The advantages and disadvantages of decentralized services

In an earlier post, I wrote about the hype around initial coin offerings (ICO’s) in general, and the specific danger of conflating the ICO investors of a decentralized app with its eventual users.

In this excellent post on cryptocurrencies, Adam Ludwin makes the same point:

“There is a pervasive narrative out there that supports entrepreneurs looking to create new crypto assets. The idea is that by selling assets to users before your network launches, you create “evangelists” who will be early users and promoters you wouldn’t otherwise have if there were no financial incentive to participate in your community.

The problem with this line of thinking is that it conflates early investors with early users. The overlap between people who buy your crypto asset and people who actually want to use the service you are building is likely very, very small, especially during market manias like this one. It creates a false sense of “product-market fit.” Yes, people are buying your crypto asset. But that’s because the “market” are people who want to get rich and the “product” you are selling is a “way to get rich.””

However, more important than this specific point, is Adam’s observation that:

“On almost every dimension, decentralized services are worse than their centralized counterparts:

They are slower

They are more expensive

They are less scalable

They have worse user experiences

They have volatile and uncertain governance

Except for one dimension.

Censorship resistance.

Censorship resistance means that access to decentralized applications is open and unfettered. Transactions on these services are unstoppable.”

In other words, Adam is stating that for most people, centralized services do just fine. As Adam states, “you cannot argue that for everyone Bitcoin is better than PayPal or Chase. Or that for everyone Filecoin is better than Dropbox or iCloud. Or that for everyone Ethereum is better than Amazon EC2 or Azure.”

But for those users who are optimizing for censhorship resistance, the tradeoffs of decentralized services are worth the censorship resistance feature that it enables.

In other words, there is heterogeneity in the homogeneity.

And that is why Adam concludes with the following statement, with which I fully agree:

“Don’t bet against crypto assets in the long-run: as we approach the 10 year anniversary of the Bitcoin paper it is clear that they aren’t going anywhere and that decentralized applications may very well find an important place alongside all the other forms of organization we have come to take for granted.”

Also published on Medium.