Decentralized Systems — What is holding us back?
The crypto market has been through quite a roller coaster in the last 15 months. At the time of this writing the market is down to $299B from a peak of $812B just a few months ago. As the market finds itself in a trough, the crypto conversations have stepped back from unbridled optimism to a sense of uncertainty and wonder of about what lies ahead. As a long-time crypto enthusiast and investor, and more recently co-founder of SKALE Labs, I’ve had a front row seat to show.
I’ve never been as excited as I am today about the future of decentralized systems. I committed my career to this industry because I believe in the values, benefits, and power of decentralized systems. However — amidst my optimistic outlook, it’s obvious to see that there are some real issues in the space.
For the industry to get to the next level, we’re going to have to mature and make adjustments. While many of these issues are growing pains that come with an industry being formed in hyper drive, we can still make progress towards fixing them with the right level of awareness and action.
There are some very big issues such as uncertainty of government regulation and speculation outpacing market traction. Aside from the obvious challenges, here is my take on what’s currently holding us back.
We lack a clear, uniform understanding of the value proposition of Decentralized Systems
If you interview 10 of your friends who are avid investors, critics, crypto-fanatics, press, lawyer, or entrepreneurs in the space, you’ll get 10 very different answers on what decentralization is and what it means to society. This is highly alarming, as the real potential of cryptocurrencies is not to enable greater efficiencies and costs savings to enterprises, but to enable a new paradigm where incentives drive benefits back to users and supporters of systems rather than to large, centralized parties. ie — Moving power, control, economic benefit, and influence from a few to many.
What makes this confusing is that the core benefits of blockchains and Smart Contracts provide value to not only decentralized systems, but also to enterprises/centralized systems. Many industries and B2B systems are rife with mistrust and high costs, combined with inefficiencies from reliance on middlemen. This, however, is a new category of enterprise software which should call upon traditional valuation metrics and does not justify the types of valuations we are seeing. The big picture comes together when decentralized systems start replacing the the top technology companies and replace the utility of currencies and stores of value such as gold.
I’ve talked to entrepreneurs in the space who still don’t fully understand this. Many understand the technology of blockchains and cryptographic systems to a world-expert level, however, they conflate or misappropriate the benefits of blockchains and Smart Contracts (immutability, transparency, trustlessness, automation, efficiency) with the benefits of decentralizing systems. To their credit, you can’t decentralize a system properly without the core values brought forth by blockchains, but again — blockchain value props are the assets that make the systems work, not the end goal.
There are also the critics who hate cryptocurrencies. Many of them fully understand the value propositions of blockchains but miss the boat on why decentralizing a system brings greater value to users. In order to effectively knock crypto, you must first show that you truly understand what decentralized systems are trying to achieve.
I’ll be writing more in the coming months on what decentralization is and why it matters.
At some point we confused the customer as the investor in the Token rather than the user of the system
If you are launching a token, your end-customer is the user of the system, not your investors. While this issue seems like an obvious mistake, it is actually a nuanced problem with unclear lines. For many decentralized systems to work, they need a native currency to drive incentives for actors in the system to perform certain tasks and allow for other actors to pay for certain completion of those tasks. For Utility Tokens, the token is baked into the use of the system and acts as the motivating incentive that makes the system flow. If the token has no external value outside of the system, then it will have zero impact from an incentive-alignment perspective inside of the system. So it is important that parties are buying the token as an investment and that they will see the asset grow in value as the network grows. This “extrinsic” value of the currency is important. It motivates Miners and Nodes to host servers in their basements (or in newly forged data warehouses next to cheap energy sources), and it puts a real-world value on the asset’s users (the real customers) of the system, who will pay for the value received within the network.
With that said, the extrinsic value means absolutely nothing if those of us building decentralized systems don’t deliver real, demonstrable value to our users. If the experience and net-value at the end of the day is not better than a centralized version of the system, why would anyone use it? This harkens back to some of the basics of Customer Development and Product Development that have become the mantra of Silicon Valley entrepreneurs for decades. We ultimately need to deliver value far exceeding (not marginally exceeding) incumbent centralized solutions.
We are selling the technology and not the implications
The industry is awash with tech buzzwords and magic one-liners regaling cryptographic algorithms. Anyone working in early-stage tech companies has made this mistake. It is tempting to focus the conversation on the cool bells and whistles of a new tech system. In reality, people buy the value they get from something not the unique way the 1s and 0s come together.
This has been an explosion of innovation and at some point it is inevitable that people get caught up in the How rather than the Why. As we communicate value we must focus on the implications and benefits of the use of our systems and not get lost in the tech (which btw is very cool and fun to talk about!). As they say in sales — sell the hole not the drill!
Product categories remain unclear and undefined
Another side affect of a Cambrian explosion of decentralized networks and protocols are undefined and blurred lines between product categories. This is a natural growing pain, but at some point, category definition makes sense to buyers both within enterprise or decentralized organizations. It expedites growth within an industry while supplying organization and rigor.
Many smart people have written about Crypto/Decentralization industry segments, the reality is that today’s decentralized-landscape does not have the clean lines we are used to in the enterprise software world. Over time, these lines will solidify and we’ll see real competition define category leaders. This, in turn, helps all of us as users, buyers, and investors.
We don’t understand the market-fit for Smart Contracts
Smart Contracts are one of the most powerful value propositions that has grown out of this period of innovation (Even though Nick Szabo was writing them back in 1994!). Some industry futurists believe that in the not-too-distant future, people will be working for Smart Contracts and not companies. Organizations will employ people ad-hoc through Smart Contracts. Self-driving cars will Smart-Contract their riders, their parking, their gas, etc.
So… what does that have to do with us collectively not understanding the market-fit for Smart Contracts? The reality is that new ground-breaking technologies first find the markets where they have the most impact and the least friction.
Too often, I hear entrepreneurs and investors talk of Smart Contracts in situations where they don’t make immediate sense and do not provide a 10x advantage over the current solution.
Smart Contracts add value in high-frequency interactions where legal terms and digital confirmation happen in a uniform manner at scale. If we have to rewrite the terms for each individual Smart Contract and rely on humans to attest to their fulfillment, then we are effectively in the same place we are today without Smart Contracts but with some small efficiencies of a bot, escrow, and instant payment working in the situation.
Effectively, Smart Contracts have the greatest impact in situations where we can codify the business terms and data inputs, put the payment into escrow, and where there is little ambiguity about delivery or contract completion (ie. a sensor confirming delivery).
In summary, let’s focus low-hanging fruit and get systems in place where they immediately have 10x or greater impact with low implementation friction.
Hype valued over substance
Is hype good? Yes. Is too much hype without enough substance good? No. Absolutely not.
As an industry, we must strive to put real substantive checkpoints in place with milestones. Biotech went through a similar boom. It is still one of the only spaces where a company without a fully functioning market-ready product has hundreds of millions (and often billions) of dollars in valuation. Bio-tech, however, has been very smart about instilling checkpoints in Clinical Trials that are key data points for investors. While it is still hype and speculation, the system is tempered with substantive checkpoints that give investors and the market indications of probability of success.
For example, SKALE Labs is not launching a Token Generation Event until we have completed our test net and audited results. A number of other projects are taking a similar path. I believe (and hope for the sake of our industry’s integrity) this will soon become the norm.
Decentralized Applications are outpacing infrastructure
Current infrastructure to support a fully decentralized apps (dApps)/systems is far behind infrastructure of centralized systems.
For example: If we look at scalability and throughput of blockchain consensus, the latency and costs make the systems unusable at scale. This is squarely why the team at SKALE Labs is focusing on solving the scalability problem.
We’re developing a solution that will quickly scale to millions of transactions and Smart Contracts per second processed at fraction of today’s costs. We will partner first with the Ethereum Foundation and will help dApps using Ethereum process transactions and Smart Contracts (with zero-timeouts, throughput of millions per second, and with no fees). This will be done in a fully open-sourced, p2p decentralized manner with governance driven in a decentralized manner by all constituents. More detail to come on the SKALE platform soon…
I’ll be diving further into how we solve for these issues in later posts. In the interim, I’d love to hear your thoughts on my perspective as well as your ideas on the biggest issues facing our industry and what we can do to solve them.