Decentralization and the new world order
The Internet, Ethereum, and the future of decentralization
It’s not the end of the week without a CMB newsletter in your inbox.
This week, alongside a fellow classmate and crypto enthusiast, Kipras Daujotas, I once again ventured away from crypto policy. In this newsletter, Kipras and I take a look at the history of the Internet and Ethereum in evaluating the potential of decentralization. At the end, we leave you with some important questions to consider in thinking about what blockchain technology can accomplish.
Please enjoy, and see you next Sunday!
-Katja
Decentralization and the new world order
Globalization has been at the heart of the Western world for hundreds of years. It creates a global interdependence that allows the prospering of economies, cultures, and people. This process is what allowed the first telephone to spread from the US to the UK and then becoming a ubiquitous object all over the world. However, globalization also brings hardship by enabling the rapid spread not only of the good but also the bad, as we continue to experience with Covid.
Since the beginning of the pandemic, we have been trying to get the domestic and global economy back to normal. However, many processes remain broken (supply chain issues being at the forefront of such problems). The past several years have brought attention to the tension of wanting interconnectedness while remaining independent.
Now the latest flashpoint in this string of developments is the Russia-Ukraine conflict, which I have focused on for the past two weeks. The sanctions that have been placed on Russia highlight a couple of things. First, we live in a world of hyper intermediation where there are multiple parties between any two endpoints of a process (e.g. the international finance system & SWIFT).
The world also becomes fragile due to the high degree of dependency everywhere. Ripples of events in Eastern Europe are now being felt around the globe, just take a look at your local gas prices. (It is also interesting to note that many did not care about recent conflicts in Syria, Myanmar, and Yemen because those economies are not as integrated into Western society and produce a much smaller - if not negligible - effect.)
The problem with this state of affairs is three-fold: 1) the system could be more efficient if we reduced the number of intermediaries, 2) fewer intermediaries could lead to less corruption, and 3) end users (citizens, startups, or nation-states) could benefit from these gains in efficiency and security. Blockchain technology has the potential to eliminate the excessive middle men and enable a new level of global cooperation.
The blockchain trilemma
Public blockchains function on three main principles: decentralization (incorruptibility), security (attack resistance), and scalability (fast services). With current technologies, optimizing one or two of these tenets usually comes at the expense of the third, creating the infamous “blockchain trilemma.”
Taking a look back, when Ethereum was first introduced, people thought that it was moving too fast and breaking too many established blockchain conventions, especially when compared to the conservative Bitcoin network that functioned under the static “code is law” mentality.
Ethereum ended up sacrificing scalability while optimizing decentralization and security. This tradeoff paved the way for alternative Layer-1s to also push one of the principles (oftentimes decentralization) to the side in hopes of coming back to it. L1s such as Solana, Fantom, and Terra decided to aim for the highest possible TPS (transactions per second) with the plan of implementing L2 rollups and decentralized node verifiers some time down the line.
Naturally, you may be asking: how important is decentralization and should we always strive for it? To answer this, we must take a closer look at the technological evolution of the past three decades.
Three internet eras
At the birth of the internet, open-source protocols such as IP, HTTP, and DNS were created and spurred incredible innovation (just think 90s Silicon Valley). This period is referred to as web1.
However, in the early 2000s, the most successful internet companies started developing closed-source systems and proprietary IP. Over time, the relationship between these dominant technology companies, their users, and complements changed drastically.
In this web2 world, big tech can easily deplatform any individual and company or block an entire country from accessing its services. Furthermore, many of these companies are engaged in anti-competitive practices and limit the innovative creativity of entrepreneurs (alongside their privacy concerns and past service outages).
As we know and see daily, centralized systems are highly scalable, high-performance, and easy to manage. At the same time, these systems are easy to manipulate, attack, and corrupt. Web3 presents an alternative (decentralized) vision for the internet: one built on top of trustless, interoperable, and attack-proof blockchains.
The beauty of decentralized web3 networks is that no party can remove any user or user possessions from the blockchain due to the tamper-proof distributed ledger. At the same time, cryptonetworks offer incredible security through their distributed node infrastructure. If any government wanted to shut down Ethereum, it would need to shut down the global internet. However, the problem that is preventing web3 from reaching mass adoption is its lack of scalability.
Roughly three-quarters of decentralized applications are built on top of Ethereum, the so-called “world’s computer.” Despite this, today’s Ethereum can only handle 15-40 TPS, whereas Visa can process 24,000 TPS.
Future of blockchain development
Vitalik Buterin, Ethereum’s creator, estimates that since Ethereum’s introduction in 2015, approximately 50% of his vision has been fulfilled. The next step for Ethereum is to reduce its energy consumption by 99.95% by switching from the proof-of-work to the proof-of-stake consensus mechanism by early 2023. This is also referred to as “The Merge.”
Simultaneously, the Ethereum Foundation is working on “The Surge,” which is a set of technologies (primarily L2 rollups and sharding) that will increase Ethereum’s TPS to 100,000. One of the biggest benefits of increased TPS will be the reduction of transaction (gas) fees on the network.
In 2017, Vitalik famously stated that “the internet of money should not cost 5 cents per transaction;” however, in 2021, gas fees went up to as high as $68 and are now hovering at around $5 following the London Upgrade in August.
The implementation of the Merge and the Surge would complete 80% of Ethereum’s road map. Beyond these improvements, there are 3 additional stages planned:
The Verge - will enable stateless clients (i.e., users will finally be able to run nodes on their mobile phones)
The Purge - will clean up historical data and lighten the network
The Splurge - will improve smart contract wallet technology and implement ZK-SNARKs across the blockchain
These improvements together are expected to take until 2028 to implement. The result will be an incredibly powerful world computer that delivers on all three desirable qualities and solves the blockchain trilemma. Today, we may have to pick between scalability and decentralization, but in the future, this trade-off may become obsolete.
Some future questions
Ultimately, by creating the technology to decentralize entire economies and societies, crypto adopters will create a new world order based on direct democracy, replacing representative democracies and authoritarian governments. Just as web3 is replacing big tech, soon crypto at scale (especially DAOs) will encroach on concentrated government power by giving it to the grassroots.
This raises a set of new questions. Do we want this to happen? Is a decentralized world order more efficient than a centralized one? What will the future of world governance look like? Returning to the Russia-Ukraine conflict, imagine Russian citizens voting within “RussiaDAO,” a referendum for determining whether to invade Ukraine or not.
It’s probably no coincidence that crypto technology has gained such traction in post-Soviet countries as well as China (before their crypto ban). Although there is much technical talent around those regions, it also isn’t a stretch to say that people’s dissatisfaction with their government pushed them to find alternative means of governance.
Even if decentralization does sound like a saving grace, do we really want an unbound democracy with everyone having a say? Shouldn’t only the educated and those who have critically assessed key issues be the ones to decide the course of action? This is the reason behind representative governments: electing those who understand the interests of the people but who are also responsible for getting the education necessary and having the wisdom to vote in favor of the people he or she represents.
Socrates brought up this argument against democracy. With decentralization creeping closer every day, it’s a point worth thinking about.