Alex Mashinsky

@Mashinsky

Fat Protocols Vs. DApps: Creating Long Term Value on the Public Blockchain

April 30th 2018
Fat Protocols vs. DApps; Photo by Raphael Koh on Unsplash

A recent article that appeared on USV.com describes a concept called “fat protocols” and “thin protocols.” Not to be confused with the word you would find on a nutrition label, fat protocols describe how value is created on the public blockchain, and where it’s stored.

According to the article, the majority of value that exists in public blockchains such as Ethereum and Bitcoin today lies in the protocol layer and not the application layer. If that seems highly technical, don’t worry as we’ll break it all down in a moment.

This article discusses how monetary value can be created and established on the blockchain, and why we think the idea of thin and fat protocols isn’t quite right. Instead, what people need is a truly revolutionary and accessible distributed Killer App to give crypto its “NetscapeMoment.”

Protocols and applications on the internet today

Before we get too far in, let’s go over a few of these things.

First, what’s a protocol? In simple terms, a protocol is the language and software infrastructure of the Internet. For example, TCP/IP, the technology that powers the entire Internet, is a protocol. Other protocols include SMTP used by email, and those used by technologies like VoIP (which I helped create) that are used in services like Skype, and on many telephone networks.

Next, an application, on the other hand, is the software or program that users interact with. For instance, Facebook could be described as a web and phone application, one that exists on top of the protocol of the Internet. The majority of Google services could also be considered as applications, and not protocols; Google search is an application that runs on the protocol of the Internet.

So now, we’re ready to explore what all of this has to do with blockchain.

The USV argument

According to the USV article, cryptocurrencies today have all of their wealth (or at least the vast majority of it) created and tied up in the protocol layer. There is a huge amount of wealth tied up in the Ethereum Blockchain itself, which is akin to a protocol. The same can be said for most other cryptocurrencies like Bitcoin, Litecoin, and so on. While some of these blockchains have DApps (equivalent to applications), only a small portion of the blockchains value is attributed to them.

Further, the article argues that the Internet today is the reverse of this. Specifically, the vast majority of the value that was created and exists on the Internet is tied up in applications like Facebook and Google.

This is where the term fat protocol comes from. Simply stated, the protocol layer in most public blockchains, according to the article, is where all the value lies today and will continue to be created. Thus, the protocol layer will continue to be the biggest (fattest), and the application layer is purportedly much thinner as it contains much less value and will continue to be so.

It also states that the inventors of the Internet’s original set of protocols could not monetize them as they were given for free use to all newcomers of the Internet. I definitely agree with USV on this part, as over 1B people use VOIP every day without paying me any royalties!

The DApps are coming

There is certainly some truth to the USV article. However, the idea that the vast majority of wealth on the blockchain will exist at the protocol level is an assessment that explains the situation but not the reasoning for it and, in fact, is quickly changing.

Value in the protocol layer; Source: https://taylorpearson.me/fat-thin/

What many seem to ignore is that Ethereum which is credited with the invention of the “Smart Contract” really changed the world by inventing and popularizing the ICO.

The ICO is one of the first times in business history when a company or an organization can invite almost anyone to participate in a crowdfunding event.

Anyone can raise funding via an ICO, create a new or improved service but charge nothing, yet create great value for its community of users by listing the ICO on crypto exchanges. The amazing success of Bitcoin and Ethereum has mostly created value for holders outside of Wall Street and traditional finance which explains the rapid adoption of other coins and tokens as many rush to replicate the model.

The Ethereum community members vote each second on the value of the Ethereum community by buying or selling ETH on over 100 crypto exchanges worldwide. As such, the price of ETH goes up or down based on the consensus of the community about the health of the Ethereum platform (Fat Protocol) and the viability of the ICO process as a future business model for company creation (the DApp). In fact, think of the DApp crypto valuation as an equivalent of the DCF or Discounted (future) Cash Flow- valuation method used by Wall Street to value public companies.

Thus, the value created is not created or stored in the “Fat Protocol” of Ethereum but rather in Ethereum’s continued ability to attract projects and members who believe in the platform and its utility. The rise in the price of ETH is directly correlated to its rise as the dominant platform to deploy DApps and ICOs and its recent decrease in price can be directly attributed to the rise of other solutions and the regulatory pressure on the ICO community.

The ICO structure enables a community to be born, grow at its own pace without the traditional pressure from financial investors or VCs to build what the “market needs” and deliver what the community needs.

This change in focus from how do we create and maximize profits to how do we maximize the growth of the community is new and revolutionary. It rides on top of the biggest wave we have seen in 500 years which is threatening to replace and dismantle the monopolies created by the centralized toll collectors which dominate our lives every day.

Companies such as Community Banks and ISPs which claimed to “do no evil” have been replaced with “we have all your money and we are too big to fail” and “we own all your data and your digital identity” legal monopolies.

Users worldwide are willing to “stake” capital in this ICO “Cambrian Explosion” to give young companies a chance to replace these giants with DApps built for the people by the people. And since most of these DApps don’t need to generate any revenues or profits to grow their membership they can very easily compete with most banks and Internet toll collectors.

Each day, there are more and more DApps available online that are powered by blockchains like Ethereum. Once these applications scale their utility and create a friendly UX accessible to the average user, their functions become indispensable. In much the same way that many online services today are, as this continues, the value of DApps in the application layer of blockchains will inevitably balloon.

The truth, unfortunately, is that today, most DApps are not decentralized, highly technical and are not very user-friendly. Either that, or they target a very specific niche technical audience such as advanced cryptocurrency users.

In order to evolve from the idea of fat protocols creating or storing most of the value, the world needs a DApp that provides an indispensable service while also bringing top-notch UX for all experience levels. It needs its own killer app.

The Celsius Network DApp

The end goal of Celsius Network has always been to bring the next 100 million users to crypto and help the blockchain cross the chasm from early adopters and into mass adoption. In order to do this, we need to offer the next wave of adopters compelling, essential, and easy to use applications that we’ve been discussing in this article.

In terms of ease of use, Celsius has spent a lot of time in researching and developing an extremely fluid, natural, and easy to use interface. This is to ensure that anyone who can use a mobile phone can participate and interact with the blockchain. We want to take out the uncertainty and remove all the technical barriers that exist today. We also want to reduce volatility by convincing most users to HODL.

HODL; Photo by Lukas Blazek on Unsplash

We often compare this to the classic Netscape Navigator. Netscape Navigator was among the first widely popular and easy to use web browsers. It is one of the major catalysts for early Internet adoption among the general public starting a few decades ago.

Our goal is nothing less than to make the Celsius Network DApp “The Netscape Moment” of cryptocurrency in terms of its power to start a revolution.

The next important component in developing a DApp like we want to is that it needs to offer something that is indispensable and that everyone needs. Today, big banks act as giant toll collectors by taking advantage of their customers by charging them incredibly high interest rates on unsecured loans and credit card debt, yet paying less than one percent back in interest to depositors on their savings.

We believe that this type of practice is abusive and unsustainable as all the bank’s power comes from its community of depositors. We demonstrated that the general public wants to do something about it as over 500,000 people worldwide visited our site during our ICO and over 20,000 registered to participate and learn about cryptocurrencies and the blockchain. Once they discovered the freedom and flexibility the combination of cryptocurrency and the Celsius Network offers as an alternative to banks, they voted with their wallets and contributed $50 million to help us build the platform.

Not only that, but we want Celsius to be able to offer some of the lowest interest rates for lending in the entire financial world (without a credit score check), as well as some of the highest and interest rates for savers on their cryptocurrency deposits.

It sounds impossible but if a fraction of us stopped giving banks our money and instead created a community that lends to its own members we can take all the profits big banks make, distribute them to the borrowers as lower rates and lenders as higher interest payments while building a community platform by the people for the people whose value is measured daily by its members. This way our token adopters can benefit from the growth and reach of the community in the same way the adopters of Ethereum benefited from believing and supporting that community.

Indeed, we believe Celsius has the power to bring in the next wave of adoption. Everyone needs to borrow, and everyone needs to save. Why not do it in a way that isn’t asymmetrical and abusive where the guys at the top make all the profits ?

Destroy the moats

One additional thing that the USV article got correct is the fact that because so much focus is put on the application layer today, we now have these highly centralized and massive data warehouses that exist surrounded by what are effectively moats or walls. Your personal data on Google, such as your search history, your email, and the contents of your Google drive all exists within Google’s domain. The same is true for Facebook, and the suspiciously large amount of data that they collect on you.

This is an unfortunate consequence of rapid development and investment in the application layer only, without first fully utilizing the power of the protocol.

One of the most amazing features of blockchain is that the DApps that run on them must operate in a way that is beneficial to the entire community in order for them to survive. If someone were to create a DApp that used practices similar to how banks and tech companies operated today, they would surely be abandoned quickly as public blockchain users are free to vote with their feet and wallets which is not true on the current Internet.

That’s why we believe that decentralization combined with public blockchain has a balanced value focus on not just one layer or the other, but instead one that makes use of the full power of both the protocol (the blockchain) and the application (DApps) layers in tandem. Further, it is our firm belief that blockchain technologies will at one point largely replace, or the very least, offer extremely viable competition towards the established stalwarts of the increasingly centralized Internet we use every day.

Indeed, it’s through the power of DApps and public blockchain that we can make our stand, and not just be a “fat protocol”.

Power to the people!

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