

Centralization vs. Decentralization. This is an old, recurring topic in our space, and I still get asked about it often. So, here is my view.

Far more important than centralization or decentralization are: security, ease-of-use, and freedom.

We should be relatively confident that our money is secure; we are not going to suddenly lose all of it, we can use it however we wish with a large degree of freedom. And easy-to-use in the sense that it doesn’t involve a lot of work when we have to use it; i.e., we don’t have to sit in a bank for hours or even wait multiple days to spend our after-tax money.

Some hardcore “crypto-people” believe decentralization itself is the ultimate goal, whereas I view decentralization as a means to increase our freedom and security (at least self-control) while (hopefully) not sacrificing on ease-of-use.

Many people think of decentralization as absolute; you are either decentralized or not. I think that in reality, there is a gradient scale from centralization to decentralized. Often, a better question is: how decentralized should we (exchanges, societies) be, now and in the future? If decentralization simply increases freedom but decreases security and ease-of-use, there is a point where it becomes a net negative, and may not be worth it.

Having said that, I am a big proponent of decentralization. I think in our current world, power is too centralized and in the hands of the few, and needs to be more distributed. But, instead of jumping to the idea that absolute decentralization is the answer to every problem, in many aspects, it is more practical and beneficial to increase the level of decentralization in small steps at a time.

Let’s examine the three factors mentioned above first.

Security

Security is a broad word. It means different things in different situations. In the context of this discussion, I am referring to security as a state of being safe, free from security dangers or personal losses. Control can be thought as part of security as well, but I will leave that to the discussion of freedom.

Is bitcoin more secure than banks? The bitcoin protocol itself is secure. It is based on math and the encryption mechanisms of bitcoin have not yet been broken. The bitcoin network has functioned reasonably well (other than being maxed out on capacity) so far. And today, there isn’t a way to shut down the bitcoin network, by any one individual, organization, or even a government body.

Now, is your bitcoin wallet secure? Well, that depends on personal management. You need to be able to keep a small piece of data, a string, the private key, safe from hackers and vulnerabilities, and safe from losing it yourself. Unfortunately, the truth is, most people in the world are not able to do the above two things properly on their own today.

To be relatively safe from hackers, you need to use a device or computer that will never connect to the internet, has never downloaded any files (to avoid a virus), and is physically only accessible to yourself (in a vault or other secure storage).

To be safe from losing the private key yourself, you need to have multiple secure backups of the data that only you can access. You can store private keys physically on one or more pieces of paper, then you need to ensure the paper will be able to survive a fire or flood, while not being able to be read by other people. You could store them on encrypted USB disks. In addition to proper encryption, you will need to ensure there are multiple copies of it in multiple physical locations, to guard against earthquake, flood, theft, etc. There is one more angle here in case if you happen to be unavailable, you may want others (loved ones) to have access to the funds, in some delayed fashion. You can set up a deadman's switch, or something similar.

All in all, given the above, and current tools we have, I believe the majority of the population today are not able to keep cryptocurrency securely on themselves. Is cryptocurrency more “secure”? Good question.

Many people choose to store their cryptocurrency on an exchange or another centralized custodian service. Good cryptocurrency exchanges invest heavily in security infrastructure that a normal person would not be able to match or even imagine. But, the downside is you have to rely on a third party, and you have to trust their ability to keep your funds secure for you, while also maintaining a level of freedom and ease of use for you. Although there are plenty of individuals getting hacked every day, exchange hacks make the headlines as there are usually more funds and people affected in a breach.  There is also exit-scam risks for exchanges. Lastly, centralized exchanges or custodian services often have know-your-customer (KYC) or anti-money laundering (AML) requirements, ask for proof of source of funds, etc. These standard policies decrease your ease-of-use. You will not have to deal with these if you just hold your own private keys. There are trade-offs.

This may be an unpopular opinion, and I will get some heat for it, but the truth is, the majority of the population out there today holding crypto on a trusted centralized custodian service is probably safer and easier than holding cryptocurrency themselves. There is a decreased level of freedom, but if you choose wisely, some options will allow you to retain a high degree of freedom. With more tools being actively developed, I do see more people will be able to hold their own funds (private keys) over time, in a secure and easy-to-use fashion.

Binance also offers a secure decentralized wallet, Trust Wallet, for safely securing your crypto on your own. We offer both choices.

Ease of Use

Being secure is absolutely necessary, but increased security often decreases usability. If you have to learn Unix, math, and encryption algorithms to understand how to manage cryptocurrency securely, you may feel it is not worth it.

Today, even a bitcoin address looks intimidating to many people. Why can’t it be given in a short and meaningful way that everyone can understand like an email address or a Twitter handle? Most people exploring blockchain are shown scary numerical inputs and output on transactions. Not to mention, if people want to use decentralized exchanges today, most of them require people to be a technical expert.

Again, the current market has voted. Centralized exchanges are more popular at this moment with far higher trading volumes and liquidity on them than decentralized ones.

Binance.com, being one of the biggest centralized exchanges, is also contributing to the development of Binance DEX, a decentralized exchange running on the BNB Chain.  Again, we offer both choices.

Freedom

There are different degrees of freedom. In our current world, if you use your credit card to pay for dinner in your local area, it should work most of the time. If you just landed in another country, and try to use your credit card, there is a chance that your bank will flag that as a suspicious transaction and block it, for your safety. Now, if you want to send a million dollars to invest in some project outside of your country, you will have lots of paperwork to fill and lots of questions to answer. It will take a number of days to get that one transaction done, even if it is your money after taxes. Sometimes, you simply get blocked from attempting to make a transaction and won’t even be allowed to complete it. This is not freedom.

With blockchain, you get a higher degree of freedom. You could send any amount to anyone in the world relatively fast. While this freedom is great, there is also a large number of scams, hackers, etc. This ties back to security. If we can increase the level of freedom without sacrificing security, that would be awesome.

Degrees of Decentralization

Now, let’s look at different degrees of decentralization.

Bitcoin is probably the most decentralized coin now. No one knows the founder, and he/she rarely gives an opinion on anything. The core dev team of bitcoin is decentralized. No one is in control of it.  There are furious and time-wasting debates about bitcoin forks and people calling their own forks the “real” bitcoin. Anyone can run a bitcoin node. The network is maintained by a large number of miners.  But a couple of large mining pools probably have a high degree of influence. Development has slowed for bitcoin. Luckily, even amid all the chaos, no one can shut the bitcoin network down, and it works very reliably and securely.

Ethereum is still relatively decentralized, but definitely less so than bitcoin. There are a few cryptocurrency influencers that will sway the community to believe otherwise. Vitalik is clearly the founder. People will look to him for tough decisions to make.  But the community does not always follow his decisions. That’s why we have Ethereum Classic (ETC). On the point of ETC, the existence of it also shows that decentralization alone does not guarantee more security.

Other blockchain networks are usually more centralized. BNB Chain will be decentralized in the sense that users hold their own private keys. They no longer need to deposit their funds to a third party platform before being able to trade. However, as a new blockchain, the initial team will naturally have more influence over the strategic direction of its growth.  We believe this is a good thing for a young chain and will allow faster decision making and a higher degree of efficiency.

In a decentralized world, I believe there should and always will be lots of choices. At different times, different options may prevail. The market will choose. For developers in a decentralized world, one should focus on making their product or service more useful, while not complaining about or expecting others to work in a certain way. It is freedom after all.

Psychology & Philosophy

So, which is better?

In closing, a famous opening line from a Chinese novel, The Three Kingdoms, brings perspective on this matter: “Speaking of important things under heaven, anything that is united will divide, and anything that is divided will unite.”

In a decentralized world (at least in our history so far), we will experience more chaos. As social animals, we group together. It is human nature to elect and follow leaders. When our groups get bigger or are merged (or taken over) by others, we become more centralized. Usually, in the early generations of centralization, the leaders are heroes, ethical and selfless, and protect the people. Life for the people is good. Then after a few generations, the successors (either by blood or vote) to the throne or power get jaded, and lust for more money and power. Can’t blame them, that’s just human nature. They tend to be less motivated by helping the people, but rather focus more on their personal gains or benefits. As a result, people suffer, and want more decentralization. Eventually, a revolution happens, and the cycle repeats itself.

Today, our world is on the more centralized side with some governments having too much power, and they control everything from what you can say to how you can spend your money. That’s why many people demand more decentralization, and why cryptocurrency is popular.

Let’s work to increase the freedom of money while optimizing both the ease-of-use and security as well.

And get ready for BNB Chain (@Binance_dex on Twitter)!

- CZ

CEO @Binance