Decentralization: Are We There Yet?
When someone asks you why they should use cryptocurrency, there’s a number of answers you can give. These range from instant payments across borders, eliminating middlemen, security and transparency, to low costs per transaction. Cryptocurrency has advantages over fiat currency (US Dollars, Pounds, Euros, etc.) as there is no small group to make decisions for the masses. There’s no central body that can “print money” and cause massive inflation. Someone with $1 vs. $100 million does not receive preferential treatment by the network other than a bit of transaction speed.
This all boils down to the concept of decentralization and what it truly means. The Merriam-Webster definition of decentralization is: “The dispersion of distribution of functions or powers”
In today’s economy, other than paper cash in circulation, every financial transaction has a touch point with a financial institution or bank. These institutions set rates on loaning money, interest earned, and cost of transactions. The worst part is that the people can’t fight the rules set by these institutions. You either follow them based on their rules or don’t use them at all. This is an extremely centralized power to regulate the entire economy, for better or for worse.
Cryptocurrency can change this power imbalance and achieve true decentralization, but they key word in this sentence is can. In the current cryptocurrency landscape, Bitcoin and Ethereum pave the way as the two largest tokens by total market size. Both Bitcoin and Ethereum are completely decentralized. Using Bitcoin or Ethereum, a technology company in California can quickly pay a marketing agency from London and pay less than 0.5% in fees. A domestic outbound transfer from T.D. Bank costs $25, regardless of the size of the transaction.
Decentralized Applications (Dapps)
While cryptocurrencies are decentralized assets, the applications that store and transact with these assets may not be as decentralized as they claim to be. If you hold Bitcoin, you have two “keys” to unlock your funds. This is your private key and your public key. Your public key is like a username on PayPal, counterparties can send cryptocurrency to your public key. Your private key is like your password for PayPal. If you give your PayPal password away to someone, the security of your funds is compromised and they can steal all of your funds on the app. The last piece of this analogy is PayPal itself, because if PayPal gets hacked, a third party hacker will have direct access to your bank account, information, and potentially your life savings.
Aside from wallets, there are also decentralized exchanges, or DEXs. A decentralized exchange is an exchange market that does not rely on a third party service to hold the customer’s funds. Instead, trades occur directly between users (peer to peer) through an automated process. There are dozens of exchanges that claim to be decentralized but in actuality are quite centralized, with only a handful of market makers adding transactions to the order books. This does not meet the vision of not relying on third party services, meaning we are on the path to decentralized exchanges, but not all the way there yet.
Cold Wallets, Hot Wallets, and Exchanges
Cryptocurrency owners store their funds on wallets or cryptocurrency exchanges. There are two types of wallets, cold wallets and hot wallets. On hot wallets, users do not own their private key, the application stores it for you. You have complete access to your funds, but they do this internally using a “deterministic wallet”. This means funds are stored on a central wallet with multiple public addresses, but all controlled by one private key or seed. If this wallet gets compromised, you will lose access to your funds. Just like a bank can, these wallets can exponentially increase their fees for you to withdraw your funds. There’s nothing we can do as users because you agreed to their Terms of Service. Exchanges like CoinBase and Gemini utilize this system. It is recommended by cryptocurrency experts not to leave your funds on an exchange as that is where your funds will be most vulnerable to attacks
On a cold storage wallet, users own their own private keys and the application does not record them. This yields maximum safety and relieves pressure from hackers and possible quantum computing attacks. This is because your private key, or “network password” is not stored on the application. If you own your own private key, it gives you access to airdrops and forks as well. One danger of this is if users lose their private keys, the application will be unable to retrieve your funds from the blockchain network. With freedom comes a level of responsibility.
Data Integrity On Decentralized Applications
Aside from the security of your funds, truly decentralized applications are supposed to give complete anonymity and privacy. This means additional information about the user should not be collected if an application claims to be truly decentralized. Collecting any data on users (as simple as a name and an email) negates the level of data integrity a Dapp should have.
Data integrity has recently been at the forefront in political and technological movements, most famously when Facebook CEO Mark Zuckerberg had two congressional hearings regarding the news that political consulting group Cambridge Analytica had collected personal information on over 87 million users on Facebook’s platform.
As we downloaded many of the top cryptocurrency wallets, they are far from decentralized. One of the most popular cryptocurrency wallets has the following quote in its Terms of Service:
“We collect information from and about the devices you use to access the Services, including Internet Protocol (IP) address (including country), device ID and type, device specific and other hardware settings, operating system and other software settings, browser type, browser language, time zones, and certain cookies or other technologies that identify your browser…”
This is very intrusive of personal privacy of their users, making it just as bad, if not worse, than the information that some financial institutions collect. Our goal of this article is to help users decide where to buy, store, and sell their cryptocurrency in the most secure methods possible. Many Initial Coin Offerings (ICOs) claim to be completely decentralized, but the use of tiered systems based on contribution amounts give preferential treatment to the highest echelon of investors wealthy individuals.
One cryptocurrency wallet that changes this narrative of “so-called decentralization” is the Monarch Wallet. Monarch is a completely decentralized universal wallet that stores over 1,500+ cryptocurrencies. With a user base of over 100,000 downloads, Monarch has never collected a single piece of data from any of its users. Monarch allows users to anonymously and freely interact with many of the largest blockchain protocols such as Bitcoin, Ethereum, XRP (Ripple), Stellar, TUSD (Trust Token), GoChain, etc.
The Monarch Wallet is also completely free for users, charging 0% transaction fees beyond gas to run the transaction on the network. This sets an example for what a true decentralized application should look like. Robert Beadles, a highly regarded influencer on YouTube (CryptoBeadles) has been concentrating on the topic of decentralization on his channel throughout all of 2018. In an interview, Beadles quoted:
“Most of us, including many Fortune 100 companies and the world’s largest banks agree blockchain is the future. Ultimately once a large enough segment of the population adopts crypto and blockchain they will ultimately be the ones who decide whether blockchain should be decentralized fully, partially, or not at all. Unlike the wallets that falsely claim to be decentralized, we [Monarch Wallet] will stay as decentralized as possible as our users security and privacy is paramount to us. In a world of identity theft, spamming, and hacking, our users can rest assured they are protected and truly the Kings and Queens of their own crypto.”
-Robert Beadles, “CryptoBeadles” President of Monarch Blockchain Corporation
To tie this all together, millions of people around the globe see the value in digital currencies and want to achieve mass decentralization. The reality is very few platforms that claim decentralization are truly decentralized in all facets. 2018 is so early in the adoption of blockchain technology and cryptocurrency, we’re debatably not even in the “early adopters” phase. With more use cases and improvements to the technology, digital currencies will be around for generations to come.