1. Decentralized from day 1

If you are building a DApp that aims to create real value to the end-customers you need to be ready to pivot and fine-tune your initial concept after the real data and user feedback kick in. You cannot do that if you have built your solution as a fully decentralized one from the very first day. In case you have, then you risk opening the Pandora box without having any options to close it afterwards. Pivoting is an essential part of every start-up’s lifecycle. According to some estimates, almost every successful startup has changed its business model at least once in order to prosper. The larger a community involved in the decision-making process is, the harder it is for such a crucial decision to be taken. This is also connected to the governance model discussed in the next chapter.

The main problem with decentralization is related to the complexity of the issues and the speed of taking actions that is needed during the feedback loop. Even if there is a perfect governance model, the velocity of applying solutions, chosen by the community will be too slow and ineffective, especially if there is an already existing competition. One requires time to create an environment, in which the majority of the parties share the same interests of preserving its integrity.

Rome wasn’t built in a day — and neither can a community appear out of the blue. A community isn’t simply a flock of people, who are occupying the same virtual space. These assemblies disperse the moment that hard times arrive. The true community is composed of individuals sharing the same values and yearnings, who cannot lose their conviction in a project, even when presented with destructive criticism of it. For this phenomenon to occur the supporters need to be thoroughly informed about the project and they need to invest some time getting acquainted with it. Before they can actually associate themselves enough with this society, they need to bond both with the founding team and with the other supporters.

Even Bitcoin itself was initially somewhat centralized. Satoshi would mine most of the coins on his own — simply because there was hardly anyone else who knew or understood what he was doing. It has been estimated that at least 60% of the hashing power came from him, as others would usually lose interest after a couple of hours or days of mining, while he single-handedly kept the system going. As a creator of this revolutionary cryptocurrency, he was the one that had the greatest drive to preserve it and see it flourish.

It was only in 2010 that multiple other miners joined in and the hashrate increased. In 2011 Satoshi was confident enough in the established community to leave the project to it — and he disappeared. Bitcoin’s popularity hasn’t stopped growing ever since, despite the lack of a central authority and the existence of constant quarrels in regards to its future.

If, however, Satoshi had stuck around, maybe this would have not been the case and Bitcoin would have been seen as a complicated pyramid scheme, where the creator is in possession of both the hashing power and most of the assets, ready to dump them on his followers anytime. By leaving it to the next ‘generation’ of network participants, he actually secured the existence of Bitcoin.

Although its infrastructure is lagging behind the newer technologies, Bitcoin is still alive and is still the dominant cryptocurrency. No matter how many times they proclaim it dead, it keeps on reviving. A normal company would have ceased to exist if it had gone through the same turbulent times as this decentralized marvel. There will always be people around the world who would keep on finding value in it, even if the majority renounces it, even if its value reaches $10 again. This is why it is immortal — because of its dispersed and tenacious community, which firmly believes in Bitcoin’s core value propositions.

Decentralized applications can have the same fate as Bitcoin, the main ingredient that they need is the die-hard supporters. And those wouldn’t appear, unless the problems that Bitcoin and some of the other proto-cryptocurrencies face aren’t dealt with.

For instance, a blockchain, often accused of centralization, is NEO. Its creator Da Hongfei has not been hiding it, pointing out that this stage is only a part of its development process:

‘We have to be very careful with decentralization of the consensus nodes because the protocol of NEO is evolving very fast. We need those consensus nodes to act very quickly to upgrade, and if there is a bug or a security issue, we need them to respond very quickly. So we’re doing the decentralization process slowly, gradually and very carefully.’

Developers have to choose the basis for their products meticulously, taking into consideration the networks’ stages and roadmaps. If the entire blockchain goes down, so does your DApp with it, due to the dependency on the network. The question about the centralization of a project is closely connected to its governance model as well.

2. Governance

Every new project needs tireless and unstoppable leaders, such as Steve Jobs or Jeff Bezos, to get it off the ground successfully. Bezos did not even have a way to receive payments online when he founded Amazon, there was no infrastructure for this sort of a business. These are the visionaries, who keep on pursuing the set goals even in the darkest hour.

However, as the startup grows into a company and the company into a corporation it becomes more and more inert. The founders get overwhelmed with trying to keep an eye on the big picture and with aspiring to please shareholders. Fresh ideas are hard to reach from the bottom to the top and even when they do, it takes ages to implement them.

At the same time, these big entities suffocate their smaller competitors; they take them over and don’t allow any innovations to threaten their business models. A decentralized structure offers a lot more opportunities for development, as it does not count on a single individual. Having a small group of people determine the fate of a business on which thousands, if not millions, of smaller business owners depend goes against the principles of the free market. Monopolies and oligopolies work against the interests of the majority and only favor the small minority at the top. Opposing them is futile due to the immense power and resources that they have obtained.

‘In a static world, a monopolist is just a rent collector.’ wrote Peter Thiel in his famous book ‘Zero to One’. A monopoly has the financial capabilities and manpower to push towards positive change — yet it rarely has the incentive to do so. The economy has been defined as the management of all the resources one has access to. Incentivizing all the participants in an economy to give their best is actually another vital part of it. Rewarding those who achieve more or bring value to the system and punishing those who loiter or impede progress creates an environment for the development of an evolving society. It is safe to say that the centrally planned economy failed communism against the booming capitalism in the Cold War. Ironically, nowadays monopolies in the capitalistic societies bring us closer the Soviet reality, where few omnipotent individuals thrive while any individual aspirations for small enterprises are being crushed.

That’s why becoming more and more decentralized with time is the best way to preserve both neutrality and progress. However, as one gives up his power to the crowd, he needs to keep in mind that the different parties involved in a crypto-project have fundamentally different incentives.

These can be divided into ‘users’ and ‘coin holders’ (being both at the same time is also possible but rare). While the first demand the product or the service, the second only hope that the assets they are in possession of steadily grow in value.

Supposedly, a steady appreciation cannot happen without a significant amount of users, who are willing to pay for accessing a platform, regardless of the token’s price. As a result, there is a never-ending conflict between the token holders and the users, since the first are those who want their assets to be as overpriced as possible, while the second would like to get the tokens for the lowest possible price. Establishing a balance between these two sides is crucial. A possible solution is to think about the coin holders at first (as they are often the investors who help you raise the funds) and as the working product emerges — switch the attention to the users. Designing it in such a manner is quite intricate.

Lately, another approach is gathering everyone’s attention — creating both security and utility tokens. The first are being distributed to the people ready to invest in the idea and the team and the second are being used internally by the users thus, aligning the incentives between the shareholders and the users.

The right approach is to establish the new economy’s key roles in several steps. While rolling out the governance model, the incentives structure needs to be tested. This way the whole community is able to see the outcomes of certain behaviors and decide on whether or not to change it.

According to the co-founder of Loom Network, James Duffy ‘launching a semi-centralized DApp and decentralizing it over time is “pragmatic’. After all, users would like the software engineers to make changes to the products. Improving them would benefit everyone.

Furthermore, censorship is crucial to any social media, whether it’s centralized or decentralized, otherwise, it could get filled with inappropriate content, such as child pornography. The users should not be disturbed with going through such content that they have to personally curate in order for it to be removed. AI may be somewhat capable of doing this for them — but for its judgment to reach the complexity of an actual person, it needs data, provided by users. Again, we need the early adopters to deal with the platform’s downsides and help overthrow the bad actors in order to create a better environment for the mass adopters.

How many of the network participants have the best intention about it though? If the number is below 50%, then handling the authority to them would be counter-intuitive. At the same time, people at the top aren’t to be completely trusted as well.

As Vitalik Buterin himself said ‘ It is much harder for participants in decentralized systems to collude to act in ways that benefit them at the expense of other participants, whereas the leadership of corporations and governments collude in ways that benefit themselves but harmless well-coordinated citizens, customers, employees and the general public all the time’.

When a physical entity is presented with too much power, it tends to abuse it due to the imperfections in the human nature. Still, how incentivized is everyone in a network to keep it robust? What if the majority is incapable of taking the right decisions because it’s not informed enough? Manipulating the masses through social media is becoming more and more common in today’s society. Should everyone be able to participate, govern, and benefit in that case?

Achieving complete architectural, political, and logical decentralization is a process that needs to be enrolled carefully and step-by-step — but what if it’s a utopia, comparable to the communistic one? The distribution of power in a network is not just a technical, but also a philosophical issue.

When it comes to tech aspect of the different types of blockchain governance, there are amazing articles explaining in greater detail. The network can be run either on-chain or off-chain. Off-chain is the instance in which node operators have the power to vote. This type of management can be summarized as a decision-making process, which is initially resolved in-between the participants and is then implemented into the protocol by the software engineers.

Unlike the rules in off-chain governance, the ones on-chain are ‘set in stone’ into the blockchain protocol. As a result, all the decisions are automatically converted into code, for instance, alterations of the block size. Tezos can be given as an example of a project, aiming to handle disagreements on-chain. Anything on-chain is following a strict protocol, and node operators have a little saying in such instances.

Naturally, neither solution is absolutely perfect. Reaching a consensus between actual human beings regularly leads to time-consuming quarrels. On the other hand, following everything according to the protocol leaves humans out of the equation and makes it harder for them to impose necessary changes.

So, is there an approach, which is “the best” or “the-proven-to-work” one? In my opinion, this is the hardest and the most important question humanity should solve before entering the next age of its economic and mental progress. The key might be in the incentive mechanisms which can motivate people to get informed and to make fair decisions when voting. Only then the decentralized ecosystems will be able to govern themselves in an efficient and fast manner and can evolve perpetually.

3. Scalability and transaction fees

If you are building a DApp, you most likely would need a token. If you need a token, you’d have to choose which blockchain to create it on — unless you would prefer to launch your own blockchain. Right now, due to the lack of working solutions, this choice isn’t a hard one, but it will be getting more and more difficult with time.

Ethereum keeps on being the most popular blockchain that businesses entrust to issue their tokens on — simply because it is the only one so far that has proven to be somewhat trustworthy over time. ‘Somewhat’ because of the main issue, that it continues to face — its scalability problem. If you are selling expensive properties via your token on the Ethereum blockchain, chances are that you wouldn’t experience a lot of transactions per day. For those, who opt to attend the needs of millions of clients on a daily basis though, the 15 to 30 transactions per second that Ethereum can perform are definitely insufficient.

We all know about CryptoKitties and how the game managed to clog the second most popular blockchain in the world. It is an argument used in favor of all of Ethereum’s competitors. Those include EOS, Cardano, Stellar, Aeternity, etc. They all promise to overthrow the king with their properties — greater scalability, security, and decentralization. Although all of them sound splendid on paper, they are yet to be tested ‘on the battlefield’. For instance, in spite of all the hype surrounding its release, EOS’ mainnet experienced a freeze two days after its launch due to a serious bug. At the same time Ethereum’s team is working industriously on reaching the second grand phase of the blockchain, called Ethereum 2.0. It includes major updates like Casper (turning from PoW to PoS), sharding (leading to thousands of transactions per second), and eWASM (creating DApps more easily and with a greater variety of languages).

This is a question that has no definite answer — who would offer the best solution at the end? Those, who have proven to be able to deliver a working product and are focused on improving the existing eco-system, or those who initiate an entirely new mechanism, absent of the initial restrictions. It is worth mentioning that adding more code to Ethereum’s original legacy code could mean more holes for malicious hackers to exploit. As the DAO hack of 2016 demonstrated, even outstanding developers can make grave mistakes.

While the technology in its current state is pretty much in its infancy, it is being constantly upgraded, and multiple solutions already exist or are in the making, to bring its transaction capacity to similar levels of the centralized payment processors, such as credit cards, and to even surpass them. Vitalik and his team are working on network upgrades that could potentially help them compete with the other token issuing platforms, which should become fully functional soon. These updates are known as first-layer solutions, such as Sharding and Proof-of-Stake consensus algorithm, and second-layer solutions, such as State Channels, Lightning Networks, Plasma, and Truebit, among others. All of these deserve articles on their own.

Right now, all the nodes supporting the Ethereum network are obligated to process all the transactions that get executed on the Ethereum blockchain. Because of this, the Ethereum blockchain is extremely secure, as every block goes through an extensive validation process. This strength inevitably leads to a weakness — since every node has to deal with every single block, the blockchain’s speed is dependent on the individual nodes’ speed.

As others have pointed out before me, a blockchain can only have two out of the following three characteristics, but not all of them at the same time:

Obviously, everyone would prefer the network to be secure, there’s no doubt about it. Choosing between being scalable and decentralized is where the blockchain community is currently divided. Right now, Ethereum is characterized by decentralization and security.

EOS is a great example of decentralization being sacrificed for scalability. Having only 21 nodes makes the network among the most centralized out there. These 21 nodes weren’t picked randomly, they are large entities within the crypto-space (such as the cryptocurrency exchange Bitfinex for example) with their own agenda. EOS has already banned 27 accounts — an action, which absolutely no one has the capability to take in the Bitcoin network.

Transaction fees in Ethereum present another issue. Since they are being paid with the same volatile cryptocurrency, the once ‘cheaper alternative’ to Mastercard and VISA often turns out to be considerably more expensive than its centralized competitors. The irony is that the more popular Ethereum becomes, the more transactions there are on it and the more they cost for those who want them executed fast (and by fast I mean in a matter of seconds and not minutes). This is a huge step backwards in terms of user experience. Even though the gas limit is being specified, a sudden spike in prices could still lead to an unpleasant surprise to the person, who pays the gas bills. And if the user has a problem using the DApp and paying for the products or services that one desires to acquire, then the whole ecosystem is having a big problem.

This is why developers need to decide beforehand how fees are being paid exactly — and by whom. For the DApp user, it isn’t sufficient to just hold the tokens in his wallet, since gas is paid in the blockchain’s native currency — in the case of Ethereum that would be ETH. Hence, one needs to have the opportunity to buy both assets (the ETH and the platform token) seamlessly.

Expecting users to sign up on exchanges (often a lengthy process), buying tokens and sending them over to the DApp wallet is extremely optimistic, to say the least. In today’s world, where people are getting used to paying for everything with a single gesture through Google Pay or Ali Pay, making them waste time in such a tedious process equals a project suicide. That’s why introducing credit and debit card payments that customers find both fast and easy, is absolutely obligatory.

4. Volatility

Even people who are barely acquainted with cryptocurrencies know one thing as a fact about them — that they are extremely volatile. This volatility often presents issues not only to investors and to traders, but to the general users as well. Most of the times it leads to several problems.

There cannot be a stable economy without any stable store of value. It is very likely that we start seeing projects, which are combining both their native tokens and an ‘external’ stable cryptocurrency. Creating an internal stable coin implies a lot of work and resources — it is basically an entirely different enterprise from the one that you may have undertaken.

So how can stable cryptocurrencies exist at all? You most likely know about the most notorious of all — Tether. It is (supposedly) backed by the US Dollar. This approach, although being quite straight-forward, is not the only one. In order for a virtual currency to have any stability whatsoever, it needs a collateral. By now, around two dozen stable coins (some of which are still in development) have been created and they can all be broken down into three main categories:

- Fiat-collateralized

The least decentralized stable coins are fiat-collateralized. For every unit of a cryptocurrency, there needs to be an exact equivalent in fiat currency stored somewhere, whether that be USD, Euro or Rubble. Such a currency, although backed by an actual asset, is quite risky, in case a government decides to shut down the bank accounts or if the token creators don’t really have the amount of money they claim to store.

- Non-collateralized

These are the most complex stable coins of all because they rely on algorithms and elaborate stability mechanisms that keep track of the market, trying to manipulate the token’s scarcity (in case of an inflation) or abundance (in case of a deflation), depending on its current appreciation. These are also known as elastic supply mechanisms.

- Crypto-collateralized

The first stable coin in crypto-history is Bitshares. Its value is backed by numerous crypto-assets. This is the most decentralized solutions of the three, but it is quite risky as well, considering that its collateral experiences significant fluctuations as well.

For a DApp creator choosing among any of those stable coins possess one common major risk — he or she will be entirely dependent on it. Hoping that there are really some assets backing it up or that its complex stabilization algorithms don’t go wrong somewhere. The problem is that none of the stable coins has been around long enough to prove its trustworthiness. So, what could be a possible solution?

There is a possible answer to this issue that my team and I came up with — make sure that you issue your own stable coin that you have the capital with which you can back it.

It’s a simple two token system. You go through an STO, a VC funding or even crowdfunding, where you offer a security token. Part of capital that you raise through it needs to be set aside to back your second token, which will be a utility one. Let’s say that you have 4 million USD to back it up — issue 4 million tokens, whose price will be pegged to 1 USD.

How you distribute your tokens from here on is up to you, whether that be through bounty campaigns, airdrops, affiliate programs, etc. It’s important this token is NOT listed on an exchange. Then it is more legitimate in the eyes of international law and it possesses actual utility features. If people were to buy it from any coin offering or exchange with the hope of making a profit, then it will be, by definition, a security token according to SEC. And you don’t want your asset to be viewed as a security by SEC if you haven’t registered it as such. According to some legal experts, the US government may even extradite foreign citizens if it finds out that they have been illegally selling securities to US citizens. So-far such official allegations haven’t been brought up when it comes to ICOs, but it’s never too late for them.

But let’s get back to your utility token — it should stay only within your system, thus keeping the value within and attracting new users. As they use their utility tokens to purchase the products or services, these assets need to get locked up by smart contracts, while the actual fiat payment is made to the service provider or manufacturer. This will ensure that there are never more tokens than cash and that they will not go through depreciation. These locked tokens can be getting unlocked only if fresh capital enters the system that can back them up again. Oracles can prove to be invaluable in such instances, as they can automate the process and reduce the human factor that can lead to mistakes, or even worse — any fraud whatsoever.

And in case there is more capital that will flow into the DApp economy then there are tokens, the smart contract should have a function of creating new tokens in order to ensure the 1:1 ratio, so that 1 token keeps on being worth 1 Dollar, Euro or Yen. Remember, having the token pegged to a fiat currency is important. It gives reassurance to every party that’s involved in the system.

As for the security token holders, they can either enjoy receiving dividends, based on your company’s performance or have them as tokenized shares, allowing them to vote on any significant decisions that need to be taken. Either way, it’s a system which is a lot closer to the corporate structures — both for better and for the worse. It may not be a leap towards the decentralized utopia, but it is a step in the right direction.

5. Usability

No product or service can become mainstream if they are hard to grasp and present a lot of challenges when it comes to their usability. Even the Internet went through this process.

In fact, in the very early stages of the world wide web, the dial-up Internet was “a phone call” that was being paid by the minute. So not only was it time-consuming to enter it and difficult to navigate through it without the help of any search engines (you had to know exactly what you were looking for), but it was also quite costly to surf through the web. Had this experience been preserved, the Internet’s popularity and importance wouldn’t have grown as much as they have.

Again, the similarities with blockchain are mind-boggling. A technology, not only misunderstood but also ridiculed by many, which develops with the speed of light only to become more and more popular with every single year.

Right now blockchain is at the same stage as the dial-up Internet. Token holders have to deal with long and unsettling private keys while making the distinction between them and the public keys. If they are sending any transactions via the Ethereum network, with the payment confirmation they have to calculate how much gas they need to use and even visit the gas station beforehand. Instead of having the transaction costs calculated automatically, they need to spend time into thinking about that issue, which presents another friction point and as a result can lead to frustration. Often if they have not chosen the correct gas price, their transaction would not go through or it would take ages (literally days) to be executed.

There is also the possibility to send your tokens to the wrong address and have them lost inevitably, which makes the whole experience quite scary.
A lot of users are driven away by this perplexing intricacy and just a few open-minded people are actually willing to try on a decentralized application.

And as if the place for mistakes wasn’t enough, there are also malicious Trojan horses such as Coinbitclip that automatically replace several digits of a BTC address when it is being copied on the clipboard. The victim then irreversibly sends its funds to the imposter’s wallet, without realizing it. Had the addresses not been composed of 33 characters, such an interference would have been easy to spot.

When it comes to developer tools, it is a vicious cycle. Even CryptoKitties has been developed only for browser and not for mobile — despite mobile’s dominance. That’s mainly due to the fact that prior to the game’s phenomenal success, software engineers found no reason to create mobile libraries and the tech that one requires to make it work on phones. As a result, programmers have no desire do create decentralized applications until there’s a reliable foundation in place. At the same time, nobody has the desire to build it till there are actually DApps ready to be run on it. In order to build DApps that are usable in a familiar and accessible way, we need an entire world of underlying technology that brings both the advantages of the already familiar centralized applications and the positives of the decentralized ones. The problem is that no one wants to build the underlying mechanics until there are DApps that are going to fully utilize them.

Many developers are aware of these restrictions and are working toward eliminating them. There are solutions for wallets which are somewhat easier to use, such as Metamask or MyEtherWallet however, they are designed for desktop while the majority of the users prefers mobile. There isn’t even one plug & play wallet solution for all the DApps out there — every time the devs have to come up with their own token repository, sometimes by making copies of open-source wallets, while others build them from scratch. It shouldn’t be that way.

As a whole, there has been a lack of successful track record entrepreneurs, product developers, design specialists, and user behavior specialists that can create easy-to-use blockchain products. Almost everyone has been trying to win over the tech-savvy crypto-adopters, which is, in fact, a terrible strategy. There is a limited number of these people and even if one manages to get the attention of all of them, it would still be insufficient for the maintenance of a self-sustainable product.

The key here is the introduction of fiat payments on top of the decentralized applications. Being able to purchase products and services via one’s debit or credit card is crucial if the ‘average Joe’ is to be included in the DApp’s user base. It is not users that have to adapt to technology, it is the technology that has to adapt to them. Currently, banks worldwide are extremely cautious when it comes to crypto. VISA and Mastercard obstruct purchases even of Bitcoin and Ethereum, so ways around it have to be figured out.

The explosion of cryptocurrencies’ prices in 2017 had one major positive effect for the blockchain technology — it got the attention of the world. Bitcoin isn’t the IT specialists’ and hackers’ currency anymore (like it was perceived for the years before that). Everyone in the first world and the developing countries has a friend or a relative who has invested in crypto or who’s mining.

Bright minds are pouring into this space, in spite of the bearish market. It was the prospects of getting rich that allured them — it’s the possibilities that the technology presents that have retained them. Thousands of people are learning how to program on Solidity and the multiple other languages, created by the newfound platforms (such as Plutus, Sophia, Scilla, CX).

Therefore, thinking that this space would be the same in 5 or 10 years would be extremely naïve.

Solutions to all of our headaches are coming. A lot of bright people are working tirelessly, day and night, to bring blockchain to the next level and make its usage as seamless as surfing through the Internet is today.

P.S.

Special thanks to Viktor Dessov and George Zlatkov for the great help for bringing that article to life.

Sources:

Top 5 problems each DApp is facing

1. Decentralized from day 1

2. Governance

3. Scalability and transaction fees

4. Volatility

5. Usability

Written by Peter Lozanov