The Tokenized Economy: inside the world of DApps and how this changes the game for Tech Companies
In which we explore the world of decentralized applications (DApps), we see some concrete examples, and we wonder if the tokenized economy marks the beginning of the end of the giant Tech Companies
✨ Hi, I’m Sara Tortoli and this is the August edition of The Plunge Club, a monthly newsletter dedicated to product and human tinkering.
If you are not a subscriber yet, then take the Plunge and join the Club:
This is the fourth issue of the “🕳 🐇 Down the rabbit hole” series, in which I deep dive into different topics. This rabbit hole is dedicated to the world of decentralized applications, also known as DApps. It is the natural follow-up to my previous article on Ethereum Part I and Part II, given that as of now most DApps are built on it. This article is especially for those that work in Tech and can influence product decisions, as the way we are used to building apps and define their business model might be about to change completely.
🛑 Important: this article is not in any form or shape financial advice. Always do your own research. A good place to start, it’s from the resources I used to prepare for this article. You can find the links with all the references at the end. 🛑
Going deeper in the rabbit hole 🕳
Following my two-part article on Ethereum and its relationship with Web 3.0, I started researching the world of decentralized applications (DApps). In particular, I had two questions in mind:
What could be the consequences that DApps might have on the way we think and build products?
What could this mean for the “traditional” Web 2.0 Tech Companies, that seem almost untouchable, like Google, Apple, or Spotify?
What are DApps? A brief get-to-know
DApps is short for decentralized applications. On the surface, DApps look similar to the normal web apps that we use every day, with some notable exceptions when it comes to purpose and user experience (more on this later). The real difference however happens in the backend. Where normal apps run on centralized and proprietary servers, DApps run in decentralized peer-to-peer networks. The most common blockchain used to build DApps today is Etheruem, but there are other layers 1 and 2 solutions viewing to compete, with Solana and Polygon taking the lead and Fantom, Avalanche, and Cardano about to roll out.
DApps can be divided into different categories according to sector/use cases, which so far includes:
DeFi: by far the most popular use case, with billions of dollars already locked in.
Marketplaces: of which NFT Marketplaces like Opensea are for now taking the crown
Gaming: where you get paid for playing and virtual players become collectible and tradable items (e.g. Axie Infinity)
Social and other DApps: like social media, browsers, publishing, and messaging apps
In this issue of The Plunge Club, I am going to focus on this last use case, as DeFi and Marketplaces deserve a rabbit hole of their own.
The Highs and the Lows of DApps: a comparison with the traditional Apps
Because they are built on decentralized peer-to-peer networks, DApps offer several advantages over traditional applications, some of which we have already discussed in previous issues. The advantages include:
You own your data and are in total control. Because data are not centralized on a server, no company can control and imprison them in silos and do with your data as they please.
It’s secure because data are encrypted and distributed. The more decentralized the blockchain is, the less likely is it that it’s vulnerable to attacks that can steal your data/passwords
It’s an ecosystem without intermediaries, all interactions, including monetary transactions, are handled through smart contracts and ensure that the rules are transparent and don’t change over time.
It’s a shared and interoperable universe. As a DApp creator, you can take whatever was previously created and built on top, like Lego blocks. As a user, this means for example that you don’t have to undergo the always annoying registration process every time you download a new app. All you need is a wallet, like Metamask, that acts as both your literal wallet and as proof of your identity.
But it’s not all rainbows and sunshine either:
DApps are not widely known outside of the world of crypto enthusiasts. People are notoriously averse to change and they only do so if a. their pain is big enough or b. it fills an unmet need.
What most DApps are trying to do is to offer a decentralized version of other successful applications. To do so, they have to overcome the network effect (acquire users) and offer a user experience that is, for now, suboptimal and only “good enough” compared to that of the traditional apps.With freedom comes responsibilities. While privacy and security are big arguments for some, I am not sure that most wouldn’t be willing to trade these elements for convenience. After all, if you forget your password or your recovery keys you are going to be locked out forever from your account. There is no customer service to help you and people might lose a lot of money because of this.
In terms of network, gas fees are too high, especially on Ethereum, and transactions are too slow to support mass usage (e.g. Ethereum supports 15 transactions per second vs Solana 65.000). Until the launch of Eth 2.0 and/or until we have more L1 and L2 solutions, the experience is bound to slow down the faster the network grows.
Considering those limitations, how can DApps hope to ever compete against giants such as Google, Microsoft or Apple, whose H1 results make them seem untouchable?
DApps do have an ace upon their sleeves, that even beats great user experience and free use of the product.
So what if I tell you that there is a decentralized version of Spotify that pays you to listen to music? Or that there is a browser that pays you to surf the Internet and even blocks all the annoying ads? Would you switch?
The advent of the Tokenized Economy: the secret formula of DApps for success
Traditional Web 2.0 apps have 3 main monetization strategies:
Ads-based models: are seemingly free but users end up being the product, as data are used to help advertisers sell more of theirs.
Freemium: mostly free with the possibility to upgrade for unlocking additional features
Paid model: where you actually pay for the service/product
Web 3.0 introduces a new type of business model, the tokenized economy. DApps often issue their own tokens, a native digital currency, to pay users to use their product.
DApps are apps with a backed-in monetary policy (aka tokenomics), whose token value appreciate the more the DApps gets adopted. This means that every time you use a DApp you are not only a user, you become automatically an investor.
DApps distribute tokens according to the rules set in smart contracts that cannot be changed. The aim is to award the users, incentivize participation and adoption. Sometimes tokens are used as a governance method, with DAO being a leading example and to secure the network with the proof of stake system.
The Tokenized Economy is an economy without intermediaries, where payments go directly from person to person, and where ownership and value are distributed across the entire network. The bigger the network, the more value is generated, the more the token appreciates. As a governance system those who possess the greater tokens allocation, also retain the greater voting power.
Some concrete examples of DApps
To understand the current DApps landscape, I reviewed a few promising projects, with the premise that we are still early and most DApps have max 3-4 years of existence. If you have more you would like me to review, feel free to leave a comment here or hit me on Twitter.
Brave Browser
By far for now my favorite DApps, it lets you browse the Internet faster and more secure than any other browser and blocks automatically all annoying ads (including the one on YouTube that interrupts when you are watching a video).
Most of all, Brave pays you for using it, by awarding users the Basic Attention Token (BAT) that can be converted in USD. BATs are awarded every time a user decides to watch ads. Could you ever imagine Google paying every single Chrome user that watches ads and redistributes the profits? Furthermore Brave allows users to tip creators: if you like this article for example you could decide to live a tip by clicking on the triangle next to the search bar.
I have been using Brave for the past two months, and I earned 2.70$. I wonder how much money I could have earned if I would have used Brave since I started browsing the Internet all those years ago.
Status
Status is a messaging DApps like Whatsapp/Facebook Messanger that is built on Ethereum and allows users to send secure and encrypted messages. Unlike its Web 2.0 competitors however, Status is also a wallet and an Ethereum browser, making it more similar to app concepts such as WeChat.
Steemit
Steemit is a sort of decentralized Reddit where you can earn the Steem token for posting and commenting. It’s actually similar to what Reddit is trying to do, the difference is that, unlike Reddit, Steemit is governed and owned by the community.
Audius
Audius is the decentralized version of Spotify/Soundcloud built on Solana. It allows musicians and their fans to interact directly with each other and for fans to pay their favorite artist, with no intermediaries and fees in between. It boasts 5.4 million active users to date and it has only been around since 2017, making it a competitor to watch (for comparison Spotify had 345 million active users in Q4 2020, and it has been around since 2006).
Mirror
Mirror is a decentralized version of Medium/Substack that allows writers to sell and earn ETH from their writings.
DTravel
This is the yet-to-launch decentralized version of Airbnb. As it has not launched yet, I am keeping it on my radar on following the project on Twitter to get updates and potentially review it in the future.
How does the future look like? A short-term vs. long-term view
The world of DApps is still very much in the experimentation phase. Use cases that reinvented completely user’s experiences and introduced never seen before opportunities, like DeFi and NFT, are so far fairing much better than DApps that are trying to copy-paste traditional Apps. This is because so far some DApps offer a somewhat suboptimal user experience and slower performance.
What is truly fascinating about this world however is that, unlike traditional software development, DApps creators have to figure out not only the functionalities and the technologies to power the DApp, but also the governance and the tokenomics policy, to align incentives.
This is a never-before-seen experiment, with profound implications for the tech world in the way we build apps and features moving forward.
Even with the current shortcomings, in the long run the tokenized economy it’s an incredible lure to overcome the network effect. In order to get to mass adaption, there needs to be an education process that gets users familiar with new experiences, such as registering via a single wallet or understanding the tokenomics of a project. By paying users, the incentives might just be high enough to lead some DApps to mass adoptions and to disrupt some of the current most unshakable businesses.
After all, we all have learned in the past to use the Internet and smartphones. We can learn again.
👉 📚 All materials and references I used for this article can be found here
The “Now” section
🎧 What I am listening: the latest episode of A16 podcast, dedicated to system leadership and in particular to the dichotomy between traditional and digital businesses, examining governance models and the control over distribution and supply.
📚 What I am reading: The Midnight Library by Matt Haig and I absolutely loved it. It’s a novel about possibilities and different path that one can take in life, narrated by a woman that attempts suicide and ends up in an imaging library. Every book in this library represents a different path her life could have taken. It’s a reminder that even when it does not seem like that, there are always different choices we can make.
🥁 What I am doing: I just signed the contract for a new apartment, which will be free from October. Now I just need to find the time to buy some furniture….
🧐 Question I am asking myself:
How can I allocate my time to balance achievement with self-care?