Before you accuse me of clickbait, let me say upfront that I’m not sure if technology entrepreneur and SPAC investor Chamath Palihapitiya’s opinions about alternative cryptocurrencies directly involve Polkadot (CCC:DOT-USD).
However, given that Polkadot has been touted as a potential Ethereum (CCC:ETH-USD) killer, Palihapitiya’s latest bold statements are nevertheless extraordinarily relevant.
According to a recent Business Insider article, the tech guru stated that Visa (NYSE:V) and Mastercard (NYSE:MA) will basically encounter peak valuation in the new year. Not only that, Palihapitiya criticized the entire traditional payments ecosystem; thus, other credit-card issuers/processors are not immune from his sharp criticism.
Not surprisingly, given Palihapitiya’s support of cryptos, he believes that emerging blockchain and DeFi (decentralized finance) projects will overthrow mainstream (centralized) financial institutions. Or, more accurately, advanced decentralized protocols — of which Polkadot is one — can replace aging relics of a bygone era with lightning-quick blockchain applications.
Palihapitiya even went so far as to suggest taking bearish actions against the aforementioned credit card giants. He said, “If you read the whitepapers of these crypto projects, and you systematically put together a framework, I think you can be long those and you can be short Visa/MasterCard, because I think this is their peak market cap.”
Again, I’m not sure if Palihapitiya considers Polkadot as one of the projects tied to a viable whitepaper. However, considering that Polkadot is one of the pioneers of open-source shared multichain protocols — that is, it can relay information across different blockchains — I think it’s a reasonable bet that the entrepreneur would have nice things to say about DOT.
Certainly, he’s not going to blast this altcoin as he did the credit-card giants. Still, you should assess the issue carefully before moving forward.
Polkadot is Awesome but Centralization is Necessary
It’s ironic perhaps that I’m bringing this up. But a few years back, Steve Wozniak, a co-founder of Apple (NASDAQ:AAPL), stated that someone stole Bitcoin (CCC:BTC-USD) from him using a stolen credit card. In short, the fraudster bought 7 BTC from Wozniak but then subsequently cancelled the credit-card payment.
Since the card was stolen, there was nothing Wozniak could do. The cryptos were gone and he had no recourse.
On the surface, this cautionary tale appears to impugn the safety mechanisms of centralized institutions like credit-card issuers. But in my opinion, it actually impugns the viability of cryptos, including useful ones such as Polkadot.
You see, when you conduct transactions through the centralized fiat money system, you the consumer and the other parties to the transaction pay higher fees (compared to decentralized systems). But that’s to be expected. The U.S. dollar is an internationally recognized currency, and a substantial part of its brand power is its stability.
If you think about it, a volatile, unstable currency is the hallmark of an unstable society.
Further, participants in traditional transactions pay a premium for protection. In most cases, buyers and sellers of credit-backed transactions have recourse. It’s when traditional credit is used to acquire decentralized assets where the situation becomes murky.
On the surface, Palihapitiya is correct. Crypto-based transactions are infinitely quicker and more convenient than their fiat-based counterparts. In addition, blockchains like Polkadot make decentralization more utilitarian than ever before. But you must ask yourself why that’s the case.
Because cryptos are decentralized, they require distributed actors to engage and bolster their underlying blockchain networks. If these distributed actors are not compensated enough, that particular blockchain will fail.
So that convenience comes at great risk of a black-swan event destroying everything.
You Can’t Have Your Cake and Eat it, Too
It’s bizarre to me that while so many smart people are jumping on the crypto bandwagon and criticizing the laggardness of the greenback, few seem to question why the greenback is that way. Fewer still bother to consider the concept that centralization is not necessarily the enemy that people make it out to be.
With Polkadot or any other crypto, it comes down to a simple concept: you can’t have your cake and eat it too.
So, if Palihapitiya is correct, advanced blockchain networks could one day replace lumbering credit cards. But what happens when merchants ship products (paid by cryptos) to shoppers’ homes, only for porch thieves to steal the packages? Or what to do about fraudulent merchants who don’t deliver as promised?
Are you going to appeal to an artificially intelligent algorithm, only to discover that your golden retriever might have a higher IQ than the magical blockchain everyone’s clamoring about? When you decentralize financial transactions, you also decentralize the moral, ethical and legal principles that covertly and overtly undergird said transactions.
You can’t have centralized morals and protections while decentralizing everything else. It doesn’t work that way. So, however you feel about Polkadot or any other crypto, please do it because you believe in its upward valuation mobility.
Don’t do it because a tech guru — however smart and awesome that person may be — believes everything will be decentralized. Most likely, it won’t be.
On the date of publication, Josh Enomoto held a LONG position in ETH and BTC. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
A former senior business analyst for Sony Electronics, Josh Enomoto has helped broker major contracts with Fortune Global 500 companies. Over the past several years, he has delivered unique, critical insights for the investment markets, as well as various other industries including legal, construction management, and healthcare.