Progressive Decentralization: A Playbook for Building Crypto Applications

In a recent post, Jesse Walden of a16z Crypto navigates the challenges facing decentralized applications (dApps) on their path to building a successful product with a sufficient level of decentralization. Striving for pseudo-decentralization and token distribution in the early stages of a project can lead to a lack of user demand and potential regulatory scrutiny. Therefore, Jesse offers a three-step process to show how dApps can decentralize progressively to avoid overlooking the foundational steps required to build a “sustainable, compliant and community-owned product.”

1. Product/Market Fit: The most important step because without a product people want, there is no business. Jesse advises tight team control of the project, no pretense of decentralization, and no token distribution at this stage.
2. Community Participation: Once the product gains traction, that’s when Jesse says projects should start fostering a community of participants, turn towards open-source development, and explore adding incentives for community contributions (either via fees or tokens).
3. Sufficient Decentralization: With product/market fit and a robust community in tow, the final stage is to seek widespread token distribution and to cede majority ownership of the project.

Why it matters:

• Navigating these waters has been a complicated process for many a project. Numerous dApps in 2017-2018 skipped the product phase in favor of claiming decentralization and early tokenization. Most now reside the ever-growing wasteland of unused dApps. The ones that have succeeded to date, such as decentralized finance app Compound (to name one), started as a single team overseeing the early product development. Only later on did their attention shift to decentralizing their efforts (e.g., Compound’s Open Oracle System to democratize collecting price information).
• Most of the questions Jesse leaves answered surround the distribution of a token. There are various proposals on how to reward community contributions via token allocations, including incentivized testnet events or security deposit mechanisms like NuCypher’s WorkLock. But there is no universal answer. Each project will have a different community, and as Jesse points out, finding the right strategy depends on a deeper understanding of community behavior.