Why I’m Optimistic About Ethereum Even Though Most Dapps Will Fail

A couple of days ago, I’ve read Bedeho Mender’s article — “Why Your Ethereum Project will Most Likely Fail”. It’s an insightful and important piece and if you haven’t read it before you should do it now.

Bedeho raises an important question — what is the value proposition of Ethereum dApps and points out that ‘decentralisation’ or ‘no middlemen’ are not actually the end user benefits.

Even though I share Bedeho’s concerns and I’ve been writing about them in the past, I’m quite optimistic about the future of the Ethereum ecosystem.

Let me explain why.

Today, we’re here — the ‘newspaper on the iPad’ stage

I look at Ethereum and the dApp ecosystem as a paradigm shift of similar magnitude as the transition from desktop to mobile.

With every technological transition of this kind, the first stage of experimentation often results in plugging old models into the new platform. If you remember the early days of mobile, the ‘Adobe Flash on the iPhone’ controversy, or some terrible experiences of desktop apps ported to mobile you know what I’m talking about.

When the new platform emerges, the first step is often to repurpose the old stuff for the new tech. It rarely works but this is a necessary step where lots of failures happen that allow everyone else to learn. It doesn’t matter whether that’s a transition from desktop to mobile, from TV to online video, or from horse carts to automobiles (technological tiller).

With Ethereum’s ecosystem, we’re now at this stage. I agree with Bedeho that a lot of current projects follow the pattern of ‘the same as before but decentralised’ . But I don’t necessarily think it’s a bad thing. To me, it’s just a signal we’re just at the first step of the transition.

So what’s next?

From Information Based Interactions to Value Based Apps

Let’s take a look at the fundamental nature of the transition from Web 2.0 to Web 3.0/Ethereum apps.

All interactions with the Ethereum computer cost a transaction fee.

So from the user perspective every time I’m clicking, submitting, registering anything in the Ethereum application I’m actually spending small amounts of money. Compared to the Web 2.0 apps this is a drastic change and some might say it’s simply a bug.

After all, why should I pay money to click buttons in the application? And then wait 15 seconds for the application to respond?

We got used to the client-server model of the Web where the only value-based interactions are the buy/sell transactions on the checkout page. (whether that’s the purchase of physical goods/services or payments for access to Software-as-Service apps). 

Every other interaction is information-based, doesn’t involve sending or receiving any value. 

Ethereum expands the range of possible value-based interactions beyond the simple ‘pay for goods’ or ‘pay for access’ UX metaphors that most people are familiar with.

Before the Internet most people were familiar with few, well-defined information-based interactions:

  • face to face or phone conversations (one to one)
  • reading a newspaper/watching TV/listening to radio/ attending a seminar or a lecture (one to many)

It’s not an exhaustive list but you get the point.

In all those cases, the roles were defined and mostly fixed and rules of interaction were established either by a tradition or social convention.

The Web has changed that. It opened up multiple new ways in which many-to-many interactions could occur, with people we don’t know, at the global scale. With blogs, social media, discussion groups and feeds we developed new many-to-many interactions that were unknown and impossible in the previous technological era. New metaphors for many-to-many interactions had to be established — with terms like ‘blogging’ or ‘tweeting’.

I remember the first time I’ve joined the IRC chat in the 1990s — seeing all these messages from people all over the world, passing through my screen, in real-time — it was something magical at the time. And way beyond the usual human interaction patterns that were known to me at the time.

Ethereum does to value-based interactions what the Web did to information-based interactions. It opens up a new world of possibilities for exchanging value, aligning economic interests, at the global scale with people you’ve never met.

It will require new UX metaphors that go beyond the known ones such as ‘buy/sell’, ‘pay-for-access’,‘receive payment for goods’, ‘receive payment for work’.

My hunch is that it will involve a lot more ‘investing’, ‘acquiring a stake’ or ‘trading’ that will become accessible to a wider group of users (as it happened with ‘broadcasting’).

There’s nothing new under the sun

But at the end of the day, fundamental things will stay the same.

If you’re designing a dApp for Ethereum, you’re architecting a new economic interaction rather building an app.

So there are 3 basic questions you have to answer before writing any code:

  • what are the categories of users that will interact using your dApp?
  • what is the main value-based benefit that applies to each group. There are only three you should consider: 1/ increased revenue, 2/reduced costs or 3/insurance. If you can’t point out how your dApp will translate to one of these three benefits then don’t go further. 
  • define core interactions that will help them achieve this benefit.

To explain this even more simply — how people will make more money, save more money or achieve a greater sense of financial security using your dApp compared to the alternatives (centralised or decentralised).

In many cases, disintermediation of the existing industries will realise these benefits. In other cases, it won’t, because the benefits won’t be substantial enough to compensate users for the high switching costs and learning curves (learning new tech, managing private keys, fear of losing money etc).

But the key message is — how can you enable new categories of users to make money in ways that were impossible before due to centralisation, friction, monopolies or high transaction costs.

To the end user of Ethereum, the decentralisation itself is a component as important as packet-routing of TCP/IP was to the early IRC users. It makes things work but it’s hidden in the background.

The value is what matters.

The Generalised Platform For Marketplaces

Ethereum is sometimes defined as a ‘world computer’ but this definition doesn’t really convey its core value proposition.

I prefer to explain Ethereum as a generalised platform for marketplaces where individuals can adopt various roles and freely participate in economic interactions.

And by marketplaces, I don’t only mean Ebay, Amazon, Etsy, AirBnb or even financial platforms.

I also mean Facebook, Google, Instagram, Snapchat which are essentially the multi-sided marketplaces for attention/reputation/money.

These are particularly interesting to me as most people are oblivious to the economics of these platforms. We participate in them daily, we see the actions (posts, photos, search results) but not the incentives (who benefits economically from us seeing these posts, photos or search results).

If you’re interested in hearing more about attention/reputation/money marketplaces , I’ve recorded a podcast with Epicenter Bitcoin where we discuss these topics:

https://www.youtube.com/watch?v=AA5cYen_FgA

Understanding the Asymmetric Payoff in Building dApps

What’s unique to Ethereum though is that all economic incentives will be open-source and public. If a particular dApp model works, it will be immediately copied, modified and improved upon. If the improvement offers more revenue, decreased costs or better insurance to the users, it will be adopted by them.

Because of full transparency, open source nature and interoperability between dApps, Ethereum is a giant feedback loop that will result in a very fast pace of iteration that we haven’t seen before. It might not be obvious today as the platform has just launched but will become apparent in a year or two.

The costs of failure for dApps are negligible but the potential rewards are huge, so dApps will evolve like memes do today. Everyone will copy and remix promising models. And when switching costs for the users are zero because identities and reputations are in their control, this will create a very powerful combination.

The 99,9% of these projects will fail and that’s fine. It’s the speed and open nature of learning & iteration that matters. Ethereum just needs 0,1% of successful dApps to become a multibillion-dollar platform. Power laws and network effects wil be at play here.

The asymmetry of payoff that’s built into Ethereum projects is so huge that I can’t point to any other platform with similar risk/reward characteristics.

What is the asymmetric payoff I’m talking about?

It’s basically the risk/reward ratio where the upside potential is greater than the downside risk.

Developers risk only their time in building new or modifying existing dApps. Infrastructure, security, identities and payments are all built into the platforms. But if the dApp takes off — then the upside is unlimited… until someone else remixes it and comes up with a better model.

This feedback loop is what makes me very optimistic about Ethereum’s future.

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