Several incumbents such as Goldman Sachs or J.P. Morgan are allegedly working on crypto custody solutions. Simultaneously, cryptocurrencies as institutional investment assets such as crypto-ETFs are gaining in popularity. Some see in this shift towards “centralization” a disappointing and illogical departure from the vision of a decentralized future. This post argues (using the process of speciation) that this departure is exactly what crypto needs.
One way how technologies reach the mainstream is speciation. In speciation, an innovation does not reach the mainstream market due to a major technological breakthrough (e.g. higher speed), but through subsequent shifts in niche application domains (i.e. targeting different customer groups). 1
Before the Internet reached the mainstream with smartphone apps, it was applied in niches such as R&D (sharing databases among scientists), websites, and web apps. Although not all technologies evolve through speciation it is quite common and also observable with Crypto/Blockchain.
Blockchains and speciation: centralized niches first, mainstream second
Similar to the Internet, speciation has changed what Crypto/Blockchain is.
Shifts in Crypto/Blockchain:
- Electronic cash, FMI (Financial Markets Infrastructure)
- Decentralized computing platform (Dapps)
- Enterprise Blockchains, store of value and (institutional) investment assets
Some describe this transformation towards Enterprise Blockchains, store of value and (institutional) investment assets as a disappointing and illogical departure from the vision of decentralized Web 3.0. However, ironically this departure makes a lot of sense.
No new technology can outcompete the existing technology from the start. For that, existing technologies are too well-defined. That is also why I was never a fan of Bitcoin as a medium of exchange, a unit of account or bank. Fiat money works, FMI is too complex, and the current financial lifestyle is too entrenched in people’s lives (people who still visit their bank to check their accounts) to be replaced by Bitcoin.
In contrast, an emerging technology should select niches where it can compete with services
- (a) that have not existed before or that are better than existing solutions
- (b) that serve a market with abundant (financial) resources
- (c) that is willing to deal with a technology’s shortcomings
When the technology grows in the niche, developers generate profits, learn, and refine the technology. Eventually, an efficiency-threshold will be reached that satisfies the demand of the mainstream market. From there the technology can invade other niches, including even its initial niche.
One example is 3.5“ computer disk drives. They started in the niche for portable computers and only later occupied the mainstream desktop market. Before 3.5” disks no other mobile storage existed for portable computers (a), owners of portable computers were wealthy enough to pay a premium (b), and these users were – in contrast to the desktop market – consent with their shortcomings (such as lower storage space) (c). Eventually, 3.5″ disks became efficient enough and were able to satisfy the mainstream market.
Centralized niches: the case for institutional investment assets
Similarly, for Blockchains, the consumer mass market is by far not yet ready. Although it has enough financing (b), there are hardly yet any dapps that are better than existing solutions (or that bring new solutions) (a). And most importantly, the mainstream market is unwilling to manage the UX difficulties that the Web 3.0 brings.
In contrast to this are cryptocurrencies as an institutional investment asset. Here they outcompete other assets in regards to “risk-reward” (a), institutional investors have enough capital to deploy (b), and are willing to sacrifice the weaknesses (e.g. lacking infrastructure such as custody solutions) for the advantages (c).
This is also why we are seeing so many incumbents enter the space with custody solutions, ETFs, and similar products. In these areas, companies can generate profits and improve the technology. Once Blockchains have reached a mainstream-ready efficiency-threshold there, developers can shift their attention to the decentralized Web 3.0.
Centralization as a springboard to the mass market
As such, developers should target whatever market accepts their current technological progress, instead of trying to convince users with semi-functional applications. Whereas such shifts seem like giving up the vision of a decentralized future, it is, in fact, the exact opposite. By going to market as early as possible with whatever early tech there is means creating a springboard for future applications.
For instance, solar powered calculators were the springboards for solar cells, digital watches & calculators the springboards for liquid crystal displays and inventory management units & simple signature capture devices springboards for pen-based computing 3. All these crude initial applications of the technologies allowed the companies to generate profits and to refine their technology for commercial success in the mass market.
The danger of shifting too slowly: dying in the lab and examples from Litecoin and Binance
Timing this shift from exploring a technology (developing it in the lab and testing it in niches) to exploiting it (selling on the mass market) is difficult. If done too late, the product might die in the lab. This is what happened to ARCO’s solar power stations and Apple’s Newton; they were kept too long in the lab a prematurely ported to the mainstream market 4. Neither became a big commercial success.
This is why Litecoin’s acquisition of WEG bank makes so much sense. By partnering with a traditional bank they are seemingly giving up on the decentralized future. Whereas this might be true in the short-term, it will serve them as a springboard for mass market adoption (only of course if WEG Bank itself is a reliable partner).
This is also why I think that Vitalik Buterin was wrong for wishing for “Centralized Exchanges Go Burn In Hell”. Crypto exchanges like Binance took the available technology (centralized exchanges) and targeted (very successfully) the market that would readily accept it. Exchanges now have enough capital to work on the more complex centralized exchanges. And in fact, Binance only recently showed a demo of their decentralized exchange.
Speciation does not mean that projects working on decentralized solutions will “die in the lab”. Rather, it shows that centralization is not necessarily evil but rather (a) necessary (evil), at least temporary.