When Will Your Parents Use Dapps?

I’m a believer that dapps, or apps build on Blockchain, will eventually displace today’s centrally built Internet based services. But there hasn’t been a breakout success yet. In this post, I’m going to talk about some of those disappointing signs, suggest some ideas what’s holding the space back, and offer a framework to think about how Blockchain technology might breakout.

What Are Dapps

The term decentralized app or dapp was created to describe apps built on top of Blockchains like Ethereum or EOS rather than a centralized computing layer like Amazon Web Services.

There are several reasons to build a dapp instead of a traditional app, covered by this seminal post. But to date, there haven’t been any break out hit dapps.

Looking at DappRadar, the top dapps have a mere hundreds of users.

Adding to the skepticism, the first dapp that seemed to break into the zeitgeist, CryptoKitties, has seen its traffic decline dramatically. It too now only has hundreds of users. And rather than understand CryptoKitties as a collectibles game, it might better be understood as a dapp that, for a short time, enabled one of the only successful uses of cryptocurrencies so far: speculation.

So are dapps and by extension Blockchain and decentralization dead?

Why I Think Dapps Will Succeed

I think dapps will succeed and here’s why.

First, while the strict definition of dapps as Solidity code on top of Ethereum has no breakout hit, I’d argue there are already two very successful dapps. One is Bitcoin itself, which as of today is still worth $100B and already very useful for remittances. Another is the set of ERC-20 smart contracts run on top of Ethereum. While not often considered dapps, ERC-20 smart contracts have been used by millions of users and have successfully transacted billions of dollars. So like using Excite or HotBot prior to the rise of Google… we can see the early signs of dapps working.

Second, many of the most promising projects have yet to launch. A great example is Filecoin. Founded by a strong team with a track record of useful product in the storage space, backed by top tier investors, and redefined the ICO space with a $250M raise in the summer of 2017. They are planning a launch in 2019.

Finally, the number of crypto users today is approximately where the Internet was in 1994. By comparison, two of the first megahits in the Internet era, Netscape and Yahoo!, were founded in 1994 and 1995 respectively.

[Source: https://medium.com/@mccannatron/12-graphs-that-show-just-how-early-the-cryptocurrency-market-is-653a4b8b2720]

What’s Holding Dapps Back

Scalability. If you want to build a dapp on top of Ethereum today, it will not work very well if you get a lot of users. At the most basic level, in Ethereum, every single miner has to perform every single computation and store every piece of data. From a distributed systems perspective, this is perhaps the worst possible form of distributed computing, comparable to a RAID 1 disk replication methodology.

“If you want to build a decentralized Uber and Lyft on top of an unscalable ethereum, you are screwed. Full stop.” – Vitalik Buterin, Founder of Ethereum

• Governance: EOS was developed after Ethereum launched and therefore acknowledged many of the problems with Ethereum. EOS set a high bar for itself by claiming to hae solved many governance issues. But its own launch had governance problems. So EOS will need some time to reestablish credibility here. Even Bitcoin itself is having governance issues.
• Cost: The expectation with Internet websites and mobile apps is that they are free to try out. Payment, if any, happens down the road. AKA Freemium. Unfortunately, Ethereum based dapps require you to get your hands on tokens before you can do anything useful. And to get tokens, you need to create an account on an exchange and buy cryptocurrency. All that is a steep onboarding ramp.
• Performance: Transactions on EOS take a minimum of 500 milliseconds to complete. If your click on a webpage needs 10 transactions behind the scenes, you’ll have to wait 5 seconds. That’s an unacceptable level of latency.
• Private Keys: To use a dapp today, you need to hold a secret, private key. If you lose it, you are toast. If someone steals it, you are toast. There’s no customer support line to call to get things reversed. This is way too much responsibility to ask of consumers and a solution like social key sharing must be developed.
• Storage: Blockchains aren’t good at storing big files.
• Distributing Large Files: Blockchains aren’t good for distributing large files. The Internet wasn’t so great at this either and led to the rise of Content Delivery Networks, like Akamai.
• Price Volatility: If you live in Japan, you are used to transacting in Yen. A person in Tokyo doesn’t worry what the exchange rate between the Yen and the Euro is. Today, if you want to transact on a Blockchain, you have to work with cryptocurrencies like Ether or Eos that fluctuates a lot relative to the price of the Yen or the US Dollar or the Euro. The goal of transacting in dollars is an area of active investment under the name “Stablecoins”. Full Disclosure: I’m a very small investor in TrustToken.
• Random Numbers: It sounds crazy, but it turns out that generating random numbers is hard to do with Blockchains. Without random numbers, many forms of games cannot be created.

By the way, another way to look at this list of problems is that it’s actually a list of areas ripe for investment.

What Dapps Will Breakout?

Thinking back to the Internet, the US military created it as a data network resilient to attacks. It was peer-to-peer by nature and relatively decentralized, to use a modern term. That, matched with the Bill Gates vision of a computer in every home, created something else entirely: a ubiquitous platform for any developer to build applications that anyone could access from their home. Compare it to the telephone system: interactive, but only Ma Bell decided what software and services a home would receive. Compare it to television: high bandwidth, but closed and not interactive. Compare it to the newspaper: relatively open, but low bandwidth and not interactive.

Basically, the Internet was better than the mail system, television system, telephone system, and newspaper system. And it’s no surprise that in just a generation, the Internet has redefined each of those industries, as well as the advertising model that supported much of it.

The common thread is information and interactivity. The Internet has disrupted the marketing, media, retail, and communications industries because it is great at distributing information in an interactive way. It hasn’t disrupted industries that don’t have those common threads, such as energy, manufacturing, and agriculture.

Many of the first attempts at building businesses on the Internet tried to simply replicate existing businesses. There was a time that newspapers though they should reproduce their physical newspaper pixel for pixel and distribute them as PDFs. There was a time mail order catalogues were presumed to be well positioned to own e-commerce. There was a time online video was presumed to mean renting movies just like renting DVDs rather than a streaming service like Netflix.

The pattern is that the first projects on a new platform don’t fully take advantage of the benefits of that platform. Instead, they shoehorn in an old model.

Many of today’s early dapps attempt to shoehorn in an existing Internet service. I think this is the wrong approach. Instead, I think we have to look at the benefits of Blockchains and decentralization, and look for dapps that take advantage of those benefits.

Some ideas:

1. Dapps can touch financial assets directly. Internet apps to this day really don’t do that — they are really just front-end gateways to existing, old school rails. So Financial Services is a good area to look into, such as disrupting payments, asset management, ETFs, stock exchanges, venture capital, royalties, remittances, and issuing securities.
2. Blockchains create immutable relationships between parties. So areas that require coordination among multiple parties are a good place to look into such as supply chain, ownership records, legal contracts, and governance.
3. Blockchains create financial incentives for good behavior. This could be the tool that unlocks peer-to-peer resource sharing. Most of your disk drive is empty, your CPU and graphics processor sits idle 99% of the time, and you use barely a fraction of the bandwidth in your home. Golem and Filecoin are in this space.
4. Decentralization is about emergent trust. So services that require a trusted third party can be disrupted, such as escrow, custody, trusts, and record keeping.
5. Decentralized apps are much harder to censor or ban. This is a controversial topic. While censorship implies something bad, the positive version of censorship is curation and moderation. If you went to eBay, do you want to see illicit drugs being sold there? Clearly not. That’s the benefit of moderation. And yet, to a pure libertarian, eBay removing illicit drugs is a form of censorship. I think the areas where“censorship resistance” will apply is when central authorities clearly overstep their bounds. A government outlawing the sale of illicit drugs or heavy duty weapons is well within the society’s expectations. But outlawing people from playing bingo more than once every 48 hours? Seems a little nutty. More seriously, government abuse of their power to control currency (aka monetizing debt, arbitrary capital controls, and currency devaluation) seems to be a good use of cryptocurrencies.