What are the core principles of crypto?
As the market remains down, with further downside likely, it’s as good a time as ever to reflect on the why of this space. Why is this technology important? Which guiding principles should we focus on over the long term?
The Bitcoin whitepaper, all the way back from 2008, laid the ideas that eventually became the groundwork for a new, digitally-native network for transferring information and value. Three principles underpin this network:
Decentralized
This is the term you’ll hear most often. Decentralization has become so synonymous with the space that it’s hard to escape. Regardless of its constant use, it points to a fundamental principle that makes repetition worthwhile.
Decentralization is the reason for crypto’s existence. If these technologies continue to run their course, they will rebuild the global financial system on a new set of open payment rails. What are open rails? Payment rails refer to networks like ACH and card networks. The ways that currency flows around our economy and worldwide are currently privileged to the largest financial institutions and governments. For example, SWIFT - the messaging network banks use to send money transfer instructions - is reserved for the largest financial institutions. You can’t access it as an individual. This part of the financial system is utterly opaque to the general public. On the other hand, the Bitcoin network regularly handles $100+ million transfers between massive entities. But you can also send $20 to your friend to split the tab after dinner.
But we have Venmo, you say.
Yes, and Venmo works fine today. The app is essentially a highly abstracted user interface built on centralized financial rails. You can only go so far down in the banking system before you reach a system that is off-limits to you as an individual.
With Bitcoin, Ethereum, and other chains, you might use an app built on a Layer 2 network (like some crypto version of Venmo), but you can also use the base Layer 1 chain. The lowest levels of the new financial system are accessible. Everything is open to everyone.
Crypto is opening these closed systems. It is part way through the long process of creating a more robust, transparent, and open financial world. While this is happening, things will get less efficient while these systems become more open. Efficiency will come in time.
Open, decentralized systems are fairer and more robust. Governments and institutions can’t manipulate them. They function transparently and provide insight into flows of money that were previously unseen.
Decentralization is arguably the key trait of the cryptoeconomy.
Trustless
Trust is good. It’s necessary for many aspects of life. Up to now, we have embedded our social understanding of trust into our most prominent institutions. Mostly of necessity. Technology has accelerated many things up to this point, but it has not been able to remove the need for trust.
Blockchains make trustless networks possible. Participants in the current financial system engage in trust-based business relationships (as banks currently do with their customers, partner banks, and the government). Both parties must trust that the other will do what it says it will do, with social reputation and the legal system as a backstop to enforce breaches of trust.
With transactions recorded permanently on a distributed public ledger, parties no longer have to trust each other. All transactions can be verified, and transfers can occur without the parties knowing each other or needing to engage in any form of trust. Trustless networks make the financial system more resilient. They subject the entire system to scrutiny from the masses, which keeps participants honest.
Sovereign
Decentralization and trustlessness open the financial system and enable the third pillar of crypto—sovereignty.
At its core, sovereignty is about individual responsibility and ownership. Each individual in crypto can maintain custody of their assets. Not all will want to take on this responsibility, and many will choose to entrust their assets to centralized custodians, and that’s okay. The difference is that in crypto—you have the choice to remain independent.
At the moment, there is no way to digitally self-custody fiat currency. The closest you can come to sovereign control is to keep cash under your mattress. Depositing your money into a bank relinquishes sovereignty. Now you have to trust the bank and government to make your money available to you at the point you wish to withdraw it. While it’s deposited, the bank can lend it out and otherwise use it to profit. Optimistically, this is fine. But in reality, it enables many of the negatives of the fiat system: Overleverage, debasement, breaches of trust, and the like.
Sovereign control brings the power of ownership back to the people. It also keeps institutions from the tendency to overreach and overextend. Securing bearer assets is a responsibility, but one that makes possible a new digitally-native financial system that will underpin a new era of the internet.