Why Decentralization is the Key to Safer Finance
Centralized systems demand trust in one entity, while decentralized systems spread trust among many.
The flames from the FTX meltdown were just beginning to cool when the ensuing chaos hit: the collapse of Silicon Valley Bank (SVB) and Signature Bank, two of the largest lenders to tech and crypto startups, respectively.
The United States and the United Kingdom are taking steps to protect affected depositors, but this latest crisis once again proves that we cannot trust centralized systems. The only way to achieve a safer financial ecosystem is through further decentralization.
Why does centralization create risk?
While centralization does offer some benefits — like efficiency and enforced protections against fraud and losses — it also creates single points of failure within systems, making them far more vulnerable to mishaps and mischief.
Take hacking, for instance. In centralized institutions, malicious actors only need to compromise the places that concentrate power. Since there are no concentrations of power in truly decentralized systems, their task is that much harder.
However, despite its name, DeFi is still flooded with projects that are only partially decentralized. It’s important to note here that any point of ongoing centralization offers a potential inroad for bad actors. Indeed, according to a report from blockchain security firm CertiK, decentralized protocols experienced a small fraction of the enormous losses suffered by their centralized counterparts last year.
Absolute Power = Absolute Corruption
Centralized systems, particularly in the financial world, are also far more at risk from human error and acts of malicious intent than their decentralized counterparts.
Decision-making authority rests in the hands of a select group of executives. This governance system is flawed from a management perspective, leading to bottlenecks and inefficiencies. Users must trust those at the top to wield that power responsibly. The collapse of FTX demonstrated that this trust is often misplaced.
These executives make decisions behind closed doors about critical issues– such as the allocation of user assets— with limited community input and few or no reporting requirements. And these decision-makers often face little accountability and often escape the consequences.
This decision-making process catalyzed some of the worst financial crises in crypto and beyond over the last few months.
Whether they resulted from a lack of foresight – as in the case of SVB – or reckless indifference to users' needs – as with FTX, these leaders' decisions had severe consequences for investors.
How does decentralization address these risks?
Decentralization may not be a panacea for all the financial world's ills. Still, it can prevent – or even eliminate – the issues that caused the downfall of FTX, SVB, and Signature Bank, among others.
Decentralized systems distribute power, risk, and data across a network of users. Instead of opaque processes that happen behind closed doors, decisions about questions that affect users in a decentralized community are made collectively.
They are also fully transparent and open source, which means that decentralized systems make decisions transparently, and the code that powers them is available for all to see. These systems provide their users with the knowledge to understand how a platform works: and therefore, each can make informed choices about how they interact with it.
Finally, fully decentralized systems are non-custodial. User assets are never squirreled away in a centralized account; thus, only users can grant investment permissions.
Taho is Truly Decentralized from the Ground Up
This promise of exceptional security is why Taho embraces decentralization at every level of its organizational and technical architecture.
Taho’s browser extension wallet will be entirely user-owned and operated in its final form. Taho’s code is protected under a GPLv3 license, so Taho is – and will remain – entirely open-source.
Since day one, Community has been at the heart of everything we do. Your voice is critical in developing the future of this project.
So join in: tell us what you’d like to see by dropping a message in the Taho Discord or leaving a comment on our public roadmap.