blockchain and decentralization

As with every transformative technology, blockchain has started off a long creative destruction process. (Think of how invention of electricity changed everything.) This time around though, the destruction part is much more palpable than the creativity part. Blockchain's infrastructural nature makes it hard to predict what sorts of profitable business models will be built on top of it in the future, but its decentralizing nature has already planted fear into the hearts of some of the world's most profitable companies that have thrived by centralizing and gating certain aspects of ourselves. (Think of how Facebook is trying to own our social selves.) The reason behind the fear is that decentralization always equilibrates towards market structures with zero producer surplus. (Think of how yellow-pages got pulvarised as internet became more widely adopted.)

But there is still a lot of hope for centralization fans! Just look at what happened at the currency front which turned out to be the killer (popularizing) application for blockchain technology. (Lighting was the killer application for electricity technology.)

• Bitcoin became by far the most dominant crypto-currency.
• Bitcoin mining operations are now concentrated in the hands of few producers.

How did these two centralization processes take hold? Was not blockchain supposed to liberate us from all centralizations? Well... We should not forget that the unfolding of a technology itself is an economic process subject to usual laws of economics. The above centralization processes took hold respectively due to network and scale effects. That is how removing one centralized node (central bank) in the network created new centralized nodes elsewhere.

In some sense, we are in a much worse paradigm today. At least when currencies were defined by national boundaries, we had many of them. Today we basically have one giant monolithic crypto-currency! 

What happened basically is that we reinvented gold in a much worse form. (Just like how Facebook ended up reinventing TV in an even more addictive form.). At least, the scale effects at gold mining operations had taken longer to crystallize due to the physical nature of the operations!

Bitcoin enthusiasts generally tend to be naive economists. They can not even see that fiat currency was actually one of the greatest inventions of mankind, giving us a previously non-existent control over the money supply. (For instance, increasing the money supply during times of crisis and decreasing it during times of exuberance help us ease the severity of business cycles.)

Blockchain itself though (the underlying technology behind Bitcoin) has unleashed a wave of great economic thinking (and creativity). People are getting wiser about economics. They are realizing that the notion of "value" goes far beyond "money", that a lot of seemingly non-economic transactions are actually economic in nature. Now all they have to do is to render the invisible trust tokens visible by launching blockchain startups.