Mass Adoption will Eventually Turn Crypto into the Old Hat Economy

Here’s How Crypto will suffer as a result of widespread adoption

For years, mass adoption has been portrayed as the ultimate goal of cryptocurrency. We're supposed to imagine a world where we can use stablecoins to pay for our morning coffee and put mortgages on-chain to be used as collateral in decentralized finance (DeFi). Prices would almost certainly reach all-time highs in a world where crypto has become mainstream, but at what cost? To realize this future, concessions would inevitably be made to meet consumer expectations. Though the proliferation of online banking may appear to have paved the way for a smooth transition to DeFi, traditional finance (TradFi) customers are accustomed to a level of inherent security that DeFi does not provide. In contrast to traditional finance, where charges can be declared fraudulent and bad actors are barred from listing exchange-traded funds, there is no centralized crypto to file a complaint with or review initial coin offerings. Though this may appear intimidating, it is precisely what distinguishes the space; users are given complete, sovereign control over their finances, and teams are free to build products without restriction.

To make the switch from TradFi, the average consumer would expect to be protected from hacks and exploits and to be offered chargeback protection. The measures required to meet consumer expectations would stymie future innovation and severely undermine one of DeFi's core principles, immutability, and decentralization. Though plans to create opt-in reversible transactions to mitigate the damage of future hacks and exploits are already in the works, consumer pressure would almost certainly spark a top-down approach, which would almost certainly be implemented with far less finesse and care for the industry than current prospects. With increased consumer pressure, regulators will take the lead in determining crypto's future, ensuring that on-chain activity meets their compliance and Know Your Customer standards. These changes would have a disproportionate impact on smaller teams, as large companies would be able to hire new compliance teams or simply pay their way through the fines.

But cryptocurrency is what it is today thanks to small teams; Ethereum was founded by a group of eight people. Smaller teams can innovate and make decisions much faster than larger organizations, which may be hampered by bureaucracy or multiple stakeholders. Mass regulation would stifle the very innovation that DeFi is known for by raising the barrier to entry for smaller teams, effectively putting an end to permissionless operations. The recent sanctions against Tornado Cash demonstrate how quickly regulation can change the industry. Following the sanctions, remote procedure calls, relayors, and apps all moved quickly to comply understandably so, because developers cannot be expected to face jail time for upholding crypto's principles. This case demonstrates how regulators can stymie even the most immutable and decentralized projects. If we follow the precedent established in this example, it appears that crypto cannot scale to mass adoption without losing its core principles. While one of the primary selling points of cryptocurrency is the censorship-resistant, permissionless, and decentralized values that pervade the industry, mass adoption would undoubtedly impede, if not completely halt, such principles. As companies face the reality of regulation, we can expect consolidations and concessions. Soon, DeFi would resemble the TradFi industry from which users and developers were attempting to flee.

This does not have to be the case.

One of the main reasons regulators are interested in pursuing cryptocurrency is that it has been marketed to the average consumer. If the damage from Anchor and Celsius had been limited to smaller groups of informed users who understood the risks, the fallout would have been far less severe. As a result, concentrating on improving crypto UX without first constructing antifragile systems is a recipe for disaster. If the user interface is simple enough, many people will ignore the underlying mechanics and assume they are safe. On the other hand, if crypto was designed for a user base that prioritized its principles, it wouldn't need to meet the expectations of the average consumer (reversibility, rollbacks, etc.). Crypto can be the future of finance or permissionless, decentralized, and censorship-resistant, but not both. While mass adoption has been assumed to be the end goal, perhaps we should be planning for a future that preserves crypto's core principles for those who want them, while accepting that this may come at the expense of mass adoption.