Beyond the Wealth Effect: Are We All Becoming Old Fogeys About Decentralization?

When crypto markets surge, institutional money flows in, and retail investors celebrate short-term gains, we rarely pause to ask whether we’re still chasing the original dream. The truth is more unsettling: both Bitcoin and Ethereum have quietly abandoned the decentralization ideals that inspired their creation, and we’ve rationalized this abandonment through a simple trade-off—wealth generation for freedom.

The Institutional Takeover: When Market Reality Defies Decentralized Ideals

The crypto landscape in 2025 presents a paradox that only becomes clearer with time. Ethereum’s pivot toward Layer 1 scaling and privacy infrastructure is drawing massive institutional capital into the ecosystem. The DTCC—the backbone of the U.S. stock market managing $100 trillion in assets—is beginning its migration on-chain, signaling what many interpret as the arrival of a transformational wave for cryptocurrency.

Yet this prosperity hides a uncomfortable reality: institutional and retail investors operate under fundamentally different profit logics. Institutions thrive on multi-year cycles and minimal-spread arbitrage strategies that require nothing more than patience and capital. A 10-year investment horizon is not ambitious for them; it’s standard practice. Meanwhile, retail investors chase the fantasy of 100x returns within a single year—a gap so wide it has become institutional opportunity.

The coming years will likely showcase a peculiar spectacle: on-chain activity booming, major institutions flooding capital into decentralized networks, while retail participants face mounting pressure and shrinking opportunities. This isn’t surprising. The disappearance of Bitcoin spot ETFs, the four-year altcoin cycles, and the documented pattern of Korean investors abandoning crypto for traditional stocks have all validated this trajectory repeatedly.

After October 2011, centralized exchanges—the safety net for project founders, venture capitalists, and market makers—entered structural decline. As their market influence grows, so too does their conservatism. The result? Capital efficiency erodes predictably.

Nick Szabo Wasn’t Wrong: How Bitcoin and Ethereum Lost Their Way

In the early crypto movement, Nick Szabo represented something more than just a technologist. His work on smart contracts (1994) and Bit Gold (proposed in 1998, refined in 2005) provided the conceptual foundation for what Bitcoin would become. Bitcoin was once affectionately called the “pocket computer,” while Ethereum aspired to become a “general-purpose computer.”

Then came 2016 and The DAO incident. Ethereum’s decision to rollback transaction records sent shockwaves through the codebase’s philosophy, and Szabo began questioning everything that followed. During Ethereum’s explosive bull run from 2017 to 2021, Szabo’s warnings were dismissed as old-fogey thinking—the complaints of someone left behind by technological progress.

But Szabo understood something essential. Decentralization operates on two levels:

Technical level: Disintermediation means eliminating unnecessary middlemen from pricing and transaction consensus. You don’t need a bank to verify a payment; the network does it through computation.

Governance level: Trustlessness means minimizing the amount of human trust required. A permissionless network should function for strangers who’ve never met and likely never will, bound only by protocol, not reputation.

Bitcoin preserved the first principle while losing the second. Ethereum pursued both simultaneously, then abandoned them both.

Bitcoin was designed as peer-to-peer electronic cash, but full node operation became impossible for individuals as blockchain data bloated beyond consumer hardware limits. Mining evolved from personal computers to specialized ASIC machines, then to industrial farms. Individual participation transformed into passive observation.

Ethereum took a different path but arrived at the same destination. Vitalik Buterin initially chose Layer 2 scaling over aggressive Layer 1 modifications precisely to protect individual node operation. The hope was that personal staking and node-running would remain viable for ordinary users. But when Ethereum transitioned from Proof-of-Work to Proof-of-Stake, something fundamental shifted.

The capital requirements for meaningful participation soared. Institutional staking pools absorbed the rewards. And critically, the “personal” element of node operation—the ability for individuals to participate meaningfully in consensus—evaporated. What remained was a system dominated by large nodes operated by professional entities.

The uncomfortable truth: both networks compromised their founding ideals. Bitcoin lost smart contract capability and individual mining participation. Ethereum retained smart contracts and scrapped PoW, but in doing so, eliminated individual node operators from the production system.

The Stablecoin Revolution: ETH’s Slow Fade as the Middle Player

Within the Ethereum ecosystem, a quiet but consequential reshuffling is underway. Stablecoins—particularly USDT and USDC—are gradually displacing ETH from its intended role as the primary medium of exchange and value benchmark.

This isn’t accidental. It reflects a fundamental misalignment between Ethereum’s original narrative and its current market dynamics. The network was envisioned as a “world computer”—a permissionless platform where applications could run without limitation. That vision required a native asset (ETH) that powered the system through gas fees.

But market demand told a different story. Ethereum’s real value became concentrated in DeFi applications—borrowing, lending, and trading. These applications require capital efficiency above all else. And capital efficiency means using stablecoins for accounting, not volatile native tokens. ETH’s role narrowed from “universal computing substrate” to “asset-like good” whose primary value came from staking yields and price appreciation.

The ecosystem responded with bureaucratization. Between 2023 and 2024, Ethereum Foundation members became de facto advisors to major projects. The Solana Foundation’s transparent market-making approach appeared less arbitrary than the opaque relationships between Ethereum core contributors and Layer 2 projects they were advising.

Vitalik Buterin eventually drew a line, announcing he would cease investing in specific Layer 2 projects. But by then, the systemic tendency was already embedded. Ethereum wasn’t just a protocol anymore; it was becoming a managed ecosystem with governance hierarchies, power brokers, and insider relationships.

In this context, “middleman” doesn’t mean parasite—it means a necessary but imperfect coordinator. ETH became the middleman asset between the traditional financial system and blockchain infrastructure. Ethereum became the middleman platform between different layers and applications. And Vitalik became the unofficial middleman settling disputes and steering direction.

The cost? Complete autonomy was sacrificed for efficient coordination.

From World Computer to Financial Engine: Ethereum’s Pragmatic Compromise

Ethereum now faces an inescapable reality: it cannot simultaneously be a free, open-access platform AND a capturing-all-value system. These goals contradict.

If Ethereum stays truly permissionless—allowing any stablecoin, any token, any system to flourish—then ETH’s ability to capture value degrades. Applications would optimize for the lowest-cost assets, not for ETH specifically. Revenue would diffuse across the ecosystem rather than concentrating in the native token.

Alternatively, if Ethereum enforces constraints to protect ETH’s value capture—requiring applications to use ETH as the settlement layer, limiting competing stablecoins, prioritizing certain Layer 2 solutions—then it abandons the open-access principle that defined it.

The resolution is pragmatic but revealing: Ethereum accepted its evolution into a “financial computer” rather than a “world computer.” It optimized for DeFi, for institutions, for capital movement. Privacy enhancements and Layer 1 scaling became features for sophisticated players, not general users.

This explains why Bitcoin hodlers and early Ethereum idealists like Nick Szabo maintain their critiques. They’re not old fogeys stubbornly clinging to past ideas. They’re observers noting that the original specifications—trustless coordination without intermediaries—have been violated in pursuit of something more prosaic: wealth generation through asset appreciation.

The Inevitable Choice: Between Ideals and Viability

The cruel irony of decentralization is that it cannot self-sustain. Complete decentralization lacks the coordination required to function at scale. Minimal organizations quickly fragment into chaos. Yet minimal trust—the closest we can approach to decentralization—requires someone or something to provide order. That role has fallen to Vitalik, to the Ethereum Foundation, and to the ecosystem’s political economy generally.

The network faced a genuine dilemma: either drift toward maximal decentralization (and lose coordination capacity), or embrace necessary governance structures (and sacrifice the cypherpunk ideal). There was no third option that escaped this trade-off.

Ethereum chose pragmatism. It retained smart contract capability—the core innovation—while embracing institutional efficiency. Whether this was right or wrong is less important than acknowledging it happened. Ethereum’s future isn’t decentralized peer-to-peer computation. It’s a financial infrastructure layer maintained by professional entities and accessible to institutions.

Bitcoin followed a parallel trajectory in a different direction. It could have added smart contracts; instead, it doubled down on being digital gold and a payment backbone for specialized applications like BTCFi and the Lightning Network.

Both networks abandoned their original manifestos. Both now serve wealthier, more sophisticated users better than ordinary people. The wealth effect worked for early investors. The decentralization promise did not.

What Remains: The Owl’s View at Dusk

The philosophical debates that defined the 2017-2021 era—decentralization versus efficiency, idealism versus pragmatism, cypherpunk revolution versus financial infrastructure—will eventually be archived as historical curiosities rather than urgent questions.

For the present, Ethereum remains the most sophisticated attempt at balancing wealth generation with some residual decentralized principles. Bitcoin stays the most secure and conservative. Newer networks like Solana pursue different trade-offs. But none escape the fundamental contradiction: what attracts institutions and enables wealth is precisely what compromises decentralized ideals.

The owls of Minerva take flight only at dusk. By the time we fully understand what happened—how Bitcoin became digital gold, how Ethereum became a financial layer, how decentralization transformed into managed efficiency—the choices will have already been locked into protocol and incentive structures.

Perhaps this was inevitable. Perhaps the dream of creating a trustless, peer-to-peer system that also generates explosive returns for participants contained internal contradictions from the start. Perhaps those who criticized the contradiction early weren’t old fogeys but prophets, ignored until their predictions materialized too obviously to deny.

What’s certain is that the next generation will inherit a different crypto ecosystem than founders imagined. Whether that’s tragedy or pragmatic adaptation depends entirely on which narrative survives.