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Last week, I shared a Beginner’s Guide to Crypto, explaining all the way from core fundamentals to more specific topics in this space.
In this guide, I outlined why crypto is a solid alternative that came up as a response to the existing financial system that is outdated and malfunctioning, and I explained how this solution is empowered by core features made possible thanks to blockchain technology and cryptography.
Now, the key call out I made is that just because a company operates in the crypto world, doesn’t mean it is decentralized.
Let me explain what I mean with a clear example: if you buy crypto in an exchange platform like Binance, Coinbase, or crypto.com, these are simply normal fintech companies that provide the service of buying crypto assets, which means they still have access and control over your assets, just like banks do today.
So today, I’d like to take a step back and elaborate a bit more on why I’m highlighting the value of decentralization.
Why does decentralization matter?
Let me tell you a story of what happened recently in Canada. Yes, Canada, a developed and liberal country.
So what happened?
In a nutshell, at the beginning of this year, Canadian truck drivers started the initial convoy movement to protest against vaccine mandates for crossing the US borders.
It soon evolved into a protest and blockades about Covid 19 mandates in general, forming convoys from several points and provinces in Canada, converging in Ottawa, with a rally at Parliament Hill.
What was the government's reaction?
Well, they invoked the Emergency Act that allows the government to take extraordinary measures in times of national emergency.
In this context, the federal government instructed banks and financial institutions to
freeze up the bank accounts
of protesters and their supporters.
Now, you can agree or disagree with the movement. We all are entitled to our own opinions, but the point here is the overarching power that institutions have over our money.
The reason why the government and then the banks can go ahead with this is that we live in a centralized financial system, where institutions have the power to make decisions over our assets because they have the access to do so.
We are giving up the custody of our money when we use their service.
Now, here is the interesting part…
When the Canadian government went ahead with their order, they went for all assets, including cryptocurrencies.
The Ontario Supreme Court of Justice then ordered Nunchuk, a software provider for a self-custodial Bitcoin wallet, to freeze and disclose information of those who were involved in the Freedom Convoy movement.
Observe the brilliant answer:
And I quote: “We cannot “freeze” our users’ aseets, we cannot “prevent” them from being moved, we do not have knowledge of “existence, nature, value and location” of our users’ assets.
This is by design
”.Savage, right?
Here is the official tweet:
So that’s the key difference that decentralization brings to the table, and that’s why it matters.
The impact is massive.
Key concepts you should understand
Let me take this opportunity to reiterate 2 sets of key concepts as a reminder and takeaway from this kind of lesson:
1. Access vs Ownership
Sharing access to your assets with other people means that they can make use of them if they choose to. Ownership, on the other hand, is when you are the only one that has access to your crypto, no one else.
The main difference here is the Trust factor: if you have ownership of your own crypto funds, then you don’t need to worry about other people’s behavior. However, if you are giving away access, then you will need to trust them.
The whole point of blockchain and decentralization is to eliminate the trust factor
the traditional financial system requires us to put in companies and intermediaries, and ensure the power and sole ownership of your own assets remain with you.
2. Custodial vs Non-Custodial
Most of the time, we simply don’t know that we are sharing our access. A good way to determine this factor is to check if the wallet where you are holding it is Custodial or Non-Custodial.
Custodial means there is a third party that takes “custody” of your assets. By definition, if a wallet is custodial, you are sharing that access with the company that is providing such wallet.
Typically, your public and private keys are being hosted in this company’s server, so if one day they wanted to, or if their network is attacked, then your crypto might be at risk.
If a wallet is Non-Custodial, then it means that you are the only person that has complete ownership of what’s stored there.
By putting you in control of 100% of your crypto, also means that your responsibility is proportionally higher, as you need to ensure you don’t lose your private keys, or don’t save it in places that other people might be able to get to it.
Final Thoughts
Unfortunately, the kind of event that happened in Canada occurs more often than you think.
I personally experienced this in Argentina during 2001 Corralito and Corralon during which banks froze all our money, and then converted 1:1 the USD accounts to Argentinian Pesos, unilaterally, following the government’s order. It was a devastating time in our history, life-long savings were lost, businesses went bankrupt, and people’s lives changed drastically.
And what the Canadian case is showing us is that this is not specific to unstable economies in developing countries, it is starting to happen in what we consider highly stable, liberal, and stable nations as well.
So, while I’m higlighting the value of crypto overall as an alternative, I’ve also called out the fact that not every company that operates in the crypto space is essentially decentralized: some still operate like traditional banks.
I’m not saying it’s inherently a bad thing. How you choose to manage and store your assets is really up to your own preferences.
The point I’m trying to make is that you need to understand the difference here between centralized and decentralized, custodial or not, and the potential risks and consequences, to be able to make a balanced and informed decisions on what is the best for you.
Thanks for making it this far! If you enjoyed it, make sure to like, subscribe and share! And if there is any particular topic you’d like me to cover, leave a comment below!