Information Asymetry — Public Blockchains Sprint To Centralization

LethalExiles
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Information Asymetry — Public Blockchains Sprint To Centralization

Public Data & Network Centralization Continuum The above graphic is one of the most nefarious and subtle risks that faces cryptocurrency and blockchain infrastructure today.

As adoption of a network increases, so does the value of the public data on said network. With an asymetry of how information can be leveraged and acted upon, the incentive to centralize block production becomes incredibly lucrative. Eventually, the pursuit of acting upon this data in a profitable manner leads to an ever increasing amount of centralization in order to derive a maximal amount of profit. As this process continues, the property of decentralization slowly and steadily gets violated. This leads to a tipping point where the collective value of the network decreases, as violation of the fundamental attribute of decentralization ultimately threatens security and censorship resistance.

As it were, 80% of Ethereum’s block production were relayed from Flashbots. Roughly 46.15% of Ethereum block production comes from only two addresses. Broad immediate reactions tend to blame Proof of Stake as the culprit. I would posit that this is actually a result of totally transparent ledgers and public data as what has caused this race to centralization. The commercialization of block production to extract profit from decentralized finance is simply too lucrative to not create this effect of centralization. As a result of this, back up plans are in place to attempt to reduce this block production centralization but this is ultimately a gamable race to the bottom. As long as there is an immense amount of value to be extracted this will be an ever present game between those creating decentralized block production versus those incentivized to crack such efforts.

All of this due the value of public data.

All of this due to the completely transparent public data.

Totally transparent blockchains are a future of ubiquitous surveillance. A decentralized panopticon. A desert with no forest coverage. [Credit] 2

Private data, flat value of available public metadata

In a world of a private-by-default smart contracts (i.e. Secret Network), there is no information asymetry to be programmatically acted upon. With a privacy first network, the value of the network scales with adoption and does not face the counter headwind of centralization that occurs from the commercialization of block production. This is because there is no value to be extracted from block product due to the fact that the metadata is private and can’t be used for things like front-running or liquidation manipulation.

Late game smart contract and blockchain infrastructure must include privacy at layer zero or else we risk a steady trend towards centralization as a result of value extraction. Some protocols will try to commercialize MEV in favor of the protocol, but this ultimately still extracts value from users in favor of a subset of actors (a largely unhealthy outcome).

My fear is that a large subset of L1s will feel they are immune to this problem of centralization from potential data extraction. I would counter that the shrugging off of this risk merely points to the fact that the value of the data has not scaled because adoption has not arrivesd in full force to said L1.

Privacy as an attribute is not optional if you wish to protect the immutable importance of decentralization. Do not confuse current decentralization of a public network as a permanent promise because value extraction (as it becomes viable) will rapidly convert such temporary healthy distributions towards unfavorable and dangerous centralized composition for all involved.

Freedom is transformative. Privacy liberates communities. It gives them agency and sovereignty.

A future of privacy is possible when builders and users unite — and I firmly believe that privacy is the key to unlocking the full value of a decentralized future.

-Carter Woetzel