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Understanding the Dangers of Centralization and Inflation Maths
Level 1 - NGMI
Welcome Avatar! In light of many recent items: 1) $160M USDT freezing, 2) wrapped product risk and 3) the crypto dot com withdrawl freeze, we thought it would make sense to review what centralization is and what risk you’re taking. In the end, if you don’t own your keys you don’t own your coins. Also. Many don’t realize when you wrap or swap your coins you may *not* have control of them just because they are on your hardware or paper device.
Part 1 - Centralization Benefits
Centralization: Before starting, there *is* value in centralization in certain cases. If you have a centralized location for something and an individual runs it, this can weed out people you don’t want. Think of a private house party where you definitely don’t want a bunch of $30K millionaires showing up. Or. You can think of Amazon. Since they have massive warehouses they have a central location to process everything and send it out. Expanding… Amazon Web Services allows for much faster scaling and the downside is that you’re left with really 3 choices: AWS, Google Cloud, iCloud and Microsoft Azure (we’re sure there are others but that’s pretty much the main stuff if you look at market research).
In Short: Centralization just means one spot. An individual/entity (central) can move faster since all decisions are made by one entity. The downside is of course also huge. It means that the entity can shut down, block and remove anyone it would like. We’ve already seen this with social media platforms removing certain people for “various reasons”.
Smaller number of people deciding allows you to move much faster.
Part 2 - Centralization Dangers With Money
Generally, people get confused when they hear centralized vs. decentralized, especially when it comes to explaining crypto to newbies. Luckily that is why you’re here! In a sentence: Centralized means someone else can: 1) freeze your account, 2) choose to kick you off or 3) prevent you from joining in the first place.
Now for most industries this doesn’t matter too much. If you get kicked off of Uber you can go and use a taxi. If you get kicked off of Lyft you can go use Uber. And… as an industry becomes more centralized the more of a monopoly it becomes.
Take for example the same ride share economy. In a world where there is *only* one application (say Uber), if you get banned it actually has large negative impacts to your life (assume zero alternatives, no taxis). It means that you can be removed from the entire system.
Ah Yes Banks: As the industry has consolidated over the years and more and more small firms get gobbled up by large ones… the same phenomenon is occurring. Assume a future with only a few number of banks. This means that you are now trusting all of your *MONEY* with a *centralized* authority who can ban you in seconds.
This means, you probably want some of your assets in something that *can’t* be locked up. Such as physical cash or of course, computer coins.
The Problem: A lot of the items people use today are actually centralized or backed by a centralized institution. If you use Coinbase, Kraken, Gemini or any crypto exchange, the same problem exists… you’re giving your money to a *digital* bank. It is no different. They can decide to reduce the amount you can take out (Binance) or they can block everything in a single click (Crypto dot com issue on Monday)
The *Bigger Problem*: As we saw with the UST lock up, certain crypto assets are actually centralized. Please read that carefully for newbies. If you own a crypto asset it might actually be centralized despite having it stored in your 0x address.
Take for example wrapped BTC/ETH. Wrapped BTC/ETH is actually a BitGo project as you can see here. This means that WBTC is actually riskier vs. holding BTC.
Conclusion for Newbies: If you own any “crypto currency” check to see if it is centralized and how it is run. If you acquire Wrapped ETH or Wrapped BTC and are worried about potentially losing it, you should immediately go to standard BTC/ETH. This reduces your risk.
As usual, we’re further out on the risk spectrum (along with many of you) and believe that you will end up using some stables/wrapped products. However. If you’re dealing with large amounts of wrapped or stable tokens, you should de-risk.
In terms of deciding how much risk you’d take just measure your emotions. If you lost all your stables and wrapped BTC would you care? Would it be simply a bad day and “move on” or would you be on the floor clutching your knees drinking whiskey as you rock back and forth. If it’s the latter… remember that you were alerted of this risk!
For Those Unfamiliar with a Wrapped BTC Check this article from Coinmarketcap as it’s an easy newbie explainer (image below from same article).
Part 3 - Inflation
We have no problem doing a short update on this. In January, numbers will likely begin to look a *tad* better. IE. month-over-month will begin to look better. Since Y/Y is going to compare to 2021 it will still be mid single digits. Y/Y will begin to look better around April 2022.
The reason for the near-term slowdown in inflation? The velocity of money. We are not health experts and know absolutely nothing about the latest COVID-19 breakout except that cases rose a ton and *appears* to be non-lethal according to the numbers.
The decisions around COVID actually don’t matter as much. Humans are driven by emotion and fear is a big one. In fact, fear of loss sells better than creation of happiness (IE. emotional impact of losing money is worse to the emotional high of making the same amount of money).
Therefore? Look around the major cities, they are basically dead. If you want to book airline flights we suggest doing them now since they are also seeing a massive numbers of cancellations (free consumer alfa).
Result of All This: As people wake up to inflation being 7%+, it means that they lose nearly a month of their entire working year. Keeping it simple, even if you think that inflation is only 8.33% it means that you lost one full month of production, so *your after tax* income needed to rise by more than 8.33% to live the exact same life in 2022 as you did last year. Insanity.
If you look at the math, rent moratorium, free money etc. The chances are that the only people who really made out like bandits = scammers. The number of incorrect distributions was likely sky high.
“Year-over-Year Comps”: This is a standard Wall Street saying. If you look at the inflation data for the first half of 2021 it wasn’t bad and the second half was ugly. Since there is *no way* that we can see them creating deflation (prices go down) at earliest they can really slow it down by April of 2022.
Look at Half 1 vs. Half 2 and we know that the numbers will slow down in April at earliest due to 1) changing the data and 2) April being the first significant month in 2021 - when April 2022 comes out it will be compared to a month that was up 4.2% not 1.4% like January.
Conclusion: If we look at the numbers, m/m should begin to look a bit better since people can’t spend as much (too scared/sick/staying at home). Y/Y is easier to mess around with in April and after changing the CPI reporting it will be even easier! In the end it’s up to you to decide what the real numbers are. Best of luck… anon.
Disclaimer: None of this is to be deemed legal or financial advice of any kind. These are opinions written by an anonymous group of Ex-Wall Street Tech Bankers who moved into affiliate marketing and e-commerce.
Daily Reminder: You ARE EARLY. Too much negativity/cope. Everyone reading this is extremely early. If you stay on top of technology, there is always a new opportunity