Interdependent, cyclical growth of protocol and dApp development
Blockchain technology is quickly gaining traction in the services and financial sectors. Large companies, as well as startups, are doing their best to leverage the new technology to reduce transaction costs and improve efficiency. The ability of the technology to create fully transparent and trustworthy ledgers has led many to believe it will revolutionize business sectors. The technology is yet to be fully adopted, but many believe it is in its infancy and has great potential. The question lies where our development efforts should be going: to protocols or to dApps?
Blockchain technology consists of a stack of protocols, dApps and the blockchain infrastructure itself. To better understand the relationship and the difference between protocols and dApps, the diagram below demonstrates how they relate to each other. A protocol is built on top of the blockchain technology, and consists merely of rules in which the nodes will play by. Protocols define what is expected of each node, and what each node should expect from the other nodes. Simply put, a protocol orchestrates the network.
dApps, short for decentralized applications, on the other hand, are run by multiple users on a trustless protocol residing on a decentralized network, the blockchain.
Currently, the technology is underutilized. This is evident by understanding that Ethereum processes 15 transactions per second while Visa handles 1,700 transactions per second. When cars were introduced roads did not yet exist making cars a slower option than horses. But with the development of better road networks cars became faster and more reliable. Similarly, protocols are still evolving, and once the infrastructure is in place, we expect to see dApps take over most sectors.
Room for growth
Blockchain has its obvious benefits, but many say that the existing protocols are limiting the development of decentralized technology. This is true in some ways; better infrastructure will promote the building of further advanced dApps. Simply put, powerful tools can create compelling apps. Once the tools are available building revolutionary dApps will be easier.
So far, the technology has enormous potential: asset management platforms, decentralized exchanges, and prediction markets are just a few of its applications. However, some barriers come with the existing protocols and infrastructure. These limitations include:
Scalability: Bitcoin and Ethreum, the world’s most popular blockchain protocols, have a consensus mechanism that requires each participating node to do transaction verifications. This limits the transactions per second (TPS) over the network. For example, Ethereum supports 15 transactions per second due to the hard-coded computation per block limit.
Storage: Information over the network is stored on a blockchain database which means that information is stored indefinitely in every node in the network — quickly reaching uneconomical cost.
Unsustainable consensus mechanism: The consensus process, especially by the bitcoin platform, is very expensive, requires a lot of energy, and is not always sustainable. Only a single block can be mined per second.
Which came first: protocols or dApps?
It seems that apps came first. Apps inspired the building of better infrastructure, and in turn, better apps were built out of the latest infrastructure. The phase we are in is not entirely an infrastructural phase; we are merely in a cycle of apps-infrastructure. New apps inspire the development of better protocols.
The app-infrastructure-app cycle
The app-infrastructure-app cycle is a pattern we’ve noted in the evolution of blockchain technology. The first apps lead to inspiration for the next phase of building protocols that in turn ease creating future apps. The infrastructure lays a foundation for widespread adoption of the apps by consumers.
The internet has evolved similarly since the 1970s. It began with just messaging and emails. These applications inspired Ethernet which led to the widespread adoption of these messaging apps. The next wave of apps was web portals which then inspired the creation of search engines to make the service accessible to the public. Companies like Amazon.com in the mid-90s inspired more programming languages that made it easier to build sites. In 2004 came Google and Facebook that gave way to the development of more advanced infrastructure that could produce more complex apps.
The same pattern can be seen most recently with mobile apps. Snapchat and Instagram Stories have inspired Ziggeo and Twilio Video that make it easier for app developers to add videos. The crypto technology is not any different; BTC was the breakout app. Similar apps quickly followed suit, including Silk Road. These pioneer apps inspired the initial infrastructure like DriveChain, Ethereum smart contracts, and SideChain to facilitate mass adoption of blockchain apps by consumers.
Where to place your bet
We are undoubtedly in a series of the app-infrastructure-app cycles, in constant flux, bringing new markets and new technologies. That said, many want to know where to put their hard-earned money. Which phase will yield a better ROI? We need better infrastructure, that is, better chains, better wallets, and even better inter-chain interoperability to achieve full potential of the technology. Therefore, as it stands now, and speaking from previous experience, the best bet is investing in infrastructure. As we speak, it is extremely hard, expensive, and frustrating to build a meaningful decentralized app. The dam will only break open when we have better platforms to build apps on, and better infrastructure to enhance full-scale adoption of these dApps. A time will come when the ROI for apps will be higher than that of infrastructure, but the current phase is skewed towards infrastructure.
Which layer stores true value?
brought light to the concept of the “fat protocol”. According to the report, most the value in blockchain, such as Bitcoin or Ethereum, resides in the protocol layer. That is true, at least in the short term. The real value will eventually shift, however, to the application layer. We will need revolutionary apps to solve problems of the future.
Protocols like Ethereum have changed a lot of things including the introduction of smart contracts. With ICOs today, crowdfunding is made easy; there is obviously value in this platform. But true value is coming from the dApps that the protocol supports. Without dApps, the protocol has no value. In the years to come we expect better apps and more money will be spent developing them.
Every day, more dApps powered by Ethereum blockchain are available online. So far, these applications have not been able to scale. Once they do, and are able to create user-friendly UX, they will be loved by the average user. When the true value of apps is unlocked their role in society will be indispensable. Today’s dApps are complex, not user friendly, and only target a miniscule audience.
The way forward
We can only create using the tools that are available. With each passing cycle, a series of more advanced apps are built. A good example is YouTube; it would not have been possible to create YouTube prior to 2000. The idea required the introduction of broadband infrastructure in 2000. It is noteworthy that a good idea may arise and meet an unfavorable app-infrastructure-app cycle. The silly ideas of the dotcom era are worth billions today. Apps of the near future — after several app-infrastructure-app cycles — may not make sense to us today.
A single phase of this cycle can cannot be looked at in isolation. We cannot just develop the infrastructure and then independently embark on building apps. First, by so doing we may be detaching ourselves from the reality on the ground and end up building infrastructure that does not fully meet immediate needs. On the other hand, building infrastructure in isolation risks building too far ahead of the apps. The whole cycle happens successively ensuring that apps influence the infrastructure while the infrastructure empowers the apps.
Successive cycles not only lead to advanced technology, but also reduce the cost of building applications. Building Amazon in the early 90s was very expensive. Today, the same could be completed in less time and on a shoestring budget because we have a swarm of platforms to enable it, the infrastructure is set, and the technology has already been adopted even pushing the labor costs down. Likewise, it is currently costly to develop a dApp, but that will not be the case 10 years from now. 10 years from now there will be better protocols to enhance the adoption of the technology.
In a nutshell
Having answered the big question on what comes first, the next big question is obviously why apps first? But to answer that, why would you create a road if there are no vehicles. Why would you build traffic controls and traffic rules if there are no planes? Likewise, why would you develop protocols and infrastructure whereas there are no apps? In short, by building infrastructure first you would be solving a non-existent problem.
It is time to change our thinking. Contrary to the narrative that we need tools to build apps — apps come first. It is the demand that creates supply and not supply creating demand. Without the tools, we can make great apps, but the cost is higher. It is an awe-inspiring cycle with one phase triggering the other.