By now you are probably aware of what went down with Steem and Tron, but if not, I’ll give you a quick recap: Steemit, the popular blogging platform run on the Steem blockchain, was recently acquired by Justin Sun, the infamous founder of the Tron cryptocurrency. Due to what can be briefly summarized as irreconcilable differences, Steem witnesses acted against Sun, who then retaliated by using a majority of staked Steem to replace all the witnesses, leveraging both tokens acquired in the Steemit acquisition and tokens residing on several major exchanges. Tokens which were ostensibly owned by many individuals who trusted their funds to an exchange, and their trust was betrayed.
While the star of this unfortunate show may seem to be Justin Sun, it’s really Changpeng Zhao (CZ) of Binance, one of the exchanges involved in this collusion (who reportedly decided to reverse his actions following customer backlash), who is the most interesting player in this crypto drama. Here’s what we should be learning from him, if we’re paying attention.
1:"Not your keys, not your crypto" failed... miserably
The whole concept of property ownership in crypto is that of radical personal responsibility: you can only consider to "own" that which you can directly control. The idea is that centralized parties that hold your funds in your name, and promise to return them promptly upon request, are the de facto owners of your property, as when push comes to shove they absolutely will take part in its repossession. Cryptocurrency allows you to use and hold your own funds without entrusting them to anyone else who might betray you down the road. Well, at least that was the original idea. As we’ve increasingly come to see, a large percentage of most coins’ supply tends to reside under the control of large centralized exchanges. In fact, for many this may be the top several largest addresses on the blockchain. Not too long ago Litecoin reportedly had the majority of its entire supply moved by what could be a single entity.
That’s a problem for the concept of personal financial autonomy, for sure, but now we’re seeing that this is an issue for supposedly decentralized networks as a whole. Whatever lure holding your own private keys was supposed to provide was not strong enough, and got out-competed by better user experience and the prospect of massive gains from speculative trading.
2: There's a strong insider's club that does collude
When Justin Sun bought Steemit, this seemed to be just the latest in a troubling series of events showing a key figure from one of the least-respected projects in the space eating up yet another piece of this still-new decentralized ecosystem. What it turned out to be was far worse. Within a very short time frame, entrenched economic actors came together to support this dubious figure and completely upend the governance system of what was once a top-ten project. Still worse, this may have been done with customer funds, meaning that action was taken with severe ethical implications just to bail out a buddy failing to control his latest acquisition. As comedian George Carlin famously said regarding the ruling elite, “It’s a big club, and you ain’t in it.”
3: Decentralization theater still has market value
However, CZ quickly saying he would reverse Binance’s votes after receiving a backlash shows something else as well: pretense of decentralization sells. The entire reason cryptocurrency took off to begin with was the promise of building a new global financial future free of control and gatekeepers. Whether or not it has lived up to that promise is a different matter entirely. There are countless services and blockchains with marketing claiming censorship resistance. However, most of these fail any actual test of such, whether through giant premines or founders rewards, “temporary” centralized elements, poorly-constructed or captured systems, and so on. While widespread condition of faux decentralization is the industry’s biggest open secret, it still does have to remain secret in public appearance.
Lest we forget, CZ already mentioned the possibility of colluding with miners to roll back Bitcoin transactions back during a major Binance hack, before quickly taking it back and assuring the public that this was impossible. We should know by now to pay close attention to his first hot take, but as long as we aren’t forced to confront how much power people like him have, our coins won’t lose all their value.
4: This spells a dismal future for proof-of-stake
Finally, this whole episode has been a nightmare for the viability of the proof-of-stake consensus mechanism. Now, technically nothing has changed, and chains leveraging its technology can still remain secure, as long as the ownership over their supply remains sufficiently decentralized. In theory. In practice, just as we’ve seen hashrate on proof-of-work chains solidify under the control of just a few actors, coin supplies have ended up heavily-weighted towards centralized exchanges. No matter how many individual owners these represent, we’ve seen how on a whim customer funds were used for arguably fraudulent purposes by a single actor, completely disrupting a (delegated) proof-of-stake chain. We may see this play out in a similar fashion in the future for any number of similar coins as their supplies congregate on exchanges whose owners display few scruples.
CZ may not have set out to give the entire cryptocurrency industry a giant wake-up call, but that’s what he ended up doing. Were you listening?
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