Regulated institutions are looking for suitable blockchain networks for their business. They will have requirements that are in line with regulations and their needs. Projects generously subsidized by VC funds try to satisfy this demand. New blockchains are emerging that scale well at the expense of decentralization. Some projects are even deliberately made in such a way that it is possible to freeze user accounts. Projects like Cardano may be lone fighters for decentralization that will be out of sight of the mainstream.
Some Original Visions Belong To The Past
One of the first ideas was that people would start using Bitcoin for payments. By ceasing to use fiat currencies, they will force institutions to use Bitcoin. Based on the observation of people's behavior in the last 15 years, we can state that this is unlikely to happen.
We have the long-awaited Bitcoin ETF approved. We can all use Bitcoin. Most cryptocurrencies are on centralized exchanges. Interest in the Lightning Network needs to grow. People don't use this network much yet. Institutions do not plan to use Bitcoin as a financial infrastructure. They only plan to buy and sell cryptocurrencies as they do with other investment assets.
BlackRock CEO Larry Flink sees value in Ethereum ETFs and a future in tokenization of everything.
New blockchain projects are emerging that are backed by VC funds. These projects are deliberately designed to suit financial institutions as much as possible. Teams do not look at the requirements of future users if we happen to be interested in the principles of decentralization.
The reality is that today's financial institutions are regulated, which is reflected in the infrastructure they use. If institutions are required by law to have KYC and AML mechanisms, their infrastructure must support them. This may include the ability to report suspicious transactions, block transactions, blacklist, or freeze accounts.
It is sad to see many influencers marketing these new VC-backed blockchains with bribes in their pockets and seeing compatibility with institutional requirements as an advantage. They do not know the principles of decentralization, or they ignore them.
It is important to observe the reasons for the creation of many new projects and what is the main motivation of the teams. Often, the main goal is not to deliver a decentralized project that preserves the benefits of decentralization for users. The goal of the teams is to deliver a blockchain that institutions will use for the migration of financial services.
The CEO of BlackRock thinks that Bitcoin is not a currency but only an investment asset. If he's talking about tokenizing everything, it's very likely going to happen. Every project would like to be the chosen one on which all the assets of the world will be.
Let's not talk about what project it will be. Many projects will probably succeed. Rather, let's be interested in what features these projects will have for end users in the context of decentralization.
A Suitable Blockchain For Institutions Does Not Yet Exist
Perhaps this opinion will surprise you, but a suitable blockchain for tokenization that meets the requirements of institutions and regulators does not yet exist. I do not believe that tokenization will take place on the blockchain, which has all transactions publicly available.
It is in the interest of users that their assets and financial transactions remain private. Migrating from current financial services to public blockchains is not a good idea.
The key technology of the next decade will be zero-knowledge cryptography. ZK cryptography can be used for privacy and to increase scalability. We will see new chains, whether L1 or L2, that will meet the needs of users and regulated institutions.
The Midnight project, which will be a partner chain of Cardano, fits into this concept.
At the moment there is little information about Midnight, so I can't say if it will be possible to write such an application that will be able to freeze user accounts. But to be honest, I expect Midnight to allow it, as it is supposed to be regulation-friendly. This applies not only to the requirement to safeguard sensitive commercial and personal data but also to KYC & AML.
Partner chain Midnight is not the only project that will be usable for the tokenization of everything. Teams are working on many ZK rollups. Solana even allows you to send confidential transactions.
Finance Of The Future Will Be On The Blockchains
I am sure that the traditional financial sector will undergo disruption. There will be a migration of services to blockchain networks.
Blockchain technologies are maturing. Obstacles that hindered adoption in the past, especially low scalability and lack of privacy, will be overcome in the foreseeable future.
The ETF opened an important gate in terms of legitimizing cryptocurrencies. Many states are finalizing the regulatory framework for cryptocurrencies.
I am afraid that decentralization will fall behind in the race for adoption. A fundamental feature of this sector will be overlooked. Greed wins over Satoshi's original visions.
Big investors will tend to pour money into projects that have the potential to become part of the new financial backbone of the world. Retail is already following this trend and essentially copying the behavior of large investors.
Cryptocurrency payment is, and I expect it will remain, a fringe issue for a few enthusiasts. Interest in cryptocurrencies will be driven mainly by investment motives. The dominant currency on the blockchain (and L2s) will be stablecoins, not native coins with high volatility.
It is even possible that in some countries CBDCs will exist on a permissioned blockchain with L2 network support.
What About Decentralization?
I am afraid that chains like Cardano will not be in the mainstream despite efforts for high decentralization, on-chain governance, and functionalities such as native assets.
If a top 10 ranking by decentralization were to be compiled, Cardano would certainly be on the front lines with an aspiration to win. However, decentralization will most likely not be the feature that will influence market capitalization, as it is not a feature that regulated companies are interested in.
You may think that this is a very pessimistic scenario for Cardano. It is important to note that Cardano is not only a core protocol but an ecosystem. Midnight is a partner chain and belongs to the ecosystem. Midnight's potential success may be at least partially a success for Cardano as well.
I believe Cardano has a lot to offer besides decentralization. First of all, it is a huge and experienced team that is and will continue to be a leader in innovation and the use of formal methods in the development of Cardano. Security, reliability, and sustainability are features that are essential for the future financial system.
Many newer project teams are trying to be fast to market at the cost of lower quality. Many of these projects may succeed in the hype but fail in the long run.
Native assets features may not be suitable for regulated institutions as they do not allow account freezing. However, many people love this. Can native assets be used to tokenize shares or bonds, for example? I can't answer that, but the institutions will look for other solutions. It is difficult to say whether it will be possible to get financial assets to Cardano via bridges and whether the authorities will want to prevent this due to a lack of control. Anyway, Cardano will continue to exist and anyone can use it.
What I would like to see on the first layer is higher privacy. But that would be for another article.
Cardano will be in the hands of the community, which will determine the priorities and direction of development. The community will start deciding on important details that will affect the decentralization of the protocol and the functioning of the Plutus platform. The absence of USDC and USDT on Cardano is just one of many topics on which community members have differing opinions.
If it is true that the future of finance is blockchain, then it is also true that teams and their ability to innovate are also an important part. It is unlikely that Cardano will not be part of the future financial infrastructure, as the IOG team is capable of delivering anything that the community will perceive as important for adoption. The ability to quickly and efficiently adapt to requirements is a big advantage.
It may take 5 to 10 years for tokenization of everything to begin. There is still plenty of time for Cardano to scale better, have more privacy features, and most importantly, for the community to think about what the future financial world should look like.
Decentralization will face hard times. It can be difficult for its proponents to promote it and highlight its benefits. However, it is also difficult to predict the future. It may turn out that less decentralized blockchains have problems that better-decentralized ones do not. There will be debates not only about how many block producers a given network has but mainly about which entities own the network and who decides on the future roadmap. Cardano should go at its own pace along its path of decentralization and staying true to Satoshi's visions.