Is centralization inevitable when making DeFi available to the masses?

In recent years, I have delved into the domains of DeFi (decentralized finance), Web3, blockchain, and cryptocurrencies, building a solid understanding (although far from being an expert) of their underlying concepts and technologies. Nonetheless, I continue to grapple with the business and economic aspects surrounding these innovations. Surprisingly, there are very few articles focusing on the economics of DeFi and blockchain businesses and this in sheer contrast to the enormous amount of content focusing on the technology and the innovative and disruptive nature of this technology.

As an engineer, I find the technology behind permissionless decentralized blockchains and smart contracts immensely captivating. However, as a business and functional analyst, I struggle to discern the business dynamics: the viability of the business case, the definition of customer support models and the customer journeys both in happy and unhappy flows. Unfortunately, these critical aspects seem to receive inadequate attention within the Blockchain and DeFi community.

In the end these questions do not come from the underlying blockchain technology, but rather from the discussion between decentralized and centralized finance. The core distinctive feature of Web3 is also the decentralization of business models.
The central question, persistently unanswered in discussions on DeFi and Blockchain, revolves around the viability of decentralized models within our current capitalist framework, which heavily relies on centralized entities that generate profit by offering services while assuming responsibility, risk, and accountability.

Several instances exemplify this tension between decentralization and centralization within the crypto space:

• Bitcoin: originally intended as a fully decentralized creation governed by the masses, Bitcoin has succumbed to the dominance of a few centralized players (crypto-miners and exchanges), which are so dominant that they can also influence the future of Bitcoin.

• Ethereum: the shift from "Proof of Work" to "Proof of Stake" reduces costs and ecological impact but raises concerns of increased centralization.

• NFTs: initially a purely virtual concept, NFTs have evolved to include extra services and perks outside the blockchain. Organizing these physical world benefits necessitates involvement from centralized companies, eroding the decentralization aspect.

• Stable Coins: while offering a lot of potential for mainstream adoption and direct payments, stable coins introduce a level of centralization, as they require an underlying issuer to maintain reserves in fiat currency, ensuring the stability of the coin.

• Crypto-Exchanges: these platforms create significant centralization by providing centralized management, facilitating fiat-to-crypto conversions (via off- and on-ramping), and offering virtual wallets for private key storage.

• Open-Source Projects: even projects with open-source code often rely on a single company or a handful of entities for development. These companies are often rewarded through Initial Coin Offerings (ICOs), but those introduce clearly also a strong conflict of interest (and centralization).

Currently, the crypto community remains relatively closed and niche, comprising individuals with technical expertise and an anti-establishment mindset. However, as crypto becomes more mainstream, attracting larger financial institutions and less tech-savvy users, the gravitational pull toward centralization intensifies. This shift is driven by various factors, including

• Regulators need to have a party to talk to and regulators will impose more and more restrictions (e.g. on KYC or AML) when crypto become more mainstream (cfr. MiCA directive in EU)

• Lobbying requires a central authority

• Users (especially companies) want to have a juridical agreementwith a party, so they can take legal action in case of issues

• Users want to be able to call someone in case of questions/support

• Users need much better and more user-friendly interfaces, which require much more design and coding (which needs again to be organized, most likely by a central entity)

• Marketing is needed to convince users to use the new platform (e.g. take away fear about security & fraud issues)

In the end centralization allows more simplicity, especially for users with little technical knowledge.
And if centralization is ultimately inevitable, for reasons which are non technical, the question can be raised if blockchain is then still the best technological choice (and not a centralized database with certain encryption and non-permutation capabilities on top of it).
Some people argue that blockchain can form an alternative ecosystem alongside traditional systems, as innovating within the existing payment ecosystem is too challenging due to dependencies and technical constraints. While a valid argument, it seems somewhat contrived, as a more efficient and modern alternative ecosystem could also be built using centralized technologies with added encryption and non-permutation capabilities.

Blockchain technology is still searching for widespread product market fit. In developed countries, cryptocurrencies serving as investment assets, represent the only use case with substantial market adoption. Other use cases, often leveraging blockchain in traditional platforms, tend to be less user-friendly and fail to provide significant added value for the average user. Blockchain enthusiasts argue that security, privacy, and decentralization provide sufficient value in themselves, but these qualities are challenging to grasp and quantify for most users.
In emerging countries, the situation may be more promising due to the lack of banking infrastructure, a substantial unbanked population, untrustworthy governments, high inflation rates and high transaction costs.

As the crypto world evolves and attracts substantial investment from business experts, it is essential to acknowledge potential blind spots and engage in discussions that move beyond the ideological (almost religious) debate of centralized vs. decentralized. Instead, the focus should be on how mainstream users can derive value from DeFi and Web3 and how these models can be organized to address unhappy scenarios (e.g. a user having a question or something goes wrong). By addressing these concerns and striking a balance between decentralization and centralization, the crypto community can pave the way for broader adoption and integration within the traditional financial system.