Author: Omid Malekan, former Citi crypto expert and Columbia Business School professor
Compiled by: Jiahuan, ChainCatcher
In a world full of power and greed, people have tried various blockchains. No one thinks Ethereum is perfect or omnipotent. One could even say Ethereum is the worst blockchain—except, all the others are worse.
I spend a lot of time arguing with people in the crypto industry, some of whom are friends. Our biggest disagreement is: how important is decentralization in core protocol design.
They see it as one of many important characteristics; I believe it's the only one that truly matters. They think scaling is more critical; I see that as secondary. They believe success depends on business development and partnerships; I disagree. They think more money helps protocol success; I think too much money guarantees failure. They think permissioned networks can work; I just laugh.
The deadliest thing is they think my view is too idealistic and impractical, which is the real divide. I'm no naive fool, wishfully dreaming of a harmonious future.
On the contrary, I'm a cynic. I've spent considerable time studying history, studying how human institutions evolve. I've also seen firsthand what powerful organizations are willing to do to maintain their power and profits.
My perspective is actually closer to Machiavelli (referring here to not relying on institutional conscience but starting from the actual operation of power and interests). If you truly understand how the real world works, you'll see: the true idealists are precisely those who are fooled by empty press releases like "tokenization on corporate databases."
To believe their set of ideas, you also have to believe these things: for-profit companies care more about innovation than their own profits; "The Innovator's Dilemma" doesn't apply to platform technologies; the executives, who are comfortable with the status quo and earn seven-figure salaries, all long for the status quo to be broken.
I don't believe it. I believe in the power of corporate inertia, and that only the most decentralized crypto systems can possibly achieve "escape velocity." Everything else will be co-opted, corrupted, until it becomes utterly useless.
A large enough network perpetually incentivizes its own corruption
Believing in crypto is essentially believing in the power of incentives. Any blockchain attracting millions of users and settling trillions in value will perpetually incentivize people to corrupt it. For the largest companies (and even governments), it would be foolish not to try to hijack it. For some of them, ignoring it could even be a matter of survival.
A decade ago they called Bitcoin a scam; today they tell you tokenization only works if they set the rules. It's the same logic. It's also quite Machiavellian: first try to stop it; if you can't, co-opt it. The only crypto systems that have a chance of surviving this threat are those intentionally kept open and neutral from day one.
When we talk about protocol security, we often only consider external attacks, like 51% reorganization attacks. But internal takeover is equally, if not more, worth guarding against, especially today when the oldest protocols are quite robust.
The history of almost every mainstream traditional financial exchange, settlement system, and even social media platform still operating today is a history of internal takeover. Visa and Mastercard are like this: they were once non-profit consortium networks, similar to today's tokenization consortium chains, but gradually turned into money-printing machines. Google is like this too, going from opposing ads as a search business model to becoming the strongest ad company in history.
This is the trajectory of "platform corruption," the inevitable result of the S-curve once fervently believed in by well-known venture capitalists.
For a Layer-1 blockchain, the risk of takeover is greater than for any card network, clearing house, or social platform. The reason is that the potential market size of a programmable, asset-agnostic settlement system is larger than most existing networks combined.
A general-purpose L1 can handle payments, securities settlement, social networking, gaming, art, ticketing, identity, and so on. There's just too much to "corrupt."
Who are the truly naive ones
From this perspective, the truly naive are those who believe in permissioned networks. Those networks are essentially databases that can be dismantled at the push of a button.
Equally naive are those who believe in "allegedly permissionless Layer-1s with highly concentrated validators," and those who believe in "allegedly public Layer-2s with unproven claims and a single sequencer." Believing in such systems is equivalent to believing individuals won't be corrupted, institutions never act in bad faith, and governments always exercise self-restraint.
To be more specific, it's believing that Visa wants Mastercard to succeed.
And today, these takeover scenarios I'm describing aren't hypothetical. Take the leading provider in the field of "databases that can be controlled at the push of a button." The CEO of this company is ambitiously aiming to "make existing giants and intermediaries great again."
In a recent interview, he (referring to Digital Asset CEO) eloquently argued that closed enterprise networks running Proof-of-Authority (PoA) are fairer than open networks running Proof-of-Stake (PoS). What's his logic? Joining Ethereum's consensus costs money (about $60,000 at today's price), while joining his network only requires potential participants to "demonstrate their value" to existing members.
Coincidentally, Visa is already a participant in this network, but Mastercard is not. How does a company "demonstrate value" to its biggest competitor? Or further: what if Visa and Mastercard collude, both join the network, but never let another competitor in, permanently cementing their duopoly at the top of Western payments?
How should a fintech company determined to completely disrupt payments "demonstrate its value" to this trillion-dollar behemoth?
By asking nicely?
If you were the CEO, what would you do
If you think I'm being too harsh, it just shows you haven't seriously studied the history of payment and clearing systems. But you don't have to believe me. Ask small and medium-sized banks and credit unions in the U.S. what they think of The Clearing House, controlled by large commercial banks; or ask banks that don't hold shares in Early Warning Services (EWS) what they think of the Zelle instant payment network run by EWS.
Ask Robinhood what they thought of the National Securities Clearing Corporation (NSCC) during the meme stock frenzy; ask Custodia, the digital asset bank that sued the Fed after its master account application was rejected, what they think of the Federal Reserve; ask fintech companies what they think of the Fed's instant payment system, FedNow.
Now, imagine yourself as the CEO of a highly profitable payment company with high commission rates and gross margins. You got to where you are precisely because you understand how important "controlling the network" is; it's practically in your bones.
Before crypto, all settlement systems were either run by existing giants or by governments (which are in turn influenced by these giants). Now, there's this new thing called "public permissionless blockchains," and some brilliant people tell you: this is a settlement system no one controls, yet everyone can use. "Everyone" includes your biggest competitor, and any startup that sees your profit margins as its opportunity.
Smart person, test yourself, what would you do? Would you embrace it with open arms?
Or would you look for some kind of "hybrid" alternative: a solution that claims to offer some blockchain benefits but still lets you maintain power and pricing power? Then instruct your PR team to craft a compelling narrative about regulation, liability, and illicit use?
The answer is obvious. From this perspective, these takeover scenarios I describe aren't particularly "Machiavellian"; they're just standard operating procedure. Competitive companies seize every advantage they can, and the means to "own" (or at least "control") settlement is the ultimate advantage.
They will, of course, try to take over any network that allows them to, and use fabricated accusations and legal pressure to undermine those that don't.
But this play won't work in the long run
But let's be clear, in the long run, none of these tactics will work. The reason isn't that these companies can't play the game well, but that "pseudo-decentralization" is objectively inferior to the status quo. It's neither as efficient as the systems running traditional finance today, nor as secure as true decentralization.
On enterprise networks, cryptography is a burden, and consensus is a farce. Fake decentralization only works in VC pitches and conference roundtables; it fails in the real world.
Looking at it with my Machiavellian eye, I can't help but suspect: the banks and brokerages playing this game, do they actually already understand this? If they truly do, then this embrace of "fake crypto" is a brilliant smokescreen to slow down progress and influence legislators.
From a human perspective, this strategy is understandable. These companies are run by people who are older, closer to the end of their careers than the beginning. They have reputations to maintain and lavish lifestyles in the Hamptons to support.
But their delaying tactics can only work for so long. The world will eventually find the most decentralized system, just as water eventually flows to the lowest point. A significant portion of the profits in the centralized world come from delays and friction in the old ways, and those profits are precisely someone else's opportunity.
This is also quite Machiavellian. A fully decentralized settlement system is a powerful weapon against competitors, especially when you don't carry their historical baggage in technology and business models. Add to that the fading trust in existing institutions, and this process will only accelerate.
Water will eventually flow to the lowest point, and assets will eventually flow to the most secure infrastructure. This is the Nash equilibrium of the world we live in. So it's better to be a realist, like me.
Decentralized systems like Ethereum have many flaws. Resisting capture is expensive and troublesome. But it's still better than the enterprise and corporate solutions people talk about today. Many idealists will have to learn this lesson the hard way.
