Why Totally Decentralizing Dapps Wins, and How to Do It

Leveraging the full power and economic might of the decentralized ecosystem through the Internet Computer.

In this article, I shall explain how the Internet Computer blockchain is enabling a blockchain wave based on radical decentralization, and how you as a Web3 developer, entrepreneur or investor, can play a part in building the next internet by staying true to the science to leverage the full power and economic might of the decentralized ecosystem.

If you are not already familiar with the Internet Computer, you should take a look at how it reimagines blockchain architecture. It was created to realize the concept of a “world computer,” an idea that arose within the early Ethereum community.

The DFINITY project was an early heretic that believed limitations on blockchain speed, efficiency, and scaling could be completely removed through a huge R&D effort that rethought blockchain architecture and applied powerful new cryptography. In the new architecture created, smart contracts themselves are enabled to directly and securely serve interactive web content to users, without the need for the corporate cloud to act as an intermediary, which together with the removal of limitations, transforms blockchain into a complete alternative technology stack.

Right now, this is already enabling developers to pursue the emerging SocialFi and GameFi realms, which blend social media and games functionality with DeFi, in which, for example, a chat service account can double as a crypto wallet, allowing tokens to be sent instantly with text messages, and games can provide true play-to-earn functionality and integrate NFTs and the decentralized metaverse. Over the long term, the kinds of technical advances first introduced by the Internet Computer will drive an inevitable “blockchain singularity,” in which the majority of humanity’s systems and services will eventually be rebuilt from smart contracts, and get reimagined in the process, in much the same way DeFi is already reimagining traditional finance.

Blockchain singularity will occur because smart contracts are in fact a profoundly new form of software system, which provides tremendous advantages over traditional IT. This means the future of online systems and services is blockchain, and you can be a part of it.

Hype and noise in blockchain can make it hard to distinguish true substance, but the Internet Computer is a major scientific and engineering breakthrough that can fundamentally change the way you build dapps and services today. Its functioning is powered by groundbreaking new “Chain Key cryptography,” and it continuously evolves its own network structure to scale out the capacity it provides for smart contract data and computation using a permissionless algorithmic governance system called the Network Nervous System. Important changes to blockchain architecture had to be made to allow smart contracts to serve web, which include adoption of a “reverse gas” model in which smart contracts pay for their own computation, which allows end users and devices to interact with dapps and services without first having a token wallet to pay for computation they initiate, which means dapps and services can immediately interact with anybody over the internet.

Other innovations include Internet Identity, which enables users to securely and anonymously authenticate themselves to dapps and services very simply, using cryptographically enabled devices that they own, such the fingerprint sensor on their laptop, face ID on their phone, or portable authenticators such as a YubiKey or Ledger wallet. These features and others transform how a a dapp or blockchain service can manifest itself to users.

The Internet Computer underwent Genesis on May 10 earlier this year (2021). It was brought to life by the biggest and boldest ongoing R&D effort in the blockchain industry, pursued by a large and stellar team of famous cryptographers, computer science researchers, and senior engineers. The disruptive potential of the network extends not just to the wider world, but to blockchain itself, which triggered a wave of FUD and misinformation from sources unknown at launch, with even the crypto media going mysteriously silent. But despite these bumps in the road, more than a thousand blockchain maximalist developers have seen straight through the noise and begun building the future already. Their numbers are growing every day, and you can join them building the next internet.

In this article, I describe a completely different approach to creating innovative blockchain projects made possible by the Internet Computer. While grants and venture capital are useful to get going (please contact the DFINITY Foundation if you are interested in getting a grant to start building), the Internet Computer is designed to support a much more decentralized approach to creating new blockchain services, which, in combination with its capabilities, can free your projects to innovate fearlessly around tokenization and succeed on a much grander scale, and raise funds directly from the internet community. The next generation of dapps and services on the Internet Computer can easily grow to millions or billions of users, all served from chain. This is where it starts.

I will outline four key steps in a new pattern for building successful future dapps and services. But first, I must explain something critical to everything — the importance of genuine decentralization and censorship resistance.

Decentralization and Censorship Resistance

On the Internet Computer blockchain, you can build without need for the centralized corporate cloud, and in the recommended approach described in the following sections, you can assign control over a dapp or service to an advanced DAO called a “Service Nervous System” (or “SNS”). This enables your dapp or service to run under the control of the decentralized community, to perform community-based fundraising, and gain the censorship resistance required for advanced tokenization.

The importance of true decentralization and censorship resistance cannot be overstated, since unless it is present, the advanced tokenomics required to succeed in emerging realms such as SocialFi and GameFi cannot safely be applied — yet they are a necessary ingredient for those wishing to blast past the established network effects of today’s centralized monopolistic internet ecosystem. Censorship resistance is thus a prerequisite to success.

Meanwhile, a lack of decentralization is already causing problems in longer-established fields such as DeFi, which helps explain why decentralization is so important.

Problems arise because smart contracts on traditional blockchains cannot serve interactive web content, and so dapps and services need to incorporate a website that runs on a corporate cloud service, or less commonly a private server, into their architecture to function at all. In fact, even if their smart contracts could serve web, their limited speed, efficiency, and capacity would still ensure the corporate cloud remain involved. It’s not difficult to see why. Just 1GB of smart contract data on Ethereum can cost upwards of a whopping $250 million, making it too expensive to store anything beyond basic DeFi data on-chain (by contrast, 1GB of smart contract data on the Internet Computer can cost less than $5 a year, since it scales its capacity and is vastly more efficient). This means “cloud websites” are also required to offload data storage and computation to the cloud.

While use of the cloud might seems like a reasonable technical solution, it can create real problems because it undermines decentralization. Specifically, it transitively extends liability for smart contract functionality, which might otherwise be truly decentralized, through the centralized cloud hosting accounts to their developers. For example, the Uniswap Ethereum DeFi exchange recently delisted half the tokens its smart contracts process because their developers must provide a cloud website (app.uniswap.org) so that their users can interact with their smart contracts. This made them transitively liable, so Uniswap jumped before being pushed and self-censored.

The problem goes beyond regulators. During the recent US election, Amazon Web Services pulled down Parler, the right-wing social media service. Given the right regulatory, political, or commercial incentives, corporate cloud services might also pull down many of today’s blockchain dapps and services in the blink of an eye. Even Ethereum’s essential MetaMask wallet was banned from Chrome Web Store for a while. Unfortunately, this problem is now creeping into Layer 1 proof-of-stake blockchains themselves: simple software-only nodes can produce blocks if they are configured with a validator key and some cryptocurrency stake. This quickly results in nearly all block-producing nodes running in the cloud, which provides great convenience, but transforms them into Layer 2 applications of corporate cloud services that might shut them down or hold them to ransom at any moment.

To build the future, you need to leave the past behind and be free of the risk of censorship.

Step 1: Avoid Corporate Cloud Kryptonite

The blockchain industry was brought to life by Bitcoin, which didn’t run on the cloud, and therefore couldn’t be censored and snuffed out in its infancy. The coming changes to the tech ecosystem involve disruption that extends far beyond the digital gold concept, making censorship resistance absolutely crucial. In today’s blockchain industry, the hype is overwhelming, and many projects run in fake-it-until-you-make-it mode yet raise millions from grants and venture capital. That is fine, but the Internet Computer enables the same, while also allowing you to dump the cloud and gain censorship resistance, which leads to other powers. Soon truly decentralized projects will begin to punch through the hype, just like the better plays eventually punched through the dot com boom.

Leaving the cloud behind is your first crucial step towards being decentralized and censorship resistant, which will free you to pursue the advanced tokenization strategies required to win big, and equally importantly, help your project raise more funds than the fakers can as explained in following section…

Step 2: Hand Control to a Service Nervous System

If you want to create a successful sophisticated dapp or service in a sector such as SocialFi or GameFi, then inevitably you will have to regularly upgrade its smart contracts to improve its functionality and deliver improvements and fix issues. The Internet Computer blockchain provides ways to upgrade smart contracts where required. However, if your team of developers directly controls the smart contracts involved, two serious problems will still arise:

1. Your end-users will have to trust your developers not to unreasonably change the rules, or do something malicious, such as add code that steals their tokens. If that possibility exists, which is antithetical to blockchain, the value of your dapp or service to users will be greatly reduced.
2. Your censorship resistance will be greatly undermined, since third parties will point out that your developers can change the system according to their whim. So even though you will have escaped the corporate cloud, regulators and lawsuits might still demand feature changes, demand compensation for perceived wrongs, and more.

The Internet Computer blockchain provides a solution. Today, the network runs under the control of a super-advanced algorithmic DAO that runs within its protocols, called the “Network Nervous System” (or “NNS”). The NNS is permissionless and processes proposals anyone can submit over the internet in a user-friendly way, then either quickly rejecting them, or adopting them, whereupon they are executed automatically by the network. Proposals can do everything from upgrading the blockchain’s protocols by updating the software running on the node machines that form its network, through inducting new node machines and combining them into subnet blockchains to add capacity, to tweaking economic parameters, and many other things. In only 5 months since the Internet Computer has been running, the NNS has already processed thousands of proposals, illustrating the maturity and effectiveness of the technology.

Now, this same Network Nervous System technology is scheduled to become available for use by dapps and services in January 2022.

Soon, you will be able to instruct the NNS to assign complete control over your dapp or service to a “Service Nervous System” (or “SNS”), an algorithmic DAO comprised from the same technology as the NNS itself. When the instruction is given, the NNS will create a new SNS “brain” for your dapp or service, and then assign it as the controller for every one of its smart contracts. Thereafter, updates to its smart contracts, and live configurations, can only be made via the SNS, which becomes the project’s autonomous owner that lives in cyberspace on the blockchain.

What’s important to understand, is that through this step, your project is effectively converted into an extension of the blockchain itself, which is free to create a micro-economy within its overall macroeconomy, and which can employ advanced tokenization strategies. This is makes the dapp or service far more powerful than it could ever have been otherwise, but how on earth does this transformation take place?

Step 3: Fund Growth of Your Dapp or Service

The Network Nervous System (NNS) works using an accompanying ledger of governance tokens, which are called “ICP” (these special governance tokens can also be converted into cycles, a token that acts as fuel for smart contract computation on the Internet Computer, but that’s not directly relevant to this discussion). Users can acquire ICP, and then participate in network governance, by staking them inside the NNS by creating “voting neurons”. A voting neuron has a voting power that is proportional to the number of ICP staked, and the configured time it will take to unlock them by dissolving the neuron, which can currently be set between 6 months and 8 years. Every day, the NNS mints new ICP to create a “neurons reward” that is divided amongst the the universe of neurons according to their relative voting power and whether they voted. Naturally, those holding neurons vote on proposals with the aim of driving decisions that maximize the value of their staked ICP over the long term, or minimally at the earliest future time they would be able to unlock them. Neurons can be configured to follow other neurons, so that they vote automatically, in a kind of algorithmic liquid democracy scheme that delegates expertise.

When a dapp or service is assigned to a new Service Nervous System (SNS), the dapp or service thereafter runs autonomously as part of the blockchain. The SNS works exactly the same way as the NNS, but is initially unable to make any decisions because it contains no neurons. This is where it gets interesting. To solve this problem, the SNS first spawns a new ledger of a billion governance tokens, and then runs a “decentralization auction” so that voting neurons can be created. The auction sells some substantial fraction of its new governance tokens, such as 40% (400m).

The funds raised by the auction are retained within the reserves of the fully autonomous SNS, rather than being forwarded to the original developers of the dapp or service (you will see how they benefit in a moment). The auction has a “single clearing price”, which ensures that all participants pay the same price for their new governance tokens, and cannot flip them on participants who received a higher price, creating market stability. The governance tokens are delivered to participants as a basket of neurons, with a range of dissolve delays configured, in such a way that some market liquidity can be immediately obtained, but the participant must be involved in governance for some minimal amount of time. Once the SNS has neurons and the dapp or service has undergone decentralization, and is running as part of the blockchain, the SNS grants the founding team behind the dapp or service a slice of its governance tokens, such as 25% (250m), also as a basket of neurons.

The final tranche of tokens, here 35% (350m) is reserved for users, who will be incorporated into successful future SocialFi and GameFi ventures as both owners and part of the team that operates them.

Thereafter, the SNS that controls the now-truly-autonomous dapp or service, mints new governance tokens to reward neurons for voting, in the same manner as the NNS, but this phase is only intended to be temporary. Once the dapp or service can generate valuable new tokens, or revenues, for example from commissions derived from facilitated token transfers, then these can substitute for the inflationary minting of new governance tokens, which also provides for the governance tokens to be valued using traditional financial analysis methodologies, making them attractive to hold.

What is super exciting, is that the Network Nervous System itself will shortly (watch for an incoming proposal!) allow its neurons to be converted into “community fund neurons” using a simple toggle switch, so that it can participate in decentralization auctions. This switch will make their staked ICP available for “autonomous contribution” to decentralization auctions. Once the switch is flipped, whenever new “auction contribution proposals” are adopted, which only community fund neurons can vote upon, a slice of their staked ICP can be contributed into a decentralization auction, and the contributed stake replaced with neurons from the SNS involved, which are then immediately passed to the neuron’s owner.

The participation of the Network Nervous System is set to act as economic rocket fuel for emerging decentralized ecosystem on the Internet Computer. Today, around 10 billion dollars in value is currently locked inside the Network Nervous System. Very possibly, by January 2022, when the SNS functionality goes live, the funds the NNS has available to contribute will exceed 1 billion dollars in value. Watch for news: the NNS is due to start collecting funds imminently.

IMPORTANT NOTE. Venture capital and grants can still play a hugely important role within this framework. Investors that help you create a dapp or service that runs a successful decentralization auction can be given a share of your founder governance tokens, which could become fantastically valuable if you successfully unlock the power of blockchain.

Step 4: Employ Advanced Tokenization

Having gone through steps 1–3, your dapp or service has been completely decentralized and is running as an extension of the blockchain. You will now be a leading community member, participating in its Service Nervous System, and you have an incentive to help it succeed through your ownership of governance tokens. It is now time to leverage the full power of blockchain by applying advanced tokenization, and you should submit proposals to the SNS to update the features of your dapp or service accordingly.

Pervasive tokenization will change the very nature of future dapps and services, and change the whole world too. In the future, the aim will be to enlist users as both owners and team members. Most basically, that means distributing governance tokens to users. For example, a SocialFi service could randomly challenge users to prove both that they are currently online and not a bot, for example using a CAPTCHA. Those users who are lucky enough, or perhaps determined enough, to be online when challenges arrive and can correctly respond in a timely way, can then be airdropped some randomized small number of governance tokens as a reward, perhaps modulated by data relating to their social graph or activity.

The purpose is twofold. Firstly, users are encouraged to be online more, making it easier to overcome initial growth inertia — the purpose can easily be seen by considering, for example, the benefit of keeping the early users of an emerging chat service online, since it increases the chance friends will respond, and makes the service more valuable for everyone. Secondly, users who become owners of governance tokens will become advocates for the service too, just like the owners of cryptocurrency promote the blockchains behind them. The aim for emerging SocialFi and GameFi services will be to enlist millions of users as advocates, catalyzing their ecosystems so that they can grow to hundreds of millions or billions of users. In these kinds of dapp and service designs, the user is first made part of the sales and growth team, but much more sophisticated schemes can also be employed that enlist the help of users in tasks like content moderation.

Your aim will be to create a blockchain micro-economy with powerful viral growth flywheels. Part of this will involve building a decentralized system that drives the value of its governance tokens, since as their value increases, so will their power as an incentive mechanism. Initially, the SNS pays voting rewards to community members that own neurons by minting new governance tokens, which is inflationary, but over time your service should transition to generating revenues, which can then be distributed as voting rewards instead.

For example, a SocialFi chat service might allow also act as a decentralized online wallet where users can maintain tokens in their accounts, which they can sent to other users in text messages, providing an opportunity for the service to deduct a small fee to generate revenues. Meanwhile, a GameFi realtime online racing game, in which users pay an entry fee into a pot to participate then distributed to the winner in a crypto play-to-earn model, might deduct a small commission from the prize (how gameplay can be validated by a smart contract, in ways that prevent cheating by bots, is an interesting topic I plan to address in an upcoming post).

Of course, these simple examples only scratch the surface of what is possible. Internet Computer blockchain developers are going to surprise us all with their creativity and what they can dream up using this fully decentralized platform. Blockchain is the future internet, and it’s going to be far wilder, more dynamic, more exciting, more innovative and grow far faster than anything we’ve seen before. This is the time to start building and win.

See also this more technical foregoing post on the Service Nervous System.

If you want to exploring building on the Internet Computer, checkout the technical documentation for Internet Computer canister smart contracts at https://smartcontracts.org and find general links and resources using https://dfinity.org and https://internetcomputer.org

Thanks for reading this far, and please join the growing army building the future on the Internet Computer!