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Updated: Jul 23, 2023

How can decentralized, digital currencies change the way we go about our economic lives?

Imagine that you had to hire a translator every time you wanted to speak to someone. At home, you would need one to interact with your parents and roommates. Every school, college, and workplace; every hospital, post office, and bank; every store and every household would require ready access to a translator to be able to function.

In such a world, even the most mundane interactions would be costly and cumbersome. Given the scarcity of translators, conversations, meetings, and social gatherings would require planning well in advance to ensure that a professional was available to make dialogue possible. Socializing among a small number of people would be expensive, resulting in forgone fruitful exchanges and potential friendships.

In their position as crucial brokers of social life, translators would have considerable market power. Such power would bring with it many risks. One such risk is the abuse of monopoly—the extraction of rents from customers, leading to still fewer interactions. Another is fraud: you can imagine how an unscrupulous translator might collude with a merchant to fleece an unwitting customer. Yet another risk is that translator mistakes would result in miscommunication, potentially causing offense or economic loss to the parties affected.

The need for translators would also create new opportunities for government control. Repressive regimes could undermine resistance by monitoring and censoring translators and by requiring them to report on private interactions. Authorities could more subtly restrict the freedom of translators by mandating that they hold a government license. The threat of losing that accreditation would be enough to elicit conformity from a great many translators.


You may find the foregoing sketch ridiculous, but it merely extends to all facets of economic and social life an already widespread phenomenon: the need for intermediaries to engage in many day‐​to‐​day activities.

If you wish to find out about today’s weather, you’re likely to ask Alexa or Google. For transportation, you may rely on Uber or Lyft. Perhaps you use PayPal or Venmo for expenses. Sometimes, the intermediary is not a firm but a person—try to buy a house without a real estate agent or to sue for compensation without a lawyer. Both are licensed intermediaries and can command high fees for their services.

Many of our intermediaries are highly efficient. For example, before the advent of search engines, people seeking information had to consult individual sources such as encyclopedias, address books, and other guides. They risked finding outdated, incomplete, or biased information. Search engines such as Google have enabled access to hundreds of thousands of independent references in one place, with search results updated as new information comes online.

Credit card networks and mobile payment apps have made transferring funds a cheaper, faster, and more reliable experience for consumers. Ridesharing platforms have created flexible employment opportunities for drivers and affordable transportation options for passengers. Financial technology firms help borrowers manage their finances and sort through loan options. Social media platforms make interaction with faraway relatives, friends, and like‐​minded people much easier.

But every intermediary is also a potential weak link. Banks and other financial firms spend billions of dollars fighting cyberattacks and other forms of fraud. Ridesharing apps are often accused of setting fees too high. Many people increasingly worry about social media’s role in creating ideological echo chambers and spreading inflammatory false news.

What’s more, every intermediary is vulnerable to government intrusion. Banks, whether they like it or not, must collect copious information from their customers, even though much of it is irrelevant to their business. Social media platforms figured among the private organizations that, some years ago, were revealed to have facilitated global surveillance of private individuals in the name of national security. Today, these platforms face growing demands to police their content more forcefully on behalf of public authorities.


Intermediaries help make modern economic life possible. But some people believe that technology can deliver a world without intermediaries, eliminating risks to individuals while continuing to facilitate productive exchange. The world these people envisage is one of fully decentralized networks: communities that no user controls but that are designed to encourage all users to behave in a constructive way, because it is in their self‐​interest to do so.

Until recently, decentralized networks existed mostly in the minds of their supporters. But in 2008, someone writing under the pseudonym of Satoshi Nakamoto proposed “a peer‐​to‐​peer electronic cash system.” 1 Bitcoin, the network Nakamoto had outlined, went live in January 2009. Embedded in the code of the first batch of Bitcoin transactions was a headline from the lead story in the London Times on January 3, 2009: “Chancellor on Brink of Second Bailout for Banks.” At a time when the global financial system appeared close to collapse, Nakamoto was hinting at the future he was hoping to help build: a future without banks.

Bitcoin is a payment system that no individual can control. Users wishing to transfer funds to other users need only know the recipient’s address. Encryption makes it possible to verify a user’s identity without gaining access to his or her bitcoins. 2 That makes the network both transparent and secure. Transactions are recorded on a shared ledger that any user can update, known as the Bitcoin blockchain. But no central authority puts through transactions. Instead, other users compete to validate transactions in exchange for a fee, including newly created bitcoins. The result is a payment system that works, even though no single person “runs” it. Everybody does.

Bitcoin has existed for 10 years. During that time, the price of a bitcoin has reached vertiginous heights ($17,060 in December 2017) and has seen precipitous drops. It stands at $7,808 at the time of publication. But those who view the Bitcoin price as a measure of the success of the underlying technology are missing the point. Bitcoin was designed as a payment system, not a vehicle for speculation. The token whose price has fluctuated so much in recent years is the means by which Bitcoin creates value for users. But Nakamoto never intended the goal of the network to be the maximization of the bitcoin price.

The birth of Bitcoin has gradually spawned hundreds of other decentralized networks. Reading Nakamoto’s original paper, many realized that his prescriptions could be applied to uses far beyond payments. One such inspired reader was Vitalik Buterin, a Russian‐​Canadian prodigy who in 2014 led in the creation of Ethereum, a platform he has described as “a ‘world computer’: a place where anyone can upload and run programs that are guaranteed to be executed exactly as written on a highly robust … network consisting of thousands of computers around the world.” 3 Upward of 1,800 Ethereum‐​compatible programs have since been launched.


Libertarians favor decentralization for two reasons.

It Can Enable People to Opt Out of the State

It’s well‐​known that libertarians are wary of the power of government. They fear that a state monopoly on violence will inevitably be abused by those with the authority to use it. If such a monopoly is at all to be tolerated, the ability of government to exercise it should have constraints. The U.S. Constitution is one of the more successful historical examples of free societies’ attempt to limit the power of public officials.

In societies lacking the constitutional protections that allow individuals to preserve their freedom, decentralized networks can help people escape the yoke of tyranny. For example, Venezuelans in recent years have increasingly resorted to Bitcoin to avoid both the rapidly depreciating currency issued by their national central bank and the capital controls that trap people’s savings inside Venezuela’s borders. 4

It Promises to Reduce Corporate Power

But the ability to opt out of the state isn’t the only reason fans of freedom are bullish on decentralization. Libertarians worry about government more than about private institutions because of the government’s privileged position. No competing entity exists to check the power of the state and to which dissatisfied citizens can turn for better service. Government’s monopoly status makes it more prone to inefficiency, abuse, and stagnation.

Yet libertarians’ concern with government should not be taken to mean that they are necessarily sanguine about concentrations of power beyond the institutions of government. More than 150 years ago, John Stuart Mill, writing about the perils of the “tyranny of the majority,” warned:

Society can and does execute its own mandates; and if it issues wrong mandates instead of right, or any mandates at all in things with which it ought not to meddle, it practices a social tyranny more formidable than many kinds of political oppression, since, though not usually upheld by such extreme penalties, it leaves fewer means of escape, penetrating much more deeply into the details of life, and enslaving the soul itself. 5

Although Mill’s admonition targeted the “tyranny of the prevailing opinion and feeling” in society, it applies to any situation where people have the ability, and the incentive, to impose their views on others against their will. Corporations—organized groups of people pursuing common aims—may certainly find themselves in a position of temporary power from which to attempt to coerce individuals.

Whether corporations ever have an incentive to abuse this power is debatable. Competition normally provides a strong check on corporate fraud and abuse, since disgruntled customers, suppliers, and workers can readily switch to alternatives. But in certain circumstances, corporations may be able to exploit their large size and counterparties’ imperfect information to the corporations’ advantage. They may attempt to co‐​opt the government against the public interest. Or the government might target large corporations to exploit individuals, knowing that the firms have too much to lose by refusing to acquiesce.

Market economies typically have institutional mechanisms to guard against these various forms of abuse: antitrust laws aim to protect against the harmful use of corporate power; gift and emoluments statutes seek to prevent the bribery of public officials; and constitutional protections, such as the Fourth Amendment to the U.S. Constitution, are meant to shield citizens from unauthorized surveillance. Yet these protections aren’t foolproof, with many people arguing that monopoly, graft, and the closeness of government and corporate leaders remain problems.

By removing the need for a go‐​between, decentralized networks also eliminate the chance that intermediaries might engage, or be forced to engage, in the abuse of individuals. Libertarians thus believe that decentralization can make people freer, more autonomous, and better able to preserve their freedom.


Not only do intermediaries feature prominently in any modern economy, but their role has grown with the internet, which has shifted the focus among many entrepreneurs from increasing production to using output more efficiently. Airbnb, Facebook, Google, PayPal, Uber, and YouTube are but the most valuable firms in an increasingly crowded field.

In light of such evidence, is it sensible to expect the next wave of innovation to render intermediaries redundant, as economic activity gradually moves to decentralized platforms? Some libertarians and many cryptocurrency enthusiasts (two groups that frequently overlap) seem to think so, and they look forward to a disintermediated future. But such a future cannot materialize unless the bulk of the population—who are neither libertarian nor enthusiastic about (when not actively averse to) cryptocurrencies—move to decentralized networks.

There are reasons to believe they will be reluctant to do so. Decentralized networks offer users autonomy and privacy, two qualities that libertarians rate highly. But the average person places greater emphasis on factors such as cost, convenience, and accountability. On all of these counts, decentralized networks currently underperform relative to intermediaries, and they’re unlikely to dramatically improve their performance anytime soon.

Decentralization Is Costly

Proponents of decentralization are fond of pointing out the costs of running economic activity through intermediaries. These costs are both explicit, in the form of fees to cover the intermediaries’ operating and financial expenses, and implicit, such as the risk of failure, manipulation, and abuse. For example, the intermediation costs of financial institutions—commercial banks, asset managers, and insurers—are 1.5 percent of total assets and have remained quite stable over the years. 6

To those must be added the cost of uncertain events, such as credit crunches, solvency crises, and government bailouts. During the last financial crisis, the U.S. government committed $700 billion (5 percent of gross domestic product at the time) to buy mortgage‐​backed securities from banks.

The 2008 crash galvanized supporters of decentralized networks. But removing the intermediary is not cost‐​free. As mentioned earlier, instead of having a central counterparty validating transactions, the users compete to perform this task on networks such as Bitcoin. To win, these users must solve a mathematical problem. They attempt to do so by using copious amounts of computing power. In other words, running a decentralized network is very electricity intensive, at least for the time being. How intensive is it? A 2018 study calculated that Bitcoin’s annual electricity requirements, at 67.2 terawatt‐​hours, equal those of medium‐​sized economies such as Ireland and the Czech Republic. 7

That may seem outrageous. Indeed, it takes two‐​and‐​a‐​half times as much electricity to process a single Bitcoin transaction as it does to process 100,000 transactions on the Visa card network, making the leading decentralized payments system 250,000 times less energy efficient—on a per‐​transaction basis—than the leading intermediated network. 8 On a dollar basis, Bitcoin doesn’t underperform quite so woefully, because the average Bitcoin transaction has a much higher value than the average Visa transaction. 9 In fact, Bitcoin currently processes $1.7 trillion in transaction volume per year to Visa’s $11.2 trillion. 10

Yet Bitcoin currently consumes more than $7 billion worth of electricity each year. If we include the cost of the computer hardware to validate transactions, the annual running costs of this decentralized network are $10 billion to $12 billion. 11 By comparison, Visa’s operating costs for 2018 were $7.8 billion. Thus, dollar for dollar, Bitcoin is not hundreds of thousands of times less efficient than the largest intermediary. But it’s still between 8 and 10 times less efficient—not a great starting place for a challenger.

Decentralization Is Inconvenient

Today, if you wish to operate on a decentralized network—say Bitcoin—you can do so in two ways. The first is the intermediary‐​free way. Start by buying bitcoins from a neighbor whom you can pay in cash, store your private key (which gives access to your bitcoins) in a safe electronic or physical place, and then learn some computer code. You can then begin using the Bitcoin network. Avoiding intermediaries completely is still possible on Bitcoin, but it can be quite a nuisance to the uninitiated.

The second way is to set up an account on a cryptocurrency exchange, such as Coinbase or Kraken, to which you must provide your personal information, including your Social Security number and bank details. This way of holding cryptocurrency is far easier and more secure for the user, but it doesn’t avoid intermediaries. Insisting on the maximum possible disintermediation complicates the prospects for widespread adoption of decentralized technology, since the intermediaries—such as exchanges—facilitate access for retail customers.

Decentralization Is Intolerant of Mistakes and Complicates Accountability

A useful trait of most intermediaries is that they typically have the power (sometimes even the legal obligation) to reverse erroneous and fraudulent transactions. Given imperfect customers with fat fingers and a surprising propensity to fall for obvious scams, the ability to provide redress increases trust in intermediaries.

It’s another reason why those not ideologically predisposed to decentralized technology may prove reluctant to shift their custom to decentralized networks. Correcting mistakes and righting wrongs involve discretion. Intermediaries can use their discretion because they control the network; furthermore, they have an incentive to use such discretion fairly but sparingly, so as to maintain a good reputation in the eyes of customers, who like certainty but are wary of irreversible mistakes.

By contrast, discretion isn’t easy to code into the software protocols that govern decentralized networks. The reason is discretion means doing something that contradicts standard procedure. If you book your plane tickets for the wrong date by mistake, normally you would have to pay for new ones. But if you notice early enough, an intermediary such as eDreams may (as a matter of mercy or of policy) cancel the transaction at no or low cost. Who would you turn to for help if you had instead booked your tickets on a decentralized marketplace?

The main differentiating characteristic of decentralized systems compared with centralized ones is both a strength and a weakness. Policies with respect to all foreseeable future events on the network must be specified in advance, leading to perfect predictability, which increases trust. Yet invariably, the network’s designers—no matter how expert and prescient—will fail to code for some future developments. In those circumstances, decentralized networks will struggle to offer users a satisfactory response, decreasing the users’ willingness to join.


Pointing out the weaknesses of disintermediated platforms is not to suggest that decentralization will fail. To learn where Bitcoin and similar networks will likely play an increasing role, start by asking, where are intermediaries currently doing a comparably lousy job?

International payments are one such area. Typically, a money transfer takes three to five days to arrive in a foreign account. Fees range between 3 percent and 10 percent of the transaction amount. What’s more, the incumbent payment system is regressive because low‐​income immigrants use costly remittances to send money home and because they typically transfer smaller amounts, for which the percentage fees are higher. Bitcoin can easily reduce the cost of international payments, although the slow speed at which transactions are processed and the volatility of the bitcoin price discourage take‐​up.

Other decentralized networks, however, promise to achieve low‐​cost money transfers without the pitfalls of Bitcoin. Ripple, for example, uses the cryptocurrency XRP to avoid the slow and expensive bank transfer system, which requires the sender’s money to go from his or her bank to a correspondent bank; from there to the central bank of the sender’s country; from that central bank to the central bank of the recipient’s country; and from there to the local correspondent bank, before finally landing in the recipient’s bank account. That amounts to five discrete transactions! Instead, Ripple converts the sender’s (say) U.S. dollar funds into XRPs, processes the transfer on the XRP blockchain, and then converts the XRPs into (say) Philippine pesos for the recipient. Ripple bears all the exchange rate risk, for which it charges users a fee. Still, the company claims to be able to lower the cost of international payments by up to 60 percent. 12

Decentralized networks will also put pressure on poorly performing governments. As regulators, legislators, and adjudicators with near‐​monopoly powers, governments determine whether economic activity flourishes or perishes within their jurisdiction. Many countries in Africa and Latin America—whether through corruption, neglect, or path dependency—have struggled to grow. But decentralized networks could put an end to this poverty trap.

Consider property titles. In developing countries, people often have difficulty proving ownership of the land they’ve lived on and worked for decades. Official property registries are inefficient and corrupt. Yet proof of title is often essential to obtain affordable credit, for which the land acts as loan collateral. Hernando de Soto has championed the formalization of property rights as a development tool and thinks blockchains are a cheap, reliable, and tamperproof means of record keeping. 13

Companies are testing the use of decentralized ledgers like the Bitcoin blockchain for their own internal processes: technology giant IBM, shipping behemoth Maersk, and e‑commerce leader Amazon are some examples. As already mentioned, decentralized networks can be weapons against monetary mismanagement and tyranny, from Venezuela to China. Wherever intermediaries—whether governments or firms—are failing, decentralized networks will challenge them, forcing the intermediaries to improve or face extinction.


Decentralized networks have shortcomings. All new technologies do, including those—such as the internal‐​combustion engine and the internet—that end up proving revolutionary. The high cost, inconvenience, and inflexibility of decentralized systems are important weaknesses, but ones that can be easily overcome with intermediation.

For example, a promising avenue to reduce Bitcoin’s per‐​transaction electricity use is to have intermediaries—banks, credit card networks, even large merchants such as Amazon—process transactions on their own books during the trading day and settle the net amount on the Bitcoin blockchain at the end of the day. That approach would remove billions of individual transactions, some of which would offset each other, from Bitcoin’s decentralized system, thereby dramatically reducing its computing power requirements. It would make Bitcoin useful even to people wishing to transfer small amounts.

Of course, this model would involve some intermediation and carrying risk on an intermediary’s account for a period, which would create a point of failure and require users to pay the intermediary a fee. But users would gain in the form of much lower costs, greater convenience, and the opportunity to reverse transactions in exceptional circumstances. All of those improvements would make dealing with decentralized networks more attractive to the typical retail customer. Those libertarians and crypto enthusiasts who value autonomy and privacy above all else would still be able to avoid intermediaries as much as possible, but they would have to sacrifice affordability, speed, convenience, and accountability to enjoy more of the other two values.

Decentralized networks in their present incarnation are often likened to the internet in the early 1990s. At that time, the internet’s staunchest proponents envisaged a future of peer‐​to‐​peer interaction, with a great deal of personal freedom and minimal government interference. The 1996 “Declaration of the Independence of Cyberspace” succinctly captured this vision:

We are creating a world that all may enter without privilege or prejudice accorded by race, economic power, military force, or station of birth.

We are creating a world where anyone, anywhere may express his or her beliefs, no matter how singular, without fear of being coerced into silence or conformity.

Your [governments of the world] legal concepts of property, expression, identity, movement, and context do not apply to us. They are all based on matter, and there is no matter here. 14

A quarter century later, the internet is dominated by large information, social media, and retail platforms. It’s quite a different place from the one the early cyberspace pioneers imagined, with a greater commercial focus, corporate presence, and government meddling than many of them would have liked. Yet today’s internet has also made productive exchange—whether economic or social—more accessible, affordable, diverse, and pleasant than it was before the advent of the technology. To the average person, those achievements may well be worth the downsides.

Libertarians are right to welcome decentralized technology in their quest to increase and protect individual autonomy. But those who believe that decentralization will enable societies to supersede the threat of government overreach and other concentrations of power must not let their guard down. A decentralized world is one in which intermediaries will continue to play a large role. That means the fight for individual liberty will continue even as technology expands the opportunities for peer‐​to‐​peer relationships.


1. Satoshi Nakamoto, “Bitcoin: A Peer‐​to‐​Peer Electronic Cash System,” white paper, 2008.
2. The emerging convention seems to be to capitalize Bitcoin when referring to the network and to use small caps for individual tokens (bitcoins).
3. Vitalik Buterin, “What Is Ethereum?” Coin Center, Washington, March 9, 2016.
4. “Why Are Venezuelans Mining So Much Bitcoin?” The Economist, April 3, 2018.
5. John Stuart Mill, On Liberty (London: Penguin, 1974), p. 63.
6. Thomas Philippon, “Has the U.S. Finance Industry Become Less Efficient? On the Theory and Measurement of Financial Intermediation,” American Economic Review 105, no. 4 (2015): 1412.
7. Alex de Vries, “Bitcoin’s Growing Energy Problem,” Joule 2, no. 5 (2018): 801–5.
8. Recent data on Bitcoin’s electricity needs are available from Digiconomist.
9. The average transaction on the Bitcoin network (as of January 2019) is about $10,000. On the Visa network, it is $90.
10. Data on Bitcoin volume are from CoinMarketCap. For Visa, see the company’s 2018 annual report.
11. Diego Zuluaga, “Why Bitcoin Is Not an Environmental Catastrophe,” Alt‑M (blog), September 4, 2018.
12. Monica Long, “Ripple and XRP Can Cut Banks’ Global Settlement Costs Up to 60 Percent,” Ripple Insights, February 23, 2016.
13. Phil Gramm and Hernando de Soto, “How Blockchain Can End Poverty,” Wall Street Journal, January 25, 2018.
14. John Perry Barlow, “A Declaration of the Independence of Cyberspace,” February 8, 1996.

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