Mass adoption will be terrible for crypto

Published at: Oct. 11, 2022

For years, mass adoption has been pitched as the endgame of crypto. We’re supposed to envision a world where we can pay for our morning coffee with stablecoins and put mortgages on-chain to be used as collateral in decentralized finance (DeFi). In a world in which crypto has become mainstream, prices would likely reach all-time highs, but at what cost?

Concessions inevitably would be made to meet consumer expectations to realize this future.

Though the proliferation of online banking may seem like it set the stage for a seamless transition to DeFi, traditional finance (TradFi) customers are accustomed to a level of inherent security absent in DeFi. Unlike in traditional finance, where charges can be declared fraudulent and bad actors are prohibited from listing exchange-traded funds, there is no centralized authority to file a complaint with or review initial coin offerings in crypto. Though this may seem intimidating, it’s precisely what makes the space unique; users are given complete, sovereign control over their finances, and teams are able to build products permissionlessly.

The average consumer would expect to be protected from hacks and exploits and be offered chargeback protection in order to make the transition from TradFi. The measures required to match consumer expectations would derail future innovation and greatly diminish the immutability and decentralization of DeFi, one of its core principles. Though there are already plans to create opt-in reversible transactions to mitigate the damage of future hacks and exploits, consumer pressure would likely spark a top-down approach, which would almost certainly be implemented with far less finesse and care for the industry than current prospects.

Increased consumer pressure would mean regulators would play a leading role in dictating crypto’s future, ensuring that on-chain activity meets their compliance and Know Your Customer standards. These moves would have an outsized impact on smaller teams, as large companies would be able to bring on new teams focused specifically on compliance or simply pay their way through the fines. But crypto is what it is today because of small teams; Ethereum was founded by a group of eight individuals. Small teams can innovate and make decisions at a far greater rate than larger organizations, which may be hampered by bureaucracy or various stakeholders. By increasing the barrier to entry for smaller teams, mass regulation would impede the very innovation DeFi is known for and effectively put an end to permissionless operations.

The recent sanctions against Tornado Cash are a great example of how quickly regulation can shift the industry. Following the sanctions, remote procedure calls, relayors and apps all moved quickly to comply — and understandably so, builders can’t be expected to face jail time in the name of upholding crypto’s principles. This instance demonstrates regulators’ ability to hamstring even the most immutable and decentralized projects. If we follow the precedent set in this example, it seems impossible that crypto could scale to mass adoption without losing its core principles.

While one of the central selling points of crypto is the censorship-resistant, permissionless and decentralized values that permeate throughout the industry, mass adoption would undoubtedly impede, if not outright halt, such principles. We’d likely see consolidations and concessions as companies face the reality of regulation. Soon, DeFi would appear eerily similar to the TradFi industry that users and developers were attempting to escape.

It doesn’t have to be this way.

One of the main reasons regulators are keen on going after crypto is that it’s been marketed to the average consumer. The fallout from Anchor and Celsius would have been far less if the damage had been limited to smaller groups of informed users who understood the risks.

For this reason, focusing on improving crypto UX without first building antifragile systems is a recipe for disaster. If the user interface is intuitive enough, many will overlook the underlying mechanics and assume they’re safe and sound. On the other hand, crypto wouldn’t need to meet the expectations of the average consumer (reversibility, rollbacks, etc.) if it were built for a user base that prioritized its principles.

Crypto can be the future of finance, or it can be permissionless, decentralized and censorship-resistant, but it likely can’t be both. While the idea of mass adoption as the end game has been taken for granted, perhaps we should be building for a future that preserves crypto’s core principles for those who want it, while accepting that this might be at the cost of mass adoption.

Sam Forman is the founder of Sturdy, a DeFi lending protocol. He became passionate about cryptography in high school before studying math and computer science at Stanford. When he’s not working on Sturdy, Sam practices Brazilian Jiu-Jitsu and roots for the New York Giants.

This article is for general information purposes and is not intended to be and should not be taken as legal or investment advice. The views, thoughts, and opinions expressed here are the author’s alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.