Cryptocurrency Investment Principles: Beware of Hidden Centralization Risks

At the end of the previous article, there was a reader comment:

“The cause of security issues is the centralized mindset, and the current solution to this problem is also centralized.”

This comment about “the current solution to this problem is also centralized” made me think of the pervasive “centralization” trap in today’s crypto ecosystem.

First, I want to emphasize again:

I’ve always been against everything being “decentralized,” for example, I explicitly oppose managing teams (like the Ethereum core development team) implementing so-called decentralization, because such decentralization can’t effectively push the project (Ethereum) forward with the times.

I also absolutely do not believe that “centralized” and “decentralized” are necessarily good or bad. When to “decentralize” and when to “centralize” depends entirely on the specific use case and scenario.

However, if you step into the very unique new world of the crypto ecosystem, then all my views will be centered around “decentralization.”

Why?

Because only decentralization and resistance to censorship can fully unleash creativity, nurture the seeds of miraculous innovations, and give birth to humanity’s greatest achievements of wisdom.

But because humans have long lived under “centralized” control, with minds full of “centralized” seeds, the default way of thinking when handling any matter is “centralized.”

It is precisely because of this that creating a world that is decentralized and resistant to censorship is so difficult, that there are so many pitfalls, and that so many problems arise.

But problems and pitfalls have never been able to stop the pace of the crypto world, nor can they halt its progress.

Under this mindset, I see the basic criteria for evaluating all layer-1 blockchains very clearly:

This is the foundation carrying the crypto ecosystem, and it must do everything possible to be decentralized and resistant to censorship.

According to this standard, only two can be counted on: Bitcoin and Ethereum.

So over the years, I’ve basically ignored other layer-1 blockchains. Many of them wear very dazzling appearances, but in my view, they are essentially no different from EOS, which has only 21 supernodes.

Yes, some of those chains are efficient, operate well, and even have periods of “ecosystem prosperity.” But I believe that’s because they haven’t yet faced a catastrophic disaster. Once they encounter an event like Aave that sweeps through the entire ecosystem, I fear only Bitcoin and Ethereum will survive.

For layer-2 scaling solutions, I’ve always believed they should be even more decentralized. But progress in this area has been painfully slow over the years.

In fact, the Ethereum ecosystem already offers multiple solutions to tightly bind security to Ethereum itself, such as Native Rollup, Gnosis’s EEZ framework, and others. Any of these solutions, if adopted, would prevent issues like those faced by Aave and many other security problems from occurring on layer-2.

In this regard, I look forward to Vitalik using even more powerful measures to enforce promotion—don’t be afraid to offend some layer-2 projects. Because projects with long-term vision will recognize this as a win-win solution, while those without such vision should be eliminated without hesitation.

Otherwise, most of today’s layer-2 solutions will continue to operate their essentially centralized systems in a half-hidden manner. In the end, they will still face catastrophic events like Aave.

Regarding various decentralized applications (dApps), because I’ve participated in security reviews of many dApps for a period, I understand that except for a few top-tier projects, most dApps have left a “centralized” backdoor—claimed to be for emergency “braking,” but at the same time introducing the risk of running off with funds at any moment.

This won’t be exposed during peaceful times, but once a storm hits, it’s hard to say what will happen.

So, in my usual use of dApps, I mainly stick to top-tier products. As for knockoffs, no matter how high their promised yields or generous their rewards, I avoid them whenever possible.

Of course, in real life, many ideals clash fiercely with reality. Such clashes sometimes force painful compromises.

But these compromises must be made with very high thresholds.

For example, the recent incident where Arbitrum’s security council froze hacker assets has sparked significant controversy.

I think a better approach might be to introduce a DAO to manage this, setting a higher voting threshold for the security council—such as automatically freezing large, sudden assets first, then allowing all ARB holders to participate in voting within a specified period, and finally deciding whether to unfreeze the assets through DAO voting.

This kind of DAO-based management itself is also what the crypto ecosystem has always pursued: “decentralized governance.”

Aave’s recent troubles have raised many issues and triggered more reflections. But I believe that after this baptism, truly resilient projects will emerge, and the idea of “decentralization” will be better understood and appreciated.

The crypto ecosystem will consolidate for a while, then continue to march forward boldly.