The Big Crypto Deception: Why Most ‘Decentralized’ Currency is Controlled by Centralized Giants

There is a naive acceptance of claims that something is “decentralized” simply because a project or platform is deployed on a distributed ledger technology (DLT) architecture—a sophisticated system with multiple components far beyond what is implied by the term blockchain, a label invented outside traditional computer science. I explore this in more detail in my book “The Digital Asset Technology Guidebook.”

But what exactly does “decentralized” mean? Decentralization lacks a clear definition within the DLT or government sector. However, the word “decentralized” morphologically dates back to the late 1700s in writings involving the French Revolution.

Within the DLT framework, there are many different definitions of decentralization used within the sector, mostly using it in a way to hype-market a project platform that hypes the distinction between being a DLT-based business in opposition to the traditional corporate sector that is intriguingly categorized by digital asset enthusiasts, evangelists, and developers as “centralized.” It is intriguing because these peddled “decentralized” organizations have similar organizational structures to the traditional corporate environment that they object to.

Satoshi Nakamoto’s Bitcoin Whitepaper
The hitching post for evangelists, enthusiasts, and marketing hype from developers around the terms “decentralized” or “decentralization” is the Bitcoin whitepaper, and yet the term never appears in this whitepaper. The term “centralized” occurs twice in the following context:

• “The problem of course is the payee can’t verify that one of the owners did not double-spend the coin. A common solution is to introduce a trusted central authority, or mint, that checks every transaction for double spending. After each transaction, the coin must be returned to the mint to issue a new coin, and only coins issued directly from the mint are trusted not to be double-spent. The problem with this solution is that the fate of the entire money system depends on the company running the mint, with every transaction having to go through them, just like a bank.”

• “By convention, the first transaction in a block is a special transaction that starts a new coin owned by the creator of the block. This adds an incentive for nodes to support the network, and provides a way to initially distribute coins into circulation, since there is no central authority to issue them.”

While the concept of operating without a central authority was fundamental to Nakamoto’s design, the specific term “decentralization” was later popularized in 2010 by the community, academics, and the media when describing the Bitcoin network’s architecture. The term “decentralized,” or any variation of it, was not explicitly or implicitly used in the original 2008 Bitcoin whitepaper by the pseudonymous Satoshi Nakamoto. The term “centralized” was primarily used in the context of solving the mint and double-spend conundrum. The whitepaper, titled “Bitcoin: A Peer-to-Peer Electronic Cash System”, focused on creating a “peer-to-peer” system that replaced institutional trust with a transactional cryptographic signature proof that does not extend to the security or storing of the asset. A portion of the whitepaper abstract reads: “Digital signatures provide part of the solution, but the main benefits are lost if a trusted third party is still required to prevent double-spending.”

America’s GENIUS Act: The nation’s first comprehensive legislation on stablecoins
A significant note that the above quotes from the Bitcoin network whitepaper are enigmatically similar to how fiat pegged tokens, colloquially and erroneously referenced as “stablecoins” in the GENIUS Act and developers, are minted by a central authority with a shortlist that includes Tether (USDT), USD Coin (USDC), Dai (DAI), TrueUSD (TUSD), PayPal USD (PYUSD), Gemini Dollar (GUSD), Binance USD (BUSD), and Ethena USDe (USDe).

However, in the L2|L3 (Layer 2 | Layer 3) development space, the term stablecoin is used more broadly across all kinds of L2 tokens for purposes of interoperability, and not just in reference to USD pegged tokens.

“Decentralization” in Today’s World
Today’s “decentralized” networks and organizations operate very much like corporate platforms due to the concentration of power in the hands of a few key developers and founders with titles of CEO, CIO, CTO, and the corporate list of titles continues in the same vein as corporations. Or indirect centralization becomes apparent through the creation of centrally controlled elements, such as a foundation, which has a legal governing board with fiduciary duties. And corporate entities are disguised within the self-proclaimed decentralized community by calling them Decentralized Autonomous Organizations or DAOs. Most DAOs are about as autonomous as the ServiceNow commercial that refers to “autonomous minions that you control.”

Some networks and L2|L3 projects operating on a distributed network are typically governed by a group, or groups, of developers or companies, or dominated by a few large platforms/investors, creating a centralized influence that limits true autonomy and leads to similar issues of censorship and control seen in traditional platforms. For example, a few dominant platforms can effectively control the ecosystem or the developers of the underlying technology to maintain significant power over its future direction. The following are just a couple of the most prominent examples of Decentralized Exchanges (DEX):

• SUSHI adopts a three-entity legal structure to provide flexibility and mitigate legal risks. This structure includes a Cayman Islands foundation (DAO Foundation), which manages governance processes, the treasury, and grant distributions; a Panamanian private interest foundation, which manages protocol development services related to L2 contracts; and a Panamanian corporation, which oversees the development of the SushiSwap web frontend (user interface) L3 layer.

• Uniswap has a corporate entity (Uniswap Labs), a non-profit Uniswap Foundation, and an evolving governance structure with proposed legal wrappers like a Wyoming Decentralized Unincorporated Nonprofit Association (DUNA).

So, the hype of the DLT stack platforms as decentralized is, in reality, highly centralized by developers/founders/foundation/corporate control, venture/large investor control, and concentrated power by a few dominant DLT platforms that become gatekeepers. This is similar to traditional tech companies that dominate the monetization of the internet and web, AI, and many other technology infrastructures.

“Decentralization” as a Marketing Slogan
Decentralization, having started as an aspirational ideal, has become more of an effective marketing slogan.
  Decentralization is easier to hype than to implement as a strict architectural standard in DLT because projects incorrectly redefine “decentralization” outside the textbook definition. A sample of phrases used by many L2|L3 to explain decentralized as: deployed on blockchain, use open-source code, DAO governance, and implement transparent L1 on mainnet ledger analytics.

This is a blatantly false narrative that users and the government have grabbed hold of in defining decentralization in DLT projects and platforms. Started as an aspirational concept, “decentralization” is a marketing slogan that is easier to market than to implement as a strict DLT architectural standard. Further, it has been incorrectly defined in the context of DLT platforms, and it is very difficult to verify across different platforms because of the marketing ruse.

Marketers use it as a dog whistle to signify benefits like local autonomy, agility, and consumer empowerment, which are attractive to their audience. There is no single, universally verifiable architectural standard defined by the sector for “decentralization,” and its actual implementation often involves a “hub and zone” and “relay-parachain” model rather than a decentralized system. And technically, full decentralization cannot be coded into a DLT architecture because some level of intervention is always necessary in network systems. As such, there are statistical measures to implement standards for determining the level of centralization of a system.

Centralization in DLT projects, when viewing it from the perspective of admin control of keys, also provides insight into centralization. A DEX technically should be articulated as “Distributed Exchange” given that they often control keys related to L2 exchange contracts in varying degrees. So, for this reason, when a DLT project collapses or goes into bankruptcy, it becomes clear to a user that the digital asset does not belong to them.

Why Technical Oversight is the Solution
Overall, the problem is that government rule makers are technologically deficient. The model of self-regulatory organizations (SRO), as with FINRA in the securities trading industry, is a workable solution when comprised of independent technology experts in distributed network architecture and data ledger technology to work with regulators to set intelligent standards for project disclosures like leadership structure, a full disclosure of technology architecture, developer involvement in other projects that have failed due to security vulnerabilities or other causes, and provide continuous monitoring and oversight as an agency task force on behalf of regulators.

There is a need for a focus on oversight of these entities that claim decentralization while holding the reins, leading to manipulation of the network’s direction. The most observed outcome of no oversight is the sudden loss of users’ digital assets due to developers deciding to terminate a project for some unknown or known reason. Holding those in control to a standard will not stifle the technology development and will result in the development of safety protocols that are lacking in the social media technology platform debate.

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