Vitalik's Major Warning: Crypto Projects Focus on Making Money and Ignore "This Issue" Could Lead to Centralization

December 31, 2023, Ethereum co-founder Vitalik Buterin published “Balance of Power,” directly pointing out a fatal blind spot in the crypto industry: most projects focus only on “business models” while neglecting “decentralization models.” He emphasizes that without actively designing mechanisms for distributing power, projects will inevitably become centralized, diverging from the spirit of encryption.

Crypto Projects Are Repeating the Monopolization of Tech Giants

Vitalik reveals a harsh reality in the article: the crypto industry is reenacting the path of power concentration seen in traditional tech companies. He cites data showing that from 2009 to 2021, the percentage of tokens directly allocated to insiders in newly launched cryptocurrencies has continued to rise. This trend mirrors the evolution of the gaming industry from entertainment to “built-in slot machines” designed to extract money from players.

The root cause lies in positive feedback loops of economies of scale and power centralization. When a project scales tenfold, the benefits gained from influencing the environment (economic, political, cultural) are also tenfold, leading to more frequent such actions compared to smaller projects. From a mathematical perspective, this is similar to why monopolists set prices above marginal costs: the extent to which you can influence the environment is proportional to your market share.

More seriously, scaling also leads to homogenization issues. All projects driven by profit motives, and many powerful actors with similar strong incentives, will inevitably work in the same direction, lacking strong checks and balances to change course. Investors further amplify this dynamic: while entrepreneurs may be content with building a $1 billion good company, investors crave $50 billion returns, and market competition favors the latter with higher rewards.

Vitalik believes that rapid technological development causes the super-exponential growth curve of economies of scale to accelerate even faster than before. Automation reduces human coordination costs, and modern technology enables the creation of proprietary hardware and software products that ensure users have usage rights while not leaking the ability to modify and control. Essentially, economies of scale are increasing, but the diffusion of control is lower than ever.

Decentralization Does Not Occur Naturally; It Requires Active Design

Vitalik points out that in some scenarios, decentralization is naturally easier to achieve. For example, in language systems like English, or open protocols like TCP, IP, HTTP, due to the lack of obvious centralized control points, dominance is not easily monopolized by a single entity. However, in other use cases, decentralization does not happen naturally but requires project teams to consciously design systems and structures.

He cites Lido in the Ethereum ecosystem as a positive example. Currently, Lido holds about 24% of the total staked ETH supply, but concerns about it are much lower than for any other project holding 24% of staked tokens. This is because Lido is not a single entity: it is an internally decentralized DAO with dozens of operators, employing a “dual governance” design that grants staked ETH holders veto power over decisions. Lido has invested significant effort in this area, which is commendable.

Principles of Decentralized Design That Projects Should Emphasize

1. Power Distribution Mechanisms

· Avoid single points of control, establish multi-party governance structures

· Use DAO models to involve the community in decision-making

· Implement veto rights to prevent unilateral rule changes

2. Technical Openness

· Open-source core code to avoid proprietary lock-in

· Adopt open protocol standards to ensure interoperability

· Support third-party client and tool development

3. Transparent Economic Models

· Publicly disclose token distribution ratios to prevent insider monopolies

· Design long-term vesting periods to reduce short-term cash-outs

· Establish community reward mechanisms rather than purely investor-driven incentives

4. Exit Mechanisms for Security

· Ensure users can migrate data and assets

· Support cross-chain bridging to avoid ecosystem lock-in

· Provide fork rights as a final check and balance

Three Major Strategies to Counteract Power Concentration

Vitalik proposes three strategies to enhance diffusion and counteract power centralization. The first is mandatory diffusion policies. He cites examples like the EU’s USB-C standardization directive and the US’s ban on non-compete agreements, which compel companies to partially open-source “tacit knowledge,” allowing employees to apply learned skills elsewhere after leaving. He even suggests governments could tax products proportionally to their proprietary level: if you share technology, including open-source tech, the tax rate drops to zero.

The second strategy is adversarial interoperability. Vitalik references Corey Doctorow’s definition: developing new products or services that seamlessly connect with existing ones without permission from the original manufacturer. Examples include alternative clients for social media platforms, browser extension interceptors, and decentralized exchanges between fiat and cryptocurrencies. He believes much of Web 2’s value is captured at the user interface layer; creating alternative interfaces that interoperate with platforms allows users to stay within the network but opt out of its value extraction.

The third strategy is returning to the concept of diversity. This involves promoting “cross-difference collaboration,” enabling more effective discussion and cooperation among people with differing opinions or goals, thereby gaining efficiency benefits of large groups while avoiding the pitfalls of large groups becoming single-goal actors. This philosophy can help open-source communities, national alliances, and other groups achieve higher levels of diffusion, allowing them to share greater economies of scale.

Defensive Acceleration to Make a Multipolar World Safer

Vitalik also responds to concerns about the “Fragile World Hypothesis”: some believe that as technology advances, more actors can cause catastrophic harm to everyone, and the only solution is increased centralization of power. Vitalik advocates for defense/acceleration (d/acc) as a complementary strategy. It involves developing defensive technologies that are synchronized with offensive capabilities, and these technologies are open, transparent, and accessible to all, reducing the need to concentrate power out of security concerns.

He proposes an integrated moral view where one does not allow dictatorship but encourages exerting influence and empowering others. One approach is to increase the breadth of external dissemination; another is to build mechanisms that minimize their use as leverage of power.

Vitalik concludes that how to gain the benefits of centralization—such as flexibility and efficiency—without suffering from its drawbacks will be a significant challenge for the crypto industry for a long time to come.