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Bitcoin's Future, and It's Success, Depends on Decentralization

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Bitcoin‘s future is looking brighter and brighter, regardless of the current market price.  As more and more companies have begun to accept it, the userbase has continued to grow (although, Bitcoin’s community needs help to grow faster), and projects such as Open Bazaar, Counterparty, Blockstream, and many others, are building amazing systems around Bitcoin’s network.  Those of us who have been involved for the past few years are seeing many of our “pipe dreams” coming to life, even if they aren’t perfect, and I am incredibly happy.

Still, something is off.  It feels like something is missing here, and I have struggled to really put my finger on it.  Thankfully, a Reddit user, who goes by the username “smileyouroncamera”, put it perfectly,

Venture capitalist don’t build decentralized/distributed solutions, because it is not profitable. Our focus should be decentralization, not handing over Bitcoin to the institutions it was created to bypass.

While many of the amazing projects that are in development are decentralized, the ones that are truly exploding, in terms of investment capital, marketshare, etc., are not.  For Bitcoin to be successful, we need decentralized answers to the centralized parts of Bitcoin’s ecosystem.

Bitcoin is Decentralized, but That Can Be Corrupted

This is the issue with centralized businesses and systems that are growing around Bitcoin.  It does not matter if Bitcoin is decentralized if it becomes mostly controlled by centralized groups.  This has been the argument against the Bitcoin Foundation‘s approach to the development Bitcoin, especially the Bitcoin Foundation’s Board, though their role in the representation of Bitcoin has become less pronounced the past few months.  This is one of the most important argument against overly large Bitcoin mining farms, giant cloud mining companies, and any other way that one group, company, or individual finds to gain a significant percentage of the Bitcoin mining hashrate.  This should also be the argument against centralized exchanges.

Luckily, there are projects in development that can solve some of these problems.  Decentralized exchanges already exist, on platforms such as Counterparty, but can be a bit daunting for new users.  However, as the developers of this system, as well as other decentralized exchanges, improve the functionality and ease of use, we may see an increase in users switching to a decentralized style exchange.

Counterparty is a Decentralized Financial Platform

Still, that is not guaranteed, and venture capitalists, along with other investors, are pouring millions of dollars into building the centralized platforms.  The level of funding is far beyond what almost any decentralized development team has access to, with Ethereum being the one exception due to the extremely successful ETH presale.  The advantage these funds give the centralized systems is hard to overstate.  From hiring large development, legal, marketing, and management teams, to a level of legitimacy they receive from the general public, these companies are being given a huge boost.

Decentralized Systems Do Have Their Own Advantages

From what I stated in the previous paragraph, it seems like all hope is lost for decentralized system development.  How can the development teams ever hope to overcome the size, and sheer power, that investor funded projects have?  The answer is the label:  Decentralization.

Decentralization itself is a huge advantage for the projects, even if it can make life much harder for their development team.  A decentralized system is almost always open source, so that means that the development teams can receive assistance from the community when they have a problem.  While centralized companies also utilize crowdsourcing, they generally keep their core software source code closed, which keeps outsiders from assisting them.  Even ones that keep their software open source are unlikely to receive the level of support from the community that a decentralized project would.  Most developers are unwilling to spend their free time working on software for a company that is not paying them, unless the point of the software is not about profit for a specific individual, group, or company.

Beyond that, decentralized systems appeal to the cryptocurrency community in general, as many became interested in Bitcoin, or another digital currency, simply because it is decentralized.  While the centralized systems are used, quite heavily, by the community, many are not happy with that necessity, myself included.  This can be remedied.  If decentralized systems were better funded, they would remove the advantages that centralized companies have, while retaining the inherent advantages that come with decentralization.

Finally, decentralized systems are very hard to stop.  Even if the creator, development team, and anyone else that was initially involved with the project decides to stop, that does not mean that a decentralized system has to die.  Other developers can pick it up, and continue where the previous ones left off, and the network created by the system will continue as long as individuals continue to support it.  This is highlighted in Bitcoin by the fact that Satoshi stopped working on the project years ago, and yet the Bitcoin network is many, many times larger today than it was when he stopped.

Bitcoin's Computational Speed Over Time
Bitcoin Network’s Total Computation Speed – Chart Provided By

Other examples can be witnessed in altcoins that exist, are actively mined, and even traded on exchanges, with any sort of development team actively working on their development.  Most of those will eventually have new developers take over, or slowly fade away, but as long as individuals are supporting them, they will still exist.  Decentralized systems do not need to pay employees, and cannot go bankrupt.

How To Protect Bitcoin and Ensure That Decentralized Systems Are Funded

There are many ways that decentralized systems could receive funding, but most are currently underutilized, unappealing, or difficult.

Presales, Crowdfunding, or Individual Investing Are The Current Options

A solid presale for a currency, or token-based system, can often give a development team some starting funds, but it is rarely enough to truly grow an idea.  Also, the community is wary of this type of funding due to past scams, or mismanagement of the funds.  No matter what, it has been proven to be effective in terms of raising funds, especially for projects that are truly innovative.

On the other hand, crowdfunding is always an option, though it offers less incentives to investors.  A decentralized, peer-to-peer crowdfunding application, Lighthouse, is now in alpha, and has a lot of people very excited.  The potential behind the project is incredible, and development seems to be moving along quite quickly.

Lighthouse - A Decentralized Crowdfunding Platform

Of course, crowdfunding also has some of the same risks as investing in a presale, though it is a little bit more transparent, and brings some level of accountability.  Unfortunately, crowdfunding has not been very reliable for funding projects.  Some projects catch on, and do get funded, but the vast majority never manage to get traction.  Others manage to get by via “Crowdfunding” in the form of tips, but that is also unlikely to actually cover the expenses of development.  We will see if Lighthouse can change this.

Finally, some developers go into a project with a large enough amount of personal funds to cover any costs needed.  In the Bitcoin world, most of these people were involved with Bitcoin at an early stage, and became significantly more wealthy when the BTC price rose in 2013.  Without the need for outside funding, they can tackle any project they like, but there are not enough of them to cover all of the work that decentralized systems need.

Investors Need More Incentive, and Increased Accountability, in Order to Invest

There are two major reasons that venture capitalists, angel investors, and the majority individuals in the community do not invest in presales, crowdfunding projects, or even donate any significant amount to new projects, unless the person, or group, that is proposing it is well known and trusted.

  1. There is little monetary incentive.  Some people in the community may be willing to engage in a presale, but even if the idea is good, it will not draw serious investors unless the risk vs reward is worth it.  Crowdfunding will not get serious investors, as the basic way crowdfunding is set up means that they will not profit from the project.
  2. There is no guarantee that the project will actually be completed, or even attempted.  In many cases, people have proposed a new digital currency, project, or idea, and proceeded to have a presale, donation drive, or some other method of obtaining funding from the community, only to disappear.  These con artists, scammers, fraudsters, or whatever you would like to call them, make it much more difficult for honest people to gather funds from the community, and completely deter all large investors.  Even when the person is not intentionally scamming investors, or committing fraud, mismanagement of the funds is very common.

Both of these issues can, and should, be addressed.

To correct the monetary incentive, there are multiple options.

  • Obvious the presale option is based on the idea that the currency/tokens/units will become more valuable in the future, once development has finished.  As long as the creator(s) actually go through with creating the system they have promised, or at least work toward it, this is sometimes true.  Unfortunately, more often than not the investors never see anything close to breaking even on their investment.  That is an issue that is related to the second point, and presales could become more worthwhile if it is addressed.
  • Another option is building incentives for investors directly into the project.  These incentives could be some sort of advertisement, or maybe a portion of transaction fees being sent to investors directly.  The potential ways to monetize a decentralized system are limited in some ways, as it is hard to stop them from being removed by consensus in the future, but creative developers should be able to find acceptable ways to create incentives that would be acceptable to everyone that joins in supporting the network.
  • Finally, now that it is possible to create true “smart contracts” on Counterparty, and multiple projects have created decentralized “shares” that can be issued to show ownership of a project, the idea of decentralized autonomous corporations (DACs) and decentralized autonomous organizations (DAOs) is finally taking hold.  Giving investors a provable form of ownership could prove to be a very useful way of making investments in decentralized systems profitable.

None of these methods of offering incentive matter until the 2nd point is addressed.  Accountability on the internet is low in general, and that seems to be especially true within the Bitcoin community, as there are a large number of individuals that work very hard to keep their identity unknown.  That is perfectly fine for individuals that are only interested in using Bitcoin, and the networks that have grown out of it.  Anonymity is also acceptable for developers that are not seeking outside funding for their project.  Unfortunately, anonymity is one of the reasons that fraud is so rampant with presales and crowdfunded projects.  Of course, even when the creator is known, fraud and mismanagement still occur, so anonymity is not the only issue.

To increase accountability, some sort of oversight, or protection, of the funds must exist.  Now, I cannot solve this problem completely, as mismanagement of funds and fraud still happen in traditional businesses.  Fortunately, multisignature Bitcoin wallets are now a reality, thanks to the Bitpay’s Copay software, and the work of many, many independent developers.  With a properly used multisig wallet, project funds can be protected.

Bitpay's Copay System

The ways to use these wallets to accomplish this are countless, but one that comes to mind would tie a project to the reputation of trusted members of the Bitcoin community, or to the investors themselves.  If a developer, inventor, entrepreneur, or any random person has a great idea, and wanted to get funding for it, he or she may not be trusted by the community or investors.  However, if that same person were to reach out to active members of the community that are trusted, or to potential investors directly, and offered to create a multisignature wallet that would only be controllable if the trusted community member(s) or investor(s) provided their signature, then the risk of fraud and mismanagement are almost completely negated.

Of course, even this isn’t a perfect system, but it should be enough to reassure investors that they are not being scammed.  Maybe someone would like to create a decentralized system for overseeing funds invested into the development of decentralized systems?  I may not be as well known in the community as some, but I am willing to act as an overseer for any funds contributed to a developer/development team working on a decentralized oversight system!  A well implemented Lex Cryptographia system would be extremely helpful as well, and may be born through a project like Open Bazaar.  However, it would require a very large userbase, and a long period of time to establish trusted arbiters.

Are Investment Returns Really Needed?

Realistically, decentralization’s inherent resilience, and efficiency, should eventually prevail over centralized systems, regardless of the amount of money that is invested into the company that controls the centralized system.  Crowdfunding is much more important for helping those systems succeed get started on the long road from idea to functional network.  In most cases, providing returns on an investment for a decentralized system is likely to be just a shortcut to speed up the process.

However, I know that I personally would like to see the shift to decentralization as the norm, rather than a novel, new idea, come as soon as possible.  I know many others feel the same way.  Without bringing in investment funds, the time it takes to reach that point could be significantly longer than it needs to be.  Bitcoin itself could very well be corrupted by centralized groups before enough of the supporting systems become decentralized.  That would not be the end of digital currency, but would certainly slow the progress to full decentralization.

To Decentralization Innovators, Entrepreneurs, Developers, and Investors

If you have a great idea for a decentralized system,  can articulate how it would function, but haven’t been able to find funding, or don’t even know where to start, let us know.

If you are a developer, and would like to work on decentralized systems, but haven’t been able to find any serious ones to work on, tell us.

If you are an investor, big or small, and have been hesitant to invest in decentralized systems, but would do so if there was a way to guarantee that your investment wouldn’t be mismanaged, contact us.

I can’t promise that Coin Brief will be able to facilitate any of this.  However, I can promise that I will personally work to connect people, and do anything I can to get ideas moving forward if enough people show interest.

Coin Brief is an open source website for digital news. It provides cryptocurrency tools, mining calculators, tutorials, and more. It was acquired by 99Bitcoins on September 2015.

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