Understanding the Usability and Value of Decentralized Networks PlatoBlockchain Data Intelligence. Vertical Search. Ai.

Understanding the Usability and Value of Decentralized Networks

Suhail Saqan
Understanding the Usability and Value of Decentralized Networks PlatoBlockchain Data Intelligence. Vertical Search. Ai.
  • What cryptocurrencies and tokens serve in their underlying blockchain networks
  • Why cryptocurrencies and tokens would be preferred over traditional financial instruments in the future

Cryptocurrencies are digital assets that have two main purposes, serving as a store of value and/or a medium of exchange. These are also general definitions of money or currency which is also why cryptocurrencies also thought of as a newer type of money. Bitcoin was what started the whole revolution of decentralized digital assets. Bitcoin can be used a form of money for purchasing any type of commodities, representing a medium of exchange, and a scarce digital asset which no one can produce similar to gold and silver, representing a store of value.

After establishing the definition of crypto assets it is important to dive deeper into their purpose and applications. Hence, we need to examine their roles, incentives and efficiency when it comes to applications and smart contracts built on decentralized blockchain networks.

Decentralized Blockchain Networks

One of the easiest ways to fully grasp the idea behind how decentralized blockchain networks work is to realize the differences between them and what we mainly have now. Furthermore, they are very similar to traditional businesses, however, very different at the same time.

Incentivizing Decentralization

Using blockchain technology, decentralized networks are capable of providing coordination services that are verifiable and secure same as centralized options do but instead keeping the control with the community rather than a single entity. However, in order for the system to work, there needs to be engagement from two main parties: operators and consumers. Given that if one is missing, it will fail. At the same time they are not free to use. This leads us to a problem about costs used to run the network.

Funding

VC Funding:
Centralized businesses usually rely on outside capital coming from venture capitalists to raise funds. This model can work very well when providing the initial capital used to fund the early development for a minimally extractive decentralized network, however, it gets really problematic when trying to get a decentralized network to become sustainable for long-term success. When networks rely on VC funding, they would need some type of value extraction from their users in order to repay their investors and shareholders. The network would also lack neutrality for the future of the network. Thus, this would challenge the whole idea of a minimally extractive system discussed earlier.

As discussed earlier it is important for the token to have a case use, other than for raising funds, throughout the network in order for it to capture the value of its network. If the token lacks in capturing the value of the network, then it would have no intrinsic value other than just speculation or an expectation for a change. Also, if the token has no value that would hinder the fund raising and the operators would not be willing to run the network to get paid with it. All in all, that would affect the growth of the network in the long term.

  1. Thereby, higher rewards for the operators results in a greater network service for the users(e.g. higher security, more liquid trades, etc). This in return leads to more services, released by the developers, as well higher user traffic meaning additional fees paid to the operators.
  2. With more network usage and higher user traffic that results in a higher demand for the token, therefore growing the network’s valuation and token’s market cap.
  3. Again, growth of the network’s valuation and its token consequently leads to more allocation for operators, resulting in more capital to fund and grow the network. It also attracts more investors and users therefore reenabling the cycle again.

Staking and Lockups

Staking is a method used by network protocols which incentivizes token holders to lock up their tokens in return for services or rewards. Staking mechanisms vary between different protocols however they all revolve around the idea of users using nodes to take tokens off the market and placing them in a state of illiquidity, reducing the circulating supply and ensuring the integrity, security and continuity of the network. When users provide tokens, they are rewarded dividends or network fees as a form of passive income.

Token Payments for Network Protocol Access

One of the simplest but effective ways to tie token value to network protocols is by requiring payments for network services to be done using the token. This requires all users to acquire the tokens in order to interact with the network, increasing market demand. By driving up demand for the token using the network’s services, it forces that the demand for the tokens to flow through demand for the network’s services. At the same time, increasing the token’s value incentivizes security nodes to sustain the network’s security as its services depend on it and the node’s payments are also influenced by the token’s value.

Governance Voting as Decentralized Autonomous Organizations

Decentralized Autonomous Organizations (DAO) are organizations represented by rules encoded as a computer program that is transparent, controlled by the organization members, and not influenced by a central government. As DAOs became more popular, there have been so many networks that create governance tokens. By holding governance tokens, network users are able to vote on certain proposals in order to make changes or improvements for the network. Most of the networks are designed that each token a user owns would count as a vote. Therefore, people are incentivized to hold on to their tokens in order to gain more power over the future of the network. One person or a small group having most of the votes could sometimes be bad, however most of the time the proposals being made are not destructive and often just variables such as fee percentages. At the same time, there have been different voting structures such as quadratic voting which fix the majority rule problem.

Fee Redistributions and Token Burns

The phrase “token burn” means algorithmically taking tokens out of market circulation by sending them to a locked address known as a “burn address”. Nobody owns the keys to this address therefore no one can retrieve these tokens and they will remain there forever. Therefore, some networks would use fees to purchase the tokens from the market and burn them. Most networks do that to accrue in token’s value and therefore to create additional incentives for traders and holders. As more tokens are burned, there will be fewer tokens available on the market therefore dragging the token’s price up. Some networks would use the fees generated from the users to pay them back directly to the holders of the token. Providing the users a form of passive income as dividends would incentivize users to keep holding the token as well as buy back more of the token with the fees paid in order to earn even more rewards.

Decentralized networks and blockchains are on a verge to change everything about our society and disrupt any form of centralized model, therefore instead supporting information transparency, societal fairness, accessibility, and security. They aim to assist in creating a more trusted and inclusive digital environment across everyone. By removing a single centralized point of failure, decentralized systems are able to improve industries where any type of exchange or security are the primary problems. Replacing centralized institutions brings about the ability for anyone to be able to exchange value without being maximally extractive or monopolistic.

Source: https://suhail-saqan.medium.com/understanding-the-usability-and-value-of-decentralized-networks-1aa27c90f183?source=rss——-8—————–cryptocurrency

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