The Importance of Decentralization in Cryptocurrency
One day, you will probably tell your grandchildren about the Wild West days of cryptocurrency.
Imagine the feeling (maybe you’ve experienced this before): you’re a regular person, somewhat familiar with cryptocurrency. You’ve heard the phrase “Not your keys, not your crypto,” and sure, that makes sense for some of those sketchier exchanges, but this is Exchange Corp (let’s use this as a hypothetical example). Everybody trusts Exchange Corp. You saw their CEO on cable news the other day, and he sounded very trustworthy. In fact, he even said on his Twitter that your coins always belong to you, even when you hold them on Exchange Corp.
One day, you log onto Exchange Corp and try to withdraw just $50 worth of BTC to move somewhere else, when suddenly you see a strange error message:
“Due to market volatility, withdrawals have been limited.”
That’s odd, what does that even mean?
You log in to Twitter to see if anybody else is experiencing the same thing.
- “Exchange Corp. just rugged!”
- “RIP to everyone that just got rekt on Exchange Corp. I knew a sinking ship when I saw one.”
- “@ExchangeCorpCEO can you help me please? Why can’t I withdraw my money??”
Does the above scenario sound familiar to you? If you’ve paid attention even the slightest amount this year, then chances are you’ve seen this story play out many times for countless cryptocurrency holders. People who didn’t know any better — or who truly thought they found a company that they could trust — woke up to the harsh reality that the crypto cliché of “not your keys, not your crypto” is, in fact, true.
The Problem with Centralized Control
Why does this keep happening? How do people keep getting taken advantage of? Is there a fundamental problem with cryptocurrency itself that horrible breaches of trust like this are able to happen?
To understand the answers to these questions, we first need to take a step back and ask ourselves if cryptocurrency is functioning the way it was originally intended. Were we meant to relinquish custody of our tokens just to be able to trade them? The answer is a resounding no.
When cryptocurrency was first introduced, the idea was radically simple: You keep custody of your own finances and nobody can take them from you so long as you maintain fundamental information security. Essentially: Keep your keys, keep your crypto.
This was an idea that worked, and it led to a quick proliferation of cryptocurrency and blockchain technology more broadly due to the safety and security that it offered. Unfortunately, as is often the case, safety and security were sacrificed for the sake of convenience.
Centralized exchanges offered a few tempting options for people who were interested in cryptocurrency, but not too concerned with autonomy. Or perhaps they didn’t understand the importance of that autonomy, and they trusted that their cryptocurrency somehow remained in their custody even when stored with a centralized exchange.
The allure of these centralized exchanges is easy to understand. No more worrying about keys; all that you need is a username and password — a system that most people are extremely familiar with. Lose your username or password? Don’t worry, just open a help ticket and the friendly staff at Exchange Corp will help you recover your account.
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