Issue #47: Decentralized Services

This week we’re going to explore another layer of the Web 3 tech stack - decentralized services.

Most of these services are data related and used primarily by developers - data storage, blockchain data, pricing data, user data, security data. All the things in the background that make your favorite applications work. They don’t get as much attention as DeFi protocols of Layer 2 scaling solutions, but they are equally important.

This discussion will feel more technical because these services are behind the scenes, but I wanted to cover it because this is another pillar of Web 3. Remember, Web 3 is the Internet as we know it today, without the intermediaries. So decentralized web services resemble the web services we have today, just without the intermediaries.

It’s Amazon Web Services, minus Amazon.

Like other layers of the Web 3 tech stack (blockchains, DeFi protocols), decentralized web services are big business. The next phase of the Internet is relying on them.

Let’s zoom in…

Introduction

We’re going to ease into decentralized services with an analogy…the sharing economy. Hear me out.

Sharing economy platforms like Uber and Airbnb, while centrally managed, share certain characteristics with decentralized services.

Uber isn’t a taxi company, it’s a software company. Same with Airbnb. These companies are effectively protocols for ridesharing and short term rentals in the form of mobile apps. The Uber protocol says drivers do this, and riders do that. The Airbnb protocol says hosts do this, and guests do that. If you want to access their networks, you conform to the protocol.

These platforms feel like Web 2 because Uber and Airbnb are public companies, but they also have elements of Web 3 - namely the supply and demand sides of their markets being decentralized. Anyone can ride, anyone can drive, anyone can host, anyone can stay. These stakeholders receive a majority of the revenue, and the protocol takes a small slice of each transaction.

This is exactly how decentralized Web 3 services work, minus the company of course.

I like to think of the sharing economy as a bridge between Web 2 and Web 3, combining centralized governance with decentralized service.

Now let’s go the rest of the way.

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The first decentralized web service I remember hearing about was Storj (pronounced ‘storage’). Founded by Shawn Wilkinson in 2014, Storj is a decentralized data storage platform - aka decentralized Dropbox. Instead of your photos being stored in an iCloud server somewhere, they are encrypted and stored across hundreds or thousands of individual computers and servers with unused storage capacity. Like Airbnb for your data.

I remember meeting Shawn at the first crypto conference I ever attended in Las Vegas in 2013. We were at a small group dinner and I was seated facing Shawn. He wore Google Glasses the entire time.

If there was a photo of someone next to the word early adopter in the dictionary, it would be Shawn. This guy was early.

I mention Shawn and Storj because decentralized data storage was the first, blockchain-based decentralized service. It’s also conveniently something I think most of you can relate to. Most of you have used centralized data storage services like Google Drive and Dropbox to store your documents, photos, etc. Those services are operated by Google and Dropbox and your data is stored on their servers.

If those services go down, everyone loses access to their data. If those systems are breached, everyone’s data is at risk. In other words, they represent a central point of failure and a central point of risk.

So what is decentralized data storage?

Remember, Web 3 = Today’s Internet minus the intermediaries.

Therefore, decentralized data storage is the data storage services we have today, minus Google and Dropbox. So what replaces the them?

Individual participants and a protocol. Same as DeFi.

Google and Dropbox servers are replaced by individual computers and servers with excess storage capacity. If the network of participants is large enough, the aggregate capacity of the network can rival its centralized counterparts. Google and Dropbox the companies are replaced by a protocol that coordinates how data is distributed, stored and retrieved across the network. Everyone on the network abides by the same set of rules.

Decentralized data storage was the first, but the services layer of the Web 3 tech stack is filling out. There are now widely used decentralized services meeting a range of developer and application needs:

• Decentralized storage: Storj, Filecoin, Arweave, Akash

• Decentralized API/indexing: theGraph, Dune Analytics

• Decentralized pricing data (oracles): Chainlink

• Decentralized data streams (identity, credentials): Ceramic

• Decentralized smart contract security monitoring: Forta

Looking at the Numbers

Because decentralized web services are primarily used by developers, the average person probably doesn’t have a perspective on just how critical these are to the ecosystem, or their cost.

Here are some quick statistics:

• theGraph will support an estimated 85 billion queries for blockchain data during December.

• Over 900 applications rely on Chainlink data feeds for up to date cryptocurrency pricing on ETH/USD, BTC/USD and hundreds of other trading pairs.

• Filecoin, the largest decentralized data storage service, generated $1.4B in revenue over the last year, second only to Ethereum.

When it comes to web services, cost and reliability are probably the two most important factors. Most users don’t care about decentralization. They just want it to work when they need it, and to pay a competitive rate.

In terms of cost, a service like Filecoin has to be cheaper than Google Drive, Dropbox or Amazon Web Services to attract marketshare.

Here’s a breakdown of the cost of Filecoin per gigabyte of storage relative to the cost of Amazon S3, a comparable offering. If you’re reading this on your phone and the graphic is too small, the takeaway here is that Filecoin is approximately 0.02% the cost of Amazon’s comparable service. That is significant, especially for heavy users.

As you can see, decentralized data storage can be quite a bit cheaper than traditional alternatives.

There are challenges though.

Like many new services trying to find a user base, decentralized web services start out heavily subsidized or free. The supply side of the market (ex: data storage providers) comes because they are receiving subsidies for doing so, usually in the form of token rewards. The demand side of the market (users) comes because it doesn’t cost them anything.

At some point though, the subsidies are turned off or run out and the marketplace must sustain itself. This is the sink or swim moment.

All of the decentralized services I’ve referenced so far have subsidized the use of their service in some capacity. Even Uber subsidized rides when it was duking it out with Lyft.

The ones that have built not only valuable services but strong communities will survive the transition from subsidized to free market.

We’re in the same position at Forta. For the time being, anyone can publish and run agents and subscribe to alerts for free. At some point, the community will decide to turn on fees and users will need to pay or stop using the network. Navigating that transition will be critical to Forta’s long term success.

Parting Thoughts

Amazon Web Services has 32% of the cloud infrastructure services market today, followed by Microsoft Azure at 19% and Google Cloud at 7%. These companies have bundled all the core middleware services together into a one-stop-shop for developers and their share prices have been rewarded handsomely.

But the Web 3 horizon is quickly approaching. My former boss at EY, Paul Brody, predicted that there would be a decentralized version of every microservice in the AWS bundle, and he was right. This is the Internet’s new frontier, and the thing that excites me most is our ability to participate.

You can contribute your excess storage capacity to Filecoin’s network. You can signal your trust in a subgraph by staking GRT. You can publish agents on Forta and help monitor the smart contracts you rely on.

It’s the sharing economy for all the middleware services Web 3 will rely on.

Participate.

Thanks for reading.

Andy

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