The Future of Crypto Payments Will Be Centralized

Custodial wallets will be the lynchpin of retail crypto payments, says the co-founder of Flexa. This post is part of CoinDesk's Payments Week.

AccessTimeIconApr 26, 2022 at 8:06 p.m. UTC
Updated Sep 19, 2023 at 4:03 p.m. UTC
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Initially conceived as peer-to-peer (P2P) electronic cash, cryptocurrencies have ideal features for retail payments. These permissionless networks enable independent verification of assets and unparalleled settlement assurance.

Since validating transactions is the primary cost in generating $1.9 trillion of revenue within the global payments market, blockchains will inevitably become mainstream technologies. But how this incredible utility manifests in the real world (e.g., buying clothes and groceries) will likely echo the adoption of the internet itself, and this means many centralized components.

The crypto decentralization meme

There are varying degrees of centralization in all cryptocurrency protocols themselves. In general, tribal arguments center around various interpretations of the Nakamoto coefficient, token distributions and external centralized dependencies. For instance, hardware/software requirements often severely limit average users from participating in network consensus, resulting in centralized mining.

Tyler Spalding is a co-founder at Flexa, a blockchain payments company based in New York City. This piece is part of CoinDesk's Payments Week.

From an ownership perspective, many projects have tokens concentrated with insiders and private buyers. Even Satoshi Nakamoto, the inventor of the Bitcoin protocol, still controls up to one million bitcoins, methodically mined for 12 months to a myriad of addresses. Custodial services have been a critical driver of mainstream adoption, with Coinbase alone now holding customer assets worth 11% of the entire crypto market.

Considering crypto assets owned by hedge funds, venture capital, corporates, governments and traders, it’s not surprising that more than half of all bitcoin is estimated to be maintained by virtual asset service providers (VASPs). Even custodial services hold at least 61% of staked ether for the upcoming Eth 2 merge.

Potential protocol centralization aside, it’s generally impossible to interact with blockchain assets without centralized services. Critics often lament the Ethereum ecosystem’s dependance on Infura, but that only scratches the surface when considering your web browser, operating system, hardware wallet and even your internet service provider are all typically trusted participants in a cryptocurrency transaction. Users typically trust website and Transport Layer Security (TLS) certificates (BGP spoofing was recently used to steal crypto) for Web 3 interactions, and rarely inspect open-source wallet downloads.

“Not your keys, not your coins.” But did you thoroughly audit and appreciate the entirety of the centralized software stack that created the keys for you? At least we can all appreciate the complexity of each of these services coming together without a central authority, just like making pencils.

Centralized finance Lego bricks

Marc Andreessen famously stated the “original sin of the internet” was in missing the opportunity to support native web payments. Despite Netscape’s intent to build integrated payments, the initiative failed due to banks’ lack of support/interest; they believed it wasn’t worth the investment. Almost 30 years later, enabling mainstream crypto payments at scale requires various (centralized) integration points.

At a minimum, networks or payment service providers offering merchants crypto acceptance will need to execute service level agreements and obtain relevant money transmitter licenses for each jurisdiction in which they operate. Even reasonably decentralized routing methods like the Lightning Network will necessarily require licensure for nodes; it is trivial for legislation to prohibit accepting these types of payments otherwise.

Additionally, crypto payments will need to be compatible with $10 billion of installed point-of-sale hardware, online platforms (Shopify, Magento, etc.) and even mobile app ecosystems (iOS and Android). The crypto revolution will be constructed with many, many centralized-finance bricks.

Custodial wallets and crypto payments

Beyond the idealism and technology, people inevitably use products that make their lives easier. People are predominantly going to use custodial wallets for retail payments. These products are safer, cheaper and more straightforward for an average person. People don’t care how payments work; they just want them to work. And they certainly are not comfortable with the possibility of permanently losing assets by forgetting a password or misplacing a seed phrase.

This is why universal, widespread self-hosted wallet usage is extremely unlikely. When it comes to taking considerable time to learn, appreciate and practice meaningful operational security, the larger population is the human incarnation of Gudetama. Keep in mind that the most commonly used internet password is still 123456.

The elegance of crypto is that despite requiring layers of centralized interfaces and integrations for real-world use, it still offers a genuine freedom of choice. Users can opt in to the virtues of self custody and decentralized P2P payments just like physical cash, without sacrificing mainstream utility. To this end, open-source networks are still incredibly valuable, even if centralized features are needed to interact with them.

The hard reality is that we’ve never had truly full-stack decentralized payments in the first place. In the future, the significant majority of crypto payments will involve custodial products and multiple centralized components. However, using crypto in its many flavors will minimize payment costs, increase optionality and provide more equitable economic access around the world. The more freedom of choice individuals have, the more inclusive money becomes.

More from Payments Week:

Blockchains offer unique advantages, but these must be combined with a user experience that feels similar to the one consumers know today, writes Senior Vice President Jose Fernandez da Ponte.

Financial censorship has gone from an abstract idea to a harsh reality for Russians who suddenly found themselves unbanked by the West and their own government.

Down The Silk Road: Where Crypto Has Always Been Used for Payments.


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Tyler  Spalding

Tyler Spalding is a Co-Founder at Flexa, a blockchain payments company based in New York City.

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