DEcentralization vs Centralization


This post is by Jeff Carter from Points and Figures


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A lot of crypto fans were heartened by the news that Facebook is going to issue its own crypto.  It is working with several businesses to create a network inside the platform.  I thought that something like this might happen years ago when I first examined crypto.  I thought Amazon might be the first.

The one thing that attracted me to crypto was the decentralization piece of it.  I am hopeful that crypto will allocate capital to the places that can utilize it the best.  I am also hopeful that crypto will bring transparency to dark marketplaces so they become more efficient and lower the costs of good and services so more people can raise their standard of living.  Decentralized marketplaces tend to allocate resources a lot better than centralized ones.  Look at Cuba and Venezuela.  They are centralized and running out everything.  Or, look at the health care market in the US.  Totally centralized.  The cost keeps going up and the amount of care goes down.  When individuals try to maximize their economic utility and can freely enter and exit a marketplace the invisible hand works.

What I see with Facebook’s move is just a way to make the walls of their walled garden bigger.

The good news is this is a first step.  As every dominant platform issues their own crypto, we might see a black market develop for arbing crypto.  Remember, one of the elements of cryptocurrency is proof of trust and proof of work. It might be possible to write proof of trust/work into arb contracts to circumvent any of the policies put in place by the centralized platforms to keep people inside of them.  I will leave it to the anarchists to figure out a way to do that.

There are two other things that private crypto issuance by huge private platforms proves out.  First, Professor Craig Pirrong hypothesized that cryptocurrency could do the exact opposite of what it is promising. Monopolies could be created and become impossible to dislodge.  The second is that an opportunity is created.  Facebook will not be able to compete against a competitor with a truly decentralized market where people have economic incentives to participate.  It won’t sabotage it’s own business model to meet a competitor.

I am a huge fan of decentralized markets.  The best marketplaces leverage individual economic incentives.  As soon as you place limits on them, distortions occur.