Three Warnings of Warnings for the Buzzwordy Allure of “Decentralization”
What value does decentralization serve anymore?
With blockchain venture capital and angel investment targets searching for more refined, user-focused, functional projects, it’s important to go over the concept of decentralization and what role it plays in attracting users.
A simple fact that many investors lost track of in the madness of ICO investing in 2017 was how important it is to have a reasonable userbase target and growth strategy. Equally important is the demographic of the users these projects are seeking to attract.
This article will highlight the types of traps many projects are blindly rushing into, and bringing potential investors with them:
1. Attempting to target a user base that will likely never be interested in using their platforms long-term.
There are too many projects in the blockchain space attempting to “steal fire from the gods” and go after the user bases of the likes of Facebook, Google, and Amazon. As if this goal isn’t ambitious enough, hinging the majority of the value proposition on the fact that their platforms are “decentralized” could be a big mistake.
In order to attract users from platforms that have pioneered and ruthlessly refined spectacular user interfaces and powerful network effects, blockchain projects must offer something magnitudes better. A back-end feature such as decentralization isn’t enough to get massive amounts of users to jump the Facebook/Google ship unless it is paired with a user experience that blows the alternatives out of the water.
This is one of the major challenges that even a more advanced blockchain-based platform such as BAT have to face. Any competitors are competing for a piece of pie that may be too far out of reach – so savvy investors will fully understand the difference between a project’s listed “total addressable” and the size of the actual opportunity itself.
2. Neglecting the true demographics in dire need of decentralization.
For the majority of Americans and Westerners, decentralization isn’t a primary concern when it comes to sending payments. Try explaining to the average college student why they should navigate the twists and turns of sending Bitcoin to each other instead of pulling up an app like Venmo and clearing the payment in two seconds.
Think of users that could really make use of decentralization. Users in developing countries such as Ghana or those with crumbling economies like Venezuela need decentralized payment and banking solutions. Many projects are working on solutions that would be perfect for developing economies, but are anchoring their business development models to attracting users in countries like the United States that simply don’t have an urgent need or desire to use.
Additionally, many of these demographics may not generate less revenue, but also be more expensive to target. Savvy investors will pay attention to what demographic a project is targeting, and whether that demographic is as lucrative as the project assumes.
3. Understand which middle-men can actually be “cut out”
So many projects in the space aim to cut out the third party intermediaries between transactions without paying attention to the actual costs. This is not only a very tough endeavor, but also a gross misunderstanding about how to run a functional business. Successful businesses tend to gravitate towards being centralized because it makes management, growth, and customer success way more efficient.
Your project wants to cut out Uber and create a blockchain-based network that connects drivers and riders at a fraction of the cost. Great. But how will users find out about it? Where’s your marketing budget? What happens if users want customer support? How will you retain users? The assumption that these can be done with network fees or praying to Satoshi that the token appreciates enough to keep everybody happy (for now) will pave the trail of tears for investors. Decentralization comes with its own costs, too.
For all the negative press, centralized intermediaries like AirBnB and Uber tend to do an above average job (all things considered). Even getting to “average” requires extensive investments in user happiness and marketing for user-heavy business models.
Think of a landscape where centralized third-party intermediaries actually kind of suck at what they do. For example, the betting landscape seems to be a decentralized glob of poorly-run centralized betting platforms. A project such as BX.Bet, one of many projects aiming to facilitate and legitimize the betting space, could potentially have a chance to offer a value proposition that beats that of the reigning centralized platforms.
Savvy investors will understand the role intermediaries play in their landscapes, will note how and why they spend tens to hundreds of millions of dollars a year just to exist.
Next time you find yourself reading a whitepaper of another project building something its target users won’t use, or targeting users that simply aren’t valuable enough to merit the development of a full decentralized business, or claiming that it will level the playing field by cutting out third party intermediaries, run (or at least do very, very diligant research to prove this argument wrong).
Featured image courtesy of Shutterstock.