Centralized Exchanges Exist Because Centralization Is Human Nature

The debate between centralized and decentralized exchanges hit a tipping point last week when Ethereum founder Vitalik Buterin shared his thoughts on the topic at a Techcrunch conference, saying “I definitely hope centralized exchanges go burn in hell as much as possible”.

The quote was in the context of a larger discussion about abuse of power by centralized exchanges. Vitalik vehemently disagreed with the way in which blockchain projects were being forced to pay $10-$15 Million in listing fees just to let people trade their tokens on these exchanges.

Despite the rest of the conversation being relatively nuanced, his “burn in hell” comments caught the attention of Binance CEO CZ.

Binance is one of the largest crypto exchanges in the world and also happens to be centralized (though it is not confirmed if they charge such amounts for listing fees).  

CZ responded on twitter by outlining the ways in which centralized exchanges are necessary to the evolution of the crypto space, and how we need to “have a bigger heart, and appreciate the fact that we are part of an eco-system”.

CZ makes some valid claims regarding fiats role in the growth of the crypto industry. All retail investors at some point bought their first Bitcoin or Ether using fiat currencies. Centralized exchanges exist to serve as an interface between the fiat world and cryptocurrencies.

As Vitalik said himself in the Techcrunch interview: “the fiat world only has centralized gateways.”

Centralization is human nature

Perhaps more controversial was CZ’s claims about projects with core teams still having centralization and the fact that “Vitalik probably has more king-like powers than anyone else in the industry, and has used it, by serving as advisors for projects, therefore helped to decide their fate, at least fate of their ICO’s to a large extent”.

This is an undeniable truth that far too many decentralization purists in the crypto space choose to ignore. No matter how much decentralization we strive to create, there will always be some form of centralization that we ourselves will impose on the system.

Human nature is such that we expect there to be leadership figures in any organization. Someone wiser and more experienced who we can turn to in order to make the difficult decisions we don’t want to take personal responsibility for making ourselves.

This flaw is clearly evident in how we collectively decide a project is valuable based on it being endorsed by Vitalik, or listed on Binance.  

Instead of taking on the difficult but necessary task of investigating the validity of a project, we accept a handful of blanket social cues in order to simplify our decision-making.

To Vitalik’s credit, he seems highly aware of this flaw and does try to distance himself from being too much of an ‘authority’ within the Ethereum community and the crypto space at large. However, our tendency to pick sides and choose leaders (in spite of our apparent commitment to decentralization) means that Vitalik’s comments about centralized exchanges carry more weight than was perhaps intended.

Ultimately, as CZ correctly points out, “decentralization is a means to an end. The goal is to increase freedom and choice. Let people choose what they want.”

People should be free to choose which ever exchanges work best for them.

Right now, the free market economy favors centralized exchanges due to their efficiency and high trading volume. This has allowed some exchanges to exploit the supply/demand imbalance by charging blockchain projects exorbitantly high listing fees.

This exploitive trend will likely fade away over time as more decentralized exchanges enter the market and prove their value.

However, what won’t fade away is the natural inclination we have to pick leaders and outsource decision making to centralized authorities. These traits run counter to the blockchain ethos, and must be consciously resisted at every level (from the technology to the team structure) in order to achieve the closest thing we can to “absolute decentralization”.