The Power of Decentralization

   Let’s travel back in time to the early 1980s. For the first time, Bag had his own place, a 600-square-foot studio apartment within walking distance of work and the local pool hall. With money tough to come by in those days, Bag didn’t even bother furnishing the place. He slept in a sleeping bag on the floor. For entertainment, he had a library card and a 13” black & white perched atop a couple of upside-down milk crates. The most expensive thing he owned at the time, besides a pool cue, was a microwave oven. At the time, microwaves were still reasonably new technology, and thus somewhat expensive. Not only that, they were big and heavy AF.  Being a small studio apartment, counter space was at a premium, and the microwave took up almost all of it.

   Fortunately, there was a tiny bit of counter space still available in the corner underneath a cabinet, which figured to be ideal for a coffeemaker. Even then, Bag was a slave to his addictions and could not live without his morning coffee. So he did what everyone on the hunt for a coffeemaker those days would do: he drove to the mall and walked into Sears. They had an entire aisle displaying multiple options, but sadly, they were all too tall. Kmart was no better, nor was JC Penny, or Wards. At his fifth stop, Bag finally found what he needed at a then-popular Chicago land department store named Venture.

  Fast forward about 40 years, and Bag was again hunting for a coffeemaker. This time, he went through Amazon, who provided, literally, over 3000 options. As a result, Bag could get EXACTLY what he needed with just a few clicks of a mouse. The hunt for a coffeemaker is one example that perfectly encapsulates why the brick-and-mortar retail business model cannot compete with Amazon.  Some of you may be quick to claim Sears, Kmart, and others were poorly managed, while companies like Walmart & Costco, who run a much tighter ship, are doing just fine. Bag would agree Walmart & Costco are much better-run companies than Sears & Kmart, but even their days are numbered. Walmart and Costco are nothing more than the best of a dying breed. Consider these numbers pulled directly from the income statements of both Walmart & Amazon:

    In the year 2000, Walmart’s gross sales were 147 times the size of Amazon’s… In 2008, they were 24x…. In 2016, they were 5x…. Last Quarter, they were nearly identical. When you zoom in on the previous five years, Walmart sales have grown by less than 3% per year. Considering inflation is greater than 3%, it means Walmart sales are actually shrinking. Amazon, meanwhile, has been compounding sales for the last five years at just under 14% per year. That financial trend suggests that a decade from now, it is highly likely that Amazon will have 5x the sales of Walmart. At that point, perhaps Wall Street will recognize Walmart as the zombie company it already is.

   It’s not even a fair fight, as Walmart & Costco have ZERO chance to compete with Amazon. The problem is that the Walmart/Costco model is “Centralized” while the Amazon model is “Decentralized”.  Since the brick-and-mortar aisle space is finite, some corporate suit (or possibly an algorithm) is sitting in Costco headquarters; right now, deciding which three coffeemakers will be on display at your local store. In other words, some corporate lackey is picking winners, and deciding for you - what your options are.  Contrast this with the decentralized Amazon model, which allows ALL manufacturers and ALL retail customers to get together and pick their own winners. The Amazon Model is a decentralized free market with decision-making power in the hands of the many. At the same time, the Costco model is a centralized closed market with decision-making power in the hands of the few. This is why brick-and-mortar is being eaten alive by Amazon.

   Even in the rare event that those Costco suits manage to get the decision right and pick the best three coffeemakers, their gross sales are still capped by the limited number of models on offer. Bag’s daughter wants a pink one for her dorm room; Costco doesn’t have that. The teenage Bag wanted one under 13” tall; Costco doesn’t have that. Modern-day Bag wants one with a Retro look; Costco doesn’t have that either. Meanwhile, Amazon has all that and more. Consequently, their gross sales are uncapped - and their market share growing.

  Let’s not forget to consider the much more common situation of what happens when those Costco suits get things wrong. If they fail to pick the same three coffeemakers the free market would choose, then Costco’s gross sales will be crimped even further.  Costco’s members will suffer as their options are restricted and less than ideal. The manufacturer with the superior product that deserves to be on that Costco shelf also suffers.  It is plain to see the biggest problem with centralized top-down decision-making is it allows for a “single point of failure” to screw up the entire market, making the customer, manufacturer, and retailer all suffer.

   Decentralized is ALWAYS superior to centralized, precisely because there are no single points of failure. This is true in every facet of life, not just in the business world. Consider mid-20th century Russia and its centralized model of Government. Rather than allow the price of wheat to be decided in a decentralized free market fashion by farmers and citizens, some Government apparatchik decided he knew more than the market and would set the price of wheat. He, of course, got the decision wrong and set the price too low; farmers couldn’t make a profit, so they quit farming. The result was the catastrophe known as the Holodomor, where even though western Russia has some of the most fertile farmland on the planet, upwards of 10 million people starved to death in 1930’s Russia thanks to centralized decision-making.

If history teaches us anything, it is that centralization ultimately leads to widespread suffering. Our founding fathers recognized this fact. So when they created the United States, they chose to keep the federal government very small and decentralize power into the hands of the states. As a result, the USA flourished in its early days, becoming the industrial envy of the world. We produced everything in abundance. Over time however, that power has become more and more concentrated in Washington DC. It is no coincidence that this centralization of power in DC coincided with - what was once the most prosperous and productive nation on the planet becoming a country that produces nothing and is in debt up to its eyeballs.

  Centralization is easy to create and thus very common. Decentralization is very difficult to create and thus very rare. This is why thousands of centralized brick-and-mortar retailers are slowly making their way to bankruptcy court, but only one decentralized Amazon taking all their business.  Decentralization may well be the most underappreciated and most misunderstood blessing on the face of the Earth. People are so accustomed to living under authoritarian rule, where all of life’s decisions are made for them by some centralized government authority, that they are completely oblivious to the value and the possibilities that come with decentralization. The most obvious benefit is how it puts power directly into the hands of the many, at the expense of the authoritarian few. Of course, the obvious downside is that the authoritarian few will not like the loss of power, but as history shows, it doesn’t matter.

   In Bag’s previous article linked here, “Master of Coin,” he made the point the single most significant advancement for humanity in the last 2000 years was the decentralization of power that coincided with the separation of Church & State in the early 1500s. Humanity was ushered out of a thousand years of squalor and misery known as the “Dark Ages” into the Renaissance and the Age of Enlightenment. The growth that followed, for all of humanity, is undeniable. If Bag had to point to the one thing most responsible for the separation of Church and State, it would be the invention of the printing press. Those in power at the time (Henry VIII) didn’t like it as witch hunts and religious persecutions spiked. Henry claimed the printing press was to blame for bad information being disseminated into the hands of the masses (Bag is certain this doesn’t sound entirely unfamiliar) - and so Henry tried to put the kibosh on it. Ultimately, though, the good of knowledge dissemination far outweighed the bad, and Henry could do nothing to stop it. The decentralization of knowledge the printing press gifted humanity, added millions of people into the world conversation, and mankind never looked back.

    There is no area of modern-day life with a greater need for decentralization than Money. It is an idea long overdue. The tightly controlled, highly centralized access to the money printer has been abused for far too long. In John Perkin’s book, “Confessions of an Economic Hitman” he lays out the case of how the US Federal government has systematically approached the rulers of nearly every country on Earth offering cash loans through the IMF to build infrastructure (roads, power plants, etc..) in their countries. The rulers can’t resist because it helps them get re-elected by enhancing the lives of their citizens. The problem is those loans have to be paid back with interest. Most of these third-world economies are not robust enough to pay back the loans, so the IMF tells the rulers in lieu of payments, they need to allow US corporations to drill for oil, mine for lithium, build some beachfront resorts, or take whatever resources they have available. The countries that buck are likely to get the full US war machine experience, like Iraq, Afghanistan, etc…

   Perkins demonstrates with remarkable clarity, yet another problem with centralization. It lends itself to violence, corruption, and cronyism. Do you think it’s possible that some corporate suit at Sears chose not to put the best coffeemaker on display and instead gave the contract to his borderline sketchy cousin, Jeff? Or maybe some Walmart suit away from his wife on business gets hit on by some smoking hot woman in the hotel bar, and in a moment of weakness caves into his carnal desires while the woman’s cousin Epstein, secretly films the whole thing … and now Walmart is also carrying cousin Jeff coffeemakers? Examples like these may or may not be accurate; we will never know because they are small and isolated. What is not small and isolated though, are the Sam Bankman Frieds, Bernie Madoffs, Elizabeth Holmes, etc… The white-collar scams these people perpetrated destroyed lives and were only possible because they were the proverbial “single point of failure” inside a centralized system.

  The key is to recognize that SBF, Madoff, Holmes, and the systematic mafia-like extortion by the US cannot exist if their books & ledgers were available on an open decentralized blockchain. The transparency inherent to decentralization means there are NO single points of failure - and thus no corruption. As of the day this is written, there is only one open decentralized blockchain on the planet, and it goes by the name of Bitcoin. Just as the printing press drove a wedge between Church and State, Bitcoin is driving a wedge between Money and State. Our rulers today, like Henry VIII, will not have a choice. They can cling to an old system, like the brick-and-mortar retailers, and slowly die …. or embrace an idea whose time has come and give power and the freedom of choice back to the people. There is no third option.

   Game theory dictates the politicians, corporations, nations, and individuals who embrace Bitcoin first will be the winners going forward. It is an openly fair system beholden to rules, not rulers - the distinction is important. It is a system where the price of everything will continue to fall over time. In Bitcoin terms, the price of homes, medical care, insurance, college tuition, food, or whatever you want to use is falling like a stone in water. It is a system where proof of work is rewarded, rather than violence, corruption, and cronyism. Bitcoin’s decentralized proof of work system will shrink the size and scope of Government because when all is said and done, the Government is merely a single point of failure. Everything they have has been taken from the productive, while everything they touch is made worse. Can you name anything at all the Government has made better? Neither can Bag.

   Regular readers of this column know Bagholder has been a Goldbug for decades. Gold is, and always has been, a superior monetary system to any Government Fiat money. But gold is not without its problems too:

1. Its supply is inflated at a couple of percent per year.

2. It is difficult for the layman to verify because it requires trust in a 3rd party like a bank or a refiner.

3. Gold is also difficult to move across both time and space.

4. Gold is also prone to hoarding, which historically has started many a war. Siezing Gold is why the Romans attacked the Gauls, The Spanish attacked the Incas, etc….

5. Finally, hoarding gold is just a form of centralization that makes its price and perceived value controllable by an authoritarian few.

  Bitcoin elegantly solves all of Gold’s shortcomings:

1. There will be no inflating supply, and thus no debasement of any kind on a Bitcoin standard.

2. No more reliance on 3rd parties to store wealth. In fact, people are running through the jungles of Africa right now trying to capture dinner who own Bitcoin. If they can do it, you can do it too.

3. Since Bitcoin is digital, it can be easily moved across time and space. Recently, someone sent 650 million dollars from New York to Tokyo. The transaction took 10 minutes and cost under 4 dollars.

4. Since Bitcoin is decentralized, it cannot be controlled, seized, or stolen. Consequently, there will be fewer wars in the future.

5. Last but certainly not least, on a Bitcoin standard, the value of your savings will not be determined by some faceless bank or Government entity; it will be decided by you and me.

  Bag has no doubt that every human being on the planet today, provided they live long enough, will eventually own some Bitcoin. It is inevitable. The adoption rate is faster than any invention planet Earth has ever seen. It is quicker than phones, cars, PCs, microwaves, coffeemakers, the internet, you name it - the Bitcoin rate of adoption dwarfs all of them. The only real question is, what price will you pay? Bag has no idea what that price will be, but conventional wisdom in the Bitcoin community dictates that it will be at the price you deserve.

As always, Bag’s articles are free. But if any of you would like to send Bag a few Sats at the address below to feed his coffee addiction, it would be appreciated:

BTC address (Bitcoin)

35G4vj23Azw4DNXigaGq4asHb6DSbPDR7F