Is Decentralization a Myth? Some Insights From Dr. Joel Garrod

Introduction to Smart Contracts

Upon the release of Ethereum and its smart contract system, Dr. Garrod recognized immediately that blockchains were going to change society in a big way. The emergence of capitalism out of mercantilism created a system of contract law which we have carried with us to the modern day.

For Dr. Garrod, smart contracts are a “…way bigger transformation of property relations than previously thought”.

While researching the Royal Bank of Canada (RBC), he stumbled on the bank investigating smart contracts and that’s when everything clicked for Dr. Garrod.

What Happens When Code is Law?

Some seasoned cryptocurrency holders might recall the infamous DAO scandal that resulted in the loss of millions of dollars worth of Ethereum.

This is one such flaw of the DAO that Dr. Garrod is concerned about. If code is law, then that makes bugs in the code, or other flaws also part of the law. If this were a model for an entire society, then it would be perfectly legal to hack these institutions and steal as much money as possible.

These are sorts of devils in the details that Dr. Garrod is interested in finding, which exposes a view of the history of capitalism that is “ahistorical”. This ahistorical idealism about decentralizing everything to remove middlemen may not be the solution that the DeFi space brands itself as.

Current Finance Capital is Extremely Centralized

Centralization is certainly a valid concern. Few understand the degree to which finance capital is centralized.

In Dr. Garrod’s 2016 paper, The Real World of the Decentralized Autonomous Society, Dr. Garrod cites a group of systems theorists at the Swiss Federal Institute of Technology who found that “…1,318 core TNCs (Transnational Corporations) with interlocking directorships, [make] up 80 percent of global operating revenues”. This is a staggering amount of capital that just a few corporations hold control over.

With this in mind, it’s very easy to see why decentralization projects have cropped up all over the world of cryptocurrency. Criticisms of centralization of both DeFi and banks have emerged in the crypto space alongside Dr. Garrod’s research.

Entrepreneur Brad Mills is also critical of the “decentralized” brand that DeFi carries with it, claiming “They are rebuilding everything that’s wrong with Wall St on a blockchain”.

Reality Check: What’s Actually Happening?

While reading about the centralized nature of capital today can sound quite pessimistic, Dr. Garrod thinks there’s more pieces to the puzzle than simply pointing to what he calls, “hopes and fears”.

Much of the current academic research on cryptocurrencies are expressing fears of a capitalist dystopia resembling J.G. Ballard’s Highrise, while on the other hand you have utopian hopes about a fully voluntary, anarcho-capitalist society that will eliminate large corporations and even the state itself.

For Dr. Garrod, he seeks out what’s currently happening. How is the technology being used by its adopters?

Cryptocurrency has been adopted by a number of institutions to track and record data. Mainly financial corporations, but there are others related to things like supply chains that are picking up the technology.

This is a rather boring side to cryptocurrency, the legal paperwork that is setting precedents in corporate and case law that is deciding how cryptocurrencies are used and regulated. It’s actively in the process of taking its shape in the legal system. For Dr. Garrod, where this really gets interesting is when a transaction has to take place across borders. One such example is all of the cryptocurrency that has been donated to Ukrainians in need of aid.

A well known source of cryptocurrencies increasing in value, is institutional adoption. Institutions only pick up technology that they can legally use, since they cannot afford expensive legal costs. It’s these courtrooms, policies, and legal cases which are carving out cryptocurrency’s presence in markets all over the world. As the law comes to terms with regulation of crypto, so too will new technologies as developers and producers gain the confidence they need to go further.

Beyond Financial Use Cases

Blockchains stand to be used for much more than just finance. Mattereum is an organization that holds Dr. Garrod’s interest.

Mattereum’s use case is as an arbitration body for contract law around the world, with the use of NFTs attached to physical goods. While this presents interesting possibilities for the wealthy who can afford to own some of the expensive assets that Mattereum currently covers such as real estate and gold bullion, there is another side that’s concerning.

The commodification of everything is potentially problematic. A number of people would not want fire services to be commodified for example. We know from history that a commodified fire service has led to corruption in the past.

With the expressed concern about commodification of all stuff and services, what are the options for blockchain tech going forward? While it is possible to use DeFi technology to financialize a lot of data activity, there are other options. Blockchains that exchange tokens resemble markets, but they also resemble parts of a nervous system. In this sense, it’s entirely possible to use blockchain technology to make things we already engage with more convenient.

The example that Dr. Garrod provides is for solar power. While reverse-metering is a current growing issue, it would be possible to have excess power produced by solar panels managed and moved around with the help of a blockchain nervous system. Tokens could be exchanged automatically with the use of smart contracts when energy storage and production reach specific thresholds. This could be marketed as a utility to cut management costs in various sectors. Most people are not financially savvy, and blockchains are still quite arcane and they may remain that way.

A consumer-focused approach would be to have a system of solar panels that manages itself, which you do not have to think too hard about managing the financial side of. An outlook such as this, may even negate the need for power companies, especially communities where costs are already high.

The Myth of Decentralization

“Decentralization, the way that people imagine it is kind of a myth,” according to Dr. Garrod.

While holders of Bitcoin are not all together in a single company, mining pools have a history of being a point of centralization in Bitcoin infrastructure. “Whales” can have a significant impact on any cryptocurrency, but one good example is Elon Musk’s influence of the currency on Twitter during 2021. In this sense, any cryptocurrency can be centralized depending on the impact a group or individual has on the community.

Bitcoin, as a community, has worked rather hard to maintain a community-first culture. As seen, sometimes extremely, in Bitcoin maximalism. This community-first approach to cryptocurrency, may be the way to go moving forward in the face of growing DeFi centralization.

For more from Dr. Joel Z. Garrod be sure to check out his personal blog.