DApp Usage vs. Valuations: Tokens Driving Rampant Speculation Despite Tiny User Base

dapp 2.pngSource: DAppRadar

Facebook’s recent decision to remove Alex Jones’ Infowars from their platform has shone a light on the disproportionate control wielded by centralized tech giants. Calls for applications which run on a shared ‘world computer’ that is trustless and available for everyone to access are growing louder. Yet these decentralized applications are hampered by the low throughput of their underlying base protocols as they seek to chart a course to mass adoption.

DApp Useage

While most dApps use the base protocol token (most likely Ethereum) as a means of exchange, 6 of the top 30 leading decentralized applications come built with their own native, publicly-traded token.   Value accrues to these utility tokens as the network usage of the dApp grows. However, since decentralized applications are still in their infancy in terms of usage rate, the trading valuation of these dApp tokens is currently unpegged from their underlying fundamentals and driven largely by speculation. Despite their meager usage numbers, dApp coins have been hugely popular with speculators looking for an early seat on the dApp train.

dapps.pngSource: DAppRadar


Of the 6 dApp tokens, 5 of these projects are decentralized exchanges with the only exception being Augur. Billed as a ‘decentralized oracle and prediction market protocol’, Augur imagines use-cases for prediction markets beyond simple gambling. For example, a Nigerian farmer relying on seasonal rainfall could place a bet against the outcome of rain in his country. Should the rain arrive, his livelihood is secure. Should it not arrive, he will have hedged his losses with his win on the Augur market. While extremely promising in theory, in practice Augur is hamstrung by the slow transaction capacity on the Ethereum blockchain. Indeed, since launching a month ago Augur has never had more than 300 daily active users on its platform.

Augur founder Joey Krug likened his project’s current scaling predicament to streaming HD videos in 1995. Just as internet capacity and GPU speed needed to show significant improvement to support HD streaming, so too the base layer protocols on which dApps are built must overcome their scalability hurdles in order for the decentralized vision of Web3.0 to manifest.

Ethereum Competitors

Many Ethereum competitors have sprung up hoping to provide a high-throughput alternative for dApp builders. Cardano, NEO, EOS and Qtum are amongst the smart contract platforms looking to solve for scalability.

However, the recent controversy surrounding EOS and their consensus model, which gives disproportionate power to 21 block producers, highlights the dangers of sacrificing decentralization in an effort to scale. Not to be outdone by their competitors, Ethereum developers are working on a number of proposed upgrades that promise to increase network capacity. Casper will replace the energy-intensive process of mining with a more scalable Proof of Stake system while Sharding refers to efforts to partition the Ethereum blockchain into many sub-chains, reducing the load on block producers by giving them only a subset of total transactions to verify.

By compounding scalability improvements on top of each other, Ethereum’s founder Vitalik Buterin has set out to increase network capacity from 15 to 1 million transactions per second.

While many internet users are growing increasingly wary of the immense power possessed by Google, Facebook and other tech giants, decentralized applications are not ready to take over just yet as the infrastructure upon which they are developed is still in beta.

With very few daily users, those dApps with publicly listed coins are trading at exorbitant valuations in comparison to their usage rate. However, the influx of speculative capital serves to attract talented developers to solve the scalability problems facing distributed systems. Once the base layer throughput is improved, it could open the door for the mainstream adoption of decentralized applications.

Istanbul Upgrade: 28 Ethereum Improvement Proposals Under Consideration

Ethereum’s developers have submitted 28 ethereum improvement proposals (EIPs), which include recommended codebase modifications that may be integrated into the upcoming Ethereum (ETH) network hard fork, called Istanbul.

The EIPs  are expected to change the smart contract platform’s mining algorithm, code execution and pricing mechanism, and data storage process.

Deciding Which EIPs to Include With Next Hard Fork

During the bi-weekly meeting between Ethereum Core developers (on May 24, 2019), the blockchain network’s development team discussed various approaches and EIPs which may help the platform scale effectively.

Commenting on the process for considering EIPs to be added to Istanbul, Hudson Jameson, the Community Relations Manager at the Ethereum Foundation, remarked:

We’ll talk more on the All Core Devs Gitter channel to wrangle in some of these EIPs that are still stuck in proposed and as quickly as possible decide on which ones are being implemented for Istanbul.

EIP 1108 Tentatively Approved During Bi-Weekly Meeting

Jameson also confirmed that the deadline for submitting EIPs to be considered for Istanbul passed on May 24. He added that Ethereum’s developers are now reviewing the proposals in order to determine whether they should be implemented in the next Ethereum hard fork .

EIP 1108, which recommends small adjustments to Ethereum network gas fees, was tentatively approved this past Friday (during the bi-weekly meeting). As explained on its Github page, EIP 1108 addresses the following:

The elliptic curve arithmetic pre-compiles are currently overpriced. Repricing the pre-compiles would greatly assist a number of privacy solutions and scaling solutions on Ethereum.

Currently, the implementation details related to EIP 1108 (and other EIPs) are being reviewed and Ethereum Core developers will be presenting benchmarking figures for repricing pre-compiles (for EIP 1108) during the next bi-weekly meeting.

According to Ethereum developer Rick Dudley, EIP 1559, which proposes a new type of transaction fee structure for Ethereum, is “a pretty complicated change.” Dudley believes that the final implementation specifications for EIP 1559 will most likely not be finalized by the time Istanbul goes live.

He also confirmed that the Istanbul hard fork, or backwards incompatible upgrade, will be activated at some point in October 2019. However, Istanbul’s Github states that the exact date and time for the planned Ethereum network update is to be determined (TBD).

ETH Mining Protocol Change Under Review

EIP 1057, which recommends a change to Ethereum’s proof-of-work (PoW) mining protocol, is also being considered to be included as part of Istanbul’s codebase modifications. Notably, the market for ether mining rewards has been estimated to be at $655 million (per annum) and powerful ASICs have been consistently outperforming lower-priced and less powerful graphics cards.

One of the design goals, for Ethereum, is to reduce miner centralization by modifying the current PoW mining protocol or replacing it with the ProgPoW algorithm.

Explaining why the implementation of ProgPoW was postponed, Jameson said

We ran into issues starting the ProgPoW audit. We had a hardware partner who specialized in ASICs who was going to work with Least Authority to perform the hardware parts of the audit. They are no longer participating in the audit so we are looking for other auditors for the hardware portion.

Developer Compiles Spreadsheet of All EIPs Under Review

In statements shared with CoinDesk, Ethereum developer James Hancock noted that the smart contract platform’s development team will be working on merging accepted EIPs for Istanbul. The merged proposals will then be added to Ethereum software clients, Hancock explained.

He also mentioned:

The suggestion is to have reference implementations in two ‘major’ clients. The definition of major is pretty loose.

The blockchain developer has compiled a list of all EIPs being considered for Istanbul and they’ve been marked to indicate whether they’re “ready” to be integrated into the Ethereum mainnet