Are We Still Pretending the Crypto World Is Decentralized?

Are We Still Pretending the Crypto World Is Decentralized?


Binance bought CoinMarketCap. It's enough of a headline on its own, yet it represents the latest piece of an increasingly worrying puzzle: just how much influence does founder Changpeng "CZ" Zhao have over the ostensibly-decentralized cryptocurrency ecosystem? As it turns out, it's a whole lot, and the cryptoverse may not be nearly as decentralized as we had previously hoped. An extremely small group of people can act as kingmakers in the entire space, possibly even compromising Bitcoin itself.

The network CZ controls or influences is pretty staggering

Rather than go into a lengthy and conspiratorial breakdown, let's quickly summarize the Binance network by taking a look at a single event: the Justin Sun takeover of Steem, which I've written about before. During this episode, three exchanges (Binance, Huobi, and Poloniex) acted together to take over the Steem network using customer funds. This was in the interest of Sun, who owns Poloniex, accounting for one actor. The other two, Binance and Huobi, acted swiftly on this ethically-dubious (and later shown to be deeply unpopular) act which did not even concern their direct financial interests, but those of a friend's side-project. This shows that, in practice, all three operate together as one entity without the need for extreme circumstances. Just the valuations of all three cryptotokens, Tron, Binance Coin, and Huobi Token, combined come to about $3.5 billion, just shy of a top-five crypto position. Binance and Poloniex occupy places #1 and #12, respectively, of the Blockchain Transparency Institute's list of verified exchanges, with Binance's trading volume exceeding that of the rest of the top ten combined (Huobi is not listed due to high levels of wash trading).

Combine this with the new acquisition of the most popular crypto market data aggregator, and CZ's propensity to bully journalists who pose problems for him (more on that next), and we can see that his heavy influence on the ecosystem is only going to grow stronger.

Pretty serious actions have been taken for minor reasons

The network of CZ and friends is not above wielding their relatively substantial power at will. CZ famously threatened to sue crypto publication The Block over reporting that Binance offices had been raided, while Binance delisted all of Bitcoin SV because of the dubious legal actions of one of its key figures, leading the charge of mass delistings which significantly impacted its market valuation in the short term (though it has since claimed a consistent place just outside of the top-five). Poloniex acted in an even more petty and vindictive manner when the exchange announced that DigiByte was delisted following critical comments from its founder. Not only this low threshold for extreme action, but the propensity for punishing speech is even more chilling.

Bitcoin is not safe from potential threat

But this threat mainly concerned less important projects out of the top few, right? Bitcoin is still safe, isn't it? Unfortunately not. Binance controls the single largest Bitcoin trading pair, BTC/USDT at almost $2 billion 24-hour trading volume, while Huobi's BTC/USDT claims #8 on the list of verified exchange trading pairs. While this is under 10% of the total trading volume, two of the top 10 verified pairs, including the single most dominant one by a wide margin, is nonetheless significant. CZ's ability to manipulate the Bitcoin price and markets should not be underestimated.

And, more importantly, let's not forget CZ's now-infamous Freudian slip where he spoke with confidence about his ability to roll back transactions on the Bitcoin network within a few days. Though he mentioned the risk to Bitcoin's credibility, and later took back the statement and said such was impossible, actions prior and since have shown he frequently has both the power and will to act in this manner. The now-infamous 2018 research paper The Looming Threat of China: An Analysis of Chinese Influence on Bitcoin indicated that a full 80% of the network's hashpower is located in China, controlled by just a few players. Depending on the extent of his influence, CZ may very well be able to make good on a network rollback threat.

What Can We Do to Improve Crypto's Decentralization?

I wouldn't paint such a bleak picture of the space without offering some slimmer of hope. It's largely an unregulated space, meaning that any temporary position of dominance is easily lost with a sharp swing of consumer sentiment. Here's a few ways of going about doing that now.

Control your keys

Most importantly, actually control the funds you pretend to own. Don't leave them on exchanges where they can be vulnerable to thefts, confiscation, or other manipulation. Keep them out of the direct area of control by the small circle of exchanges.

Use your crypto with as few third parties as possible

While decentralized cryptocurrencies are relatively difficult to disrupt or attack, their various supporting companies can be. The more often you use your coins in a direct, private key-to-private key manner, the less middlemen matter.

Diversify investments

Quite simply, don't have all your money in one potentially-compromised project. Find networks with coins and control distributed more evenly and in different geographic areas outside of those with the heaviest influence from CZ and company. Also consider spreading to other assets outside of blockchain.

Exercise both research and purchasing power

Finally, look into the projects, and businesses, you support. Look up the consensus model and distribution, as well as coin supply and how much is controlled by how few parties. Investigate the jurisdiction, and ethical behavior, of exchanges you use. And stay way from those of both which exhibit centralized tendencies.

Crypto is a big idea with a small group of users and influencers. CZ and friends may have significant control over the space, far more than we'd like to admit, but we can still decentralize the world of decentralized digital assets. And we should, before it's too late.

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Crypto and liberty lover. Journalist. Living unbanked off of crypto since 2016. Free State Project mover. Opinions are my own.

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