Cryptocurrency Investment Principles: Beware of Hidden Centralization Risks

Writing by: Dao Ge

At the end of the day before yesterday’s article, there was a reader comment like this:

“Causes of security issues are rooted in a centralized mindset, and the current way to solve this problem is also centralized.”

The phrase in this comment—“the current way to solve this problem is also centralized”—made me think of the “centralization” trap that is everywhere in today’s crypto ecosystem.

First of all, I still want to stress this again:

I have always opposed the idea of decentralizing everything—for example, I clearly oppose management teams (such as Ethereum’s core development team) carrying out so-called decentralization, because such decentralization fundamentally cannot efficiently keep the project (Ethereum) moving and up to date.

I also absolutely do not think that “centralization” and “decentralization” are necessarily better in one direction or worse in the other. When to “decentralize,” and when to “centralize,” entirely depends on the specific use case and the specific operational scenario.

But if we step into this very unique new world—the crypto ecosystem—then all my views will be tightly anchored to “decentralization.”

Why?

Because only decentralization and resistance to censorship can fully unleash creativity, fully nurture the seeds that grow miracles, and give birth to the greatest crystallization of human wisdom.

However, because humans have long lived under “centralized” control, with “centralization” seeds everywhere in their thinking, the default way of thinking when dealing with any matter is “centralized.”

It is precisely because of this that creating such a decentralized, censorship-resistant world is so difficult, full of so many pitfalls, and leads to so many problems.

But problems and pitfalls have never stopped the pace of the crypto world, nor have they stopped the progress of the crypto world.

Guided by this thinking, when I look at every layer of blockchain, the basic judgment criteria are very clear:

This is the foundation that carries the crypto ecosystem—it must be as decentralized and as censorship-resistant as possible.

By this standard, there are only two you can count by holding up your fingers: Bitcoin and Ethereum.

So for so many years, I’ve basically paid little attention to other layer-one blockchains. Many of them have draped themselves in very dazzling exteriors, but in my view, at their core they are no different from EOS, which has only 21 supernodes.

Yes, many of those chains are still efficient, operate well, and even have so-called ecosystem prosperity at certain stages. But I believe that’s because they haven’t yet encountered a catastrophic disaster. And once they run into an event like Aave that sweeps through the entire ecosystem, then in the end, it’s likely that only Bitcoin and Ethereum will survive.

As for layer-two scaling, I’ve always believed they should be even more decentralized. But over these years, their progress has been painfully slow.

In fact, the Ethereum ecosystem already provides multiple solutions, allowing layer-two scaling to tightly bind security to Ethereum—for example, Native Rollup, and the EEZ framework proposed by Gnosis, among others. If any of these solutions are adopted, the issues Aave encountered—along with many other security problems—would not occur on layer two.

In this regard, I hope Vitalik can push adoption with even more forceful measures, without being afraid of offending a group of layer-two projects. Because projects with a long-term perspective will surely recognize this as a win-win solution, while projects without a long-term perspective should be eliminated when it’s time—not something to cling to.

Otherwise, today’s vast majority of layer-two solutions will continue to operate those systems that are essentially centralized, half-hidden as they go. And in the end, they will still run into catastrophic events like Aave.

As for various decentralized applications (dApps), because for a period of time I participated in security audits of many dApps, what I’ve come to understand is that—aside from a very small number of top-tier projects—most dApps have left “centralized” backdoors. They claim it’s to step on the “emergency brake” when things get critical, but at the same time it introduces the risk of being able to rug-pull and run with funds at any time.

This won’t show up during peaceful times, but once a storm hits, it’s hard to say.

So in my day-to-day use, even when I use all kinds of dApps, I basically only use top-tier products. As for copycats, no matter how high the returns they promise are or how generous the rewards they offer are, I try my best to avoid them.

Of course, in real life, many ideals collide fiercely with reality. Such collisions can sometimes force painfully difficult compromises.

But these compromises must be set with very high thresholds.

For example, the fact that Arbitrum, over the past couple of days, froze hackers’ assets through its security committee has sparked a lot of controversy.

I think a better approach might be to introduce a DAO to manage it—set higher voting thresholds for the security committee. For instance, first automatically freeze unexpected large-amount assets, then let all ARB holders participate in voting within a specified time period, and finally use the DAO’s voting to decide whether to release the frozen assets.

This kind of DAO-based governance is itself also the “decentralized governance” that the crypto ecosystem has always pursued.

Aave was implicated this time, which brought up many issues and prompted even more thinking. But I believe that after this baptism, truly solid projects will become stronger, and the idea of “decentralization” will gain more recognition and understanding.

The crypto ecosystem will consolidate for a period, and then continue to move forward boldly.