Opinion by Kyle Torpey, a Bitcoin journalist since 2014.
Crypto began as an idealistic movement to decentralize digital finance, but the long-term trend since Bitcoin originally launched in January 2009 has been towards ever more centralized and permissioned activity.
These issues have been obvious for some time, particularly in relation to the reliance upon centralized stablecoins throughout the industry. But the devolution of crypto into traditional fintech is now becoming more blatant with the blockchains upon which these stablecoins operate becoming more centralized as well.
So, what has crypto become? Or perhaps better put: What are we even doing here at this point?
From Bitcoin’s decentralized vision to crypto’s centralized reality
In a January 2009 post, Bitcoin creator Satoshi Nakamoto pointed out the reliance on trust in centralized third parties that exists in the traditional financial system. Nakamoto’s removal of the need for trusted third parties is the underlying value proposition of his invention
Since then, Bitcoin has evolved with its fundamental investment thesis built around the digital gold narrative. Since there is no central party that controls bitcoin’s monetary policy, it is resistant to the sort of dilution that can be found in centrally-issued digital assets, whether they be fiat currencies or privately-issued crypto assets.
Ethereum and other layer-one blockchains that enable more expressive smart contracts were originally intended to bring this same sort of decentralization to other areas of finance such as trading and lending.
While these platforms have exploded in popularity over the past decade, much of the activity on them is centered around centrally-issued stablecoins such as USD Coin (USDC) and Tether (USDT). Additionally, Ethereum has faced increased competition from alternative crypto networks, such as Solana, that are willing to make even greater tradeoffs that favor usability and lower fees over decentralization.
Centralized stablecoins dominate crypto trading
The potential issues with Ethereum’s reliance on centralized stablecoins became apparent to some in the previous crypto bull market. Ethereum co-founder Vitalik Buterin said in 2022 that stablecoins like USDC and USDT could become “a significant decider in future contentious hard forks.”
When looking at the trading volume data for decentralized exchange Uniswap, for example, it’s clear that centralized stablecoins are a key ingredient that enables the majority of the activity found on these apps.
According to data from DefiLlama, USDC and USDT have generated the most revenue of any applications in crypto over the past 30 days. Additionally, platforms that are generally viewed as more centralized than Ethereum, such as Solana and Tron, have generated more revenue than Ethereum over the past week.
An often-cited metric regarding the hypothesis that centralized stablecoins don’t necessarily need to be operating on the most decentralized blockchains is that substantially more USDT payments take place on Tron rather than Ethereum. That said the total amount of USDT on Ethereum recently overtook Tron, according to data from The Block.
Coinbase and Base: Centralization meets decentralization
Ethereum layer-two network Base is a particularly interesting development recently due to its incubation by Coinbase, which is the largest crypto exchange in the U.S. Using its popular exchange, Coinbase has the ability to push users to Base as part of their onchain vision, and the publicly-traded company collects fees from the blockchain as the operator of the sole sequencer. Coinbase then uses a small proportion of those fees to pay layer-one fees to Ethereum, as it is an optimistic layer-two rollup. ETH is also used as the gas token on Base.
Critics argue that Coinbase’s use of Base can be seen as a form of regulatory arbitrage and decentralization theater that allows the company to collect fees and generate revenue from customers without having to go through Know Your Customer and anti-money laundering checks. This both lowers costs for Coinbase and creates a more seamless onboarding and overall user experience for Base users. This improved user experience is especially true when also considering the abstraction of ETH as a gas token and the promotion of USDC as the main currency of Base.
Base fans will no doubt point to the introduction of fault proofs as indicating the L2 is progressing efforts to decentralize. However it remains at Stage 0 decentralization at present according to L2 Beat, even as newer rollups like Unichain debut at Stage 1.
The clearest example of the level of centralization found in this structure is perhaps seen with Coinbase’s relatively new Bitcoin loans product, which allows Coinbase customers to borrow USDC (Coinbase is an investor in its issuer Circle) against cbBTC (issued by Coinbase) on Base (Coinbase is the sole sequencer collecting all fees).
At a certain point, it becomes questionable as to what part of this can be considered DeFi or crypto, especially in the context of the original Bitcoin value proposition outlined by Satoshi. This increasingly looks like a traditional financial institution or fintech company offering traditional, centralized services. What function does a public blockchain offer in this new paradigm? Is it even needed?
It should be noted that this is not a phenomenon that is only found at Coinbase, as Binance created Binance Smart Chain all the way back in 2017 and Kraken recently launched its own Ethereum layer-two network known as Ink (also Stage 1). However, the combination of Base, USDC, and cbBTC make the potential centralization-related issues easier to see.
Crypto merges with traditional finance
The popularity of Base and USDC are both viewed as net positives by many ETH holders today. However, the logical conclusion of this continued trend towards more centralization may not bode well for the value proposition of ETH over the long term.
If user activity continues to centralize around USDC, Coinbase may eventually ask the question of what they’re getting out of paying fees to Ethereum. Outside of the aforementioned regulatory arbitrage play, paying extra for the decentralization offered by the base layer may not make as much sense if the vast majority of user activity involves centrally-issued tokens anyway.
Over the weekend, Base’s potential lack of alignment with Ethereum was criticized by Sonic Labs co-founder Andre Cronje, who previously built Yearn Finance on Ethereum.
In a response to the criticism that Base was receiving on X over the weekend, Base creator Jesse Pollack referred to the idea that Coinbase must retain all of the ETH they earn as virtue signaling.
However, he pointed out “we also think it’s valuable to hold ETH (we hold over 100K) to reinforce its role as a store of value and share in the upside we are creating in building on Ethereum… it’s not a ‘solution’ people should fixate on, it’s an end state that ETH the asset earns by being useful and productive.”
Coinbase holds 119,696 ETH (worth around $320 million at current prices), according to a recent filing.
Meanwhile, Offchain Labs co-founder Steven Goldfeder took the opportunity to point out that Arbitrum’s L2-based revenue is controlled by a decentralized autonomous organization (DAO) that has elected not to sell any of its ETH, insinuating that it is better aligned with Ethereum’s success.
So, where does this ultimately lead? Due to the high degree of centralization that has slowly crept into crypto over time, it appears that the worlds of fintech and crypto are merging. Traditional banks like Wells Fargo, fintech platforms like PayPal and Robinhood, crypto exchanges like Coinbase and Binance, and crypto networks like Solana and Ethereum may all be in competition with each other.
There seems little doubt that Pollak is personally committed to decentralization, however the commitment of the publicly traded company behind the network is less certain, particularly if commercial realities change.
Base maintains it is committed to becoming more decentralized over time, including opening up the ability for other entities to collect sequencer fees.
“Base is committed to decentralization because we believe open economies have the opportunity to grow more widely,” a Base spokesperson told Magazine.
“Lower fees and more opportunities for others to earn from the Base onchain economy will help to grow the pie overall, and we believe that exponential growth in the onchain economy will be mutually beneficial for Base and all participants.”
Base outlined its goals for greater decentralization in 2025 in a January blog post. However, the decentralization of the Base sequencer is not planned for this year.
Of course, even if Coinbase is honest about their intentions of decentralization with Base, it does not change the underlying incentives. It’s unclear if the recent push for financial institutions to create their own L2s on top of Ethereum will make sense for ETH holders, particularly as fee revenue has plunged due to the rollup centric roadmap.
However, according to Etherealize founder Vivek Raman, who is now selling this Ethereum L2 strategy to Wall Street, it is cheaper for companies to outsource settlement and validation to Ethereum while still retaining the sequencer fees.
While regulators previously prevented the launch of Meta’s Diem platform, Coinbase is arguably bringing many of the same concepts back to life in a different form. And it’s possible that the future of crypto looks more like the previously-abandoned Diem model than the cypherpunk ethos that Bitcoin started with sixteen years ago.
Crypto networks have the advantage of decentralization, but they do not appear to be making the most of it. And you can’t necessarily blame them, as nobody seems to be demanding it.
Kyle Torpey
Kyle Torpey has been covering Bitcoin and crypto since 2014. Notably, he covered Bitcoin’s blocksize war at Bitcoin Magazine and Forbes. Over the years, his work has also been published in Fortune, Vice, Investopedia, and many other media outlets
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