Multi-angle analysis of the reasons for the decline of ICP: Unique technology and a sparse ecosystem

Author: Titanio, Geek Web3

Introduction: Since 2022, with the gradual decline of new public chains like Solana and the growing prosperity of Ethereum Layer 2, the stories of "Ethereum killers" seem to have been forgotten by the world, and the once vibrant "hundred schools of thought" no longer exists. However, looking back at history, the narrative of new public chains that began with EOS has always been a magnificent chapter in the development history of Web3 that cannot be ignored.

When it comes to new public chains, Dfinity (ICP) is undoubtedly a topic that cannot be overlooked. With nearly $200 million in massive financing, a glamorous team of cryptographers, and unique technology, ICP was once pursued by countless people; however, since its high-profile launch in 2021, ICP has plummeted, falling from the "king project" that was once hot in people's hearts to the "cursed project" that is now despised, leaving many people sighing. At the same time, the thin and desolate ecosystem has made ICP feel ashamed in front of competitors like Solana.

Looking back at history and reflecting on the past, what factors have influenced the development of the ICP ecosystem? Can its unique technology help ecological development? Can the "cursed project" be revived again? This article will start from the technical characteristics of ICP, then discuss the flaws of its NNS governance system and the lack of a unified token standard, briefly analyzing the difficulties in its development process to clearly present the reasons for the decline of this "king project."

ICP's Technical Features: Decentralized AWS

First, let's introduce ICP's smart contract system—Canister, which is the carrier of DAPPs and allows WebAssembly (WASM) bytecode to run within it, supporting programs written in multiple languages.

ICP allocates dedicated memory for each Canister. If we consider ICP as a supercomputer, then Canister is like a process within that computer, with each Canister process containing its own runtime memory. You can encapsulate data related to smart contracts within specific containers. This is ICP's unique data storage method—Canister allows you to store the program's state, database, and even front-end data (such as game assets) all within this container, aiming to further expand DAPPs. It can be said that ICP is essentially a platform that hosts containers, deploying many Canister containers on ICP nodes through containerization technology.

At the same time, Canister supports gas fee payment functionality, allowing users to pay fees without owning native assets, as the project party can cover the transaction fees. This is essentially the "Gas fee payment" mechanism that many low-threshold wallets on Ethereum aim to achieve. This has led many to have expectations of mass adoption for ICP—users can enjoy Web2-level UX without having to purchase native assets upfront (especially not having to pay high gas fees during network congestion).

However, ICP has a significant flaw: it does not support global state. Ethereum has a setting of "global state," where the state of all accounts is publicly visible to all smart contracts, managed by a "globally visible" state storage structure through State Trie; but ICP is completely different. Specifically, programs (smart contracts) in ICP have their own dedicated Canister, and the data of different smart contracts is encapsulated in their respective independent containers, making the details of the data invisible to the outside world, which can only access internal data through the interfaces provided by Canister.

In other words, ICP does not have the "globally visible" state storage structure like Ethereum, and the interactions between different Canister programs are asynchronous, meaning that multiple contract calls cannot be completed simultaneously. Clearly, this is not friendly to DeFi protocols, making the ICP ecosystem long-term incompatible with DeFi. Some believe that Ethereum is a "world accounting machine" purely for asset transactions, while ICP is actually a "decentralized AWS" supporting complex web applications.

In addition to the unique Canister setup, ICP also adopts a layered architecture, mainly including containers, subnets, nodes, and data centers. We can think of ICP as a system composed of multiple subnets, each subnet essentially being a public chain. Within each subnet, multiple Canisters are hosted, and these containers are the interoperable basic units in ICP, with each Canister containing the code and state uploaded by users.

At the bottom layer of ICP are independent data centers that host dedicated hardware, above which run nodes responsible for processing data and state transitions within the subnet containers. This layered structural design provides ICP with higher scalability and flexibility, enabling it to meet application scenarios of different scales and needs, making its appearance more akin to cloud services.

Some believe that ICP has achieved sharding from the very beginning through its subnetting approach. Currently, ICP has 40 subnets, with the largest subnet containing 13 Validator nodes and the smallest having only 1 Validator. Combined with the aforementioned asynchronous interactions (communications) between Canisters, the overall benefit of ICP's design is high efficiency, allowing for cross-subnet communications.

Currently, all subnets combined can produce about 20 blocks per second. However, due to the limited number of nodes in each subnet, its theoretical security is questionable. Applying to become an ICP node also requires approval from the ICP Foundation, and the hardware configuration for nodes is extremely high (far exceeding the configurations of heavier public chains like Solana and Sui), leading to criticism of ICP's level of decentralization.

Regarding this, a project party within the ICP ecosystem admitted: after all, most of the applications running on ICP are "applications," not financial transactions related to assets, so there is no strict pursuit of security; ICP is essentially just a cloud platform with a higher degree of decentralization than AWS.

Aside from the above points, ICP has successfully integrated BTC into its system. Through proprietary Chain Key, threshold ECDSA, and other cryptographic algorithms, along with a special retrieval mechanism, ICP and BTC can be directly integrated, allowing ICP's smart contracts to hold real, non-mapped BTC assets. The specific implementation is as follows:

At the network layer, a BTC adapter randomly connects to 8 nodes in the BTC network, pulling BTC blocks into the ICP network and updating all UTXO sets based on the transaction data contained in the blocks, allowing the containers on ICP to be aware of the latest state of the BTC chain, enabling programs within ICP containers to verify and retrieve BTC blocks and UTXOs.

At the same time, the threshold ECDSA algorithm is the key technology that enables ICP smart contracts to accept and output BTC transactions. It is an extension of the ECDSA signature algorithm. This protocol uses a method similar to MPC (multi-party computation) to distribute fragments of the private key associated with the smart contract to subnet nodes responsible for signing, achieving a higher level of security. In short, ICP smart contracts can delegate private key management to multiple nodes rather than a single node or the smart contract itself. When the contract wants to output a BTC transaction, more than a threshold number of nodes (2/3) in that subnet need to collaborate to create a complete ECDSA signature to allow the transaction to proceed.

ICP's asset integration solution is a step further compared to current cross-chain bridge solutions. Most cross-chain bridges only provide mapped BTC rather than native BTC and heavily rely on their own nodes, which poses many security risks. ICP, however, can place native BTC into Canisters and even directly store the private keys of addresses on the BTC chain.

Compared to traditional cross-chain methods that rely on third-party cross-chain bridge nodes, ICP's BTC ledger can conveniently operate on decentralized subnets with a larger number of nodes. As long as the security of the subnet is sufficient, ICP's BTC ledger is secure.

Rationality Trap: Token Price and Lock-up

However, history has proven that no matter how superior or unique the technology, it cannot compensate for the lack of ecological construction. Since its launch on the mainnet, projects in the ICP ecosystem have remained in an embarrassing state of "no one using them," leading to a vicious cycle of "ecological scarcity → excellent projects flowing out → further loss of ecosystem participants." The focus of this discussion is not on specific issues of ecological development and support, but rather an attempt to explain from another perspective why ICP has fallen into its current predicament.

One viewpoint is that within hours of ICP's listing, it was subjected to price manipulation by certain forces (the ICP founder has always believed it was SBF and FTX). The market cap of ICP soared with the rising token price, once exceeding $230 billion, ranking third in market cap after BTC and ETH. However, as the manipulation ended, the price of ICP began to plummet, shrinking by 90% in just six weeks.

The crash in token price severely damaged the reputation of the ICP ecosystem and the Dfinity Foundation, leading to further attacks from various forces, exacerbating the decline in ICP's price, which fell far below its actual value. (It is said that a16z, which has always adhered to long-termism, has now completely exited ICP.)

I do not intend to evaluate the truth of the above claims but rather provide readers with a possible perspective (another interesting viewpoint suggests that a series of actions by ICP founder Dominic that investors found off-putting were significant reasons for ICP's crash and the isolation of its ecosystem). In reality, the factors affecting token price are more related to its lock-up mechanism—originally intended to prevent early investors from "crashing" and cashing out, but the lengthy 8-year lock-up period has resulted in "being trapped" and selling pressure on staked income-generating assets/neuron unlock selling pressure, as illustrated in the following chart:

It has been proven that the Dfinity Foundation's lock-up for early investors did not achieve the intended effect: the presence of a large number of bottom chips and the inflated price at the time of listing created a massive gap between the highest point and the densely packed area of chips, making it unlikely for anyone other than early investors to participate in the price rally in that range. However, at this point, early investors still have profits to gain; for them, reinvesting the interest generated during this phase into NNS or selling the interest is profitable. When the token further drops to a certain price, early investors, due to opportunity costs, have effectively entered a "trapped and losing" state. In this state, early investors are more likely to sell the interest, and after the neuron unlocks upon expiration, they may sell at a loss, further exacerbating the decline.

This "sell more as it drops, and sell even more at a certain price" death spiral severely hinders ICP's rebound and ecological development. Due to the inherent characteristics of Canister, DeFi has long been absent from the ICP ecosystem (leading to the absence of stablecoins), and ecosystem participants can only hold ICP tokens most of the time. Committed holders will find a fact: the returns from their contributions to the ecosystem do not keep up with the depreciation of the token!

The game of rationality assumption goes further, as retail investors and project parties turn to public chain ecosystems they believe have more potential (taking liquidity with them), further reducing the number of on-chain burned Cycles (i.e., ICP quantity), while early investors locked for 8 years feel powerless and enter a "lying flat" state.

Although this may lead to a significant drop in token price, I believe that to quickly resolve the death spiral, a thorough clearing must be conducted—unlocking all long-term staked neurons at once to fully release liquidity; maintaining the status quo will only prolong the situation and worsen it.

NNS Governance Dilemma

When VCs invest in projects, an important criterion is whether the token has governance rights, and retail investors also like to see token governance rights as an empowering factor. Dfinity's NNS system allows token holders to fully participate in the governance of the public chain, but what is the actual operation of on-chain governance?

Before analyzing public chain governance in detail, it is important to understand the governance system. Here, I will briefly introduce Dfinity's governance system—NNS system: NNS is an on-chain governance system that allows all community members to submit proposals and vote. The voting power of community members is proportional to the amount of ICP they hold, and the length of the staking period affects their voting weight. Community members participating in voting will receive ICP tokens as rewards, known as "NNS rewards." Holders who stake ICP in neurons can participate in governance through manual voting or by following the votes of other neurons.

In contrast, many blockchain projects' governance voting has become "dictatorial," where only large whales/investors/project parties themselves are qualified to initiate governance proposals, while retail investors often only have the right to participate.

As early as two years ago, the Dfinity Foundation adjusted the strategy of NNS governance, reforming some reward parameters of NNS governance to favor those who actively participate in voting, while significantly reducing the rewards for ICP stakers who do not participate in NNS governance. At the same time, the foundation no longer participates in active voting, further reducing the rewards for many nodes that default to following the official neurons without setting their own votes.

However, the governance system faces two problems:

First, since the NNS system does not restrict the proposal rights, allowing all neurons to propose and vote, a large number of junk proposals have emerged, and neurons that support a lot of junk proposals can earn more token rewards by actively participating in governance voting (similar to how Filecoin storage nodes intentionally store a lot of junk data)—in a sense, this behavior is a mockery of on-chain governance.

Second, the excessive democratization of the governance system leads to defects—extremely low efficiency and inevitably divided communities. A typical example is that the community still does not have a unified token standard! Certainly, developers can choose a token standard according to their own situations, but the poor communication and mutual misunderstanding between Eastern and Western developer communities make the unification of token standards still a distant goal, adding another stumbling block to the development of the ecosystem. In this situation, liquidity will be severely fragmented; even if a DEX is created, asset swaps will be severely hindered. There have even been incidents of NFT loss when transferring to wallets with different token standards.

How can we find a balance in the governance system to ensure efficiency while maintaining democratization? This question has been debated from ancient times to modern times, and from Web2 to Web3. In the trade-off between the two, Dfinity has chosen the former, granting ecosystem participants ample rights to participate in governance. However, given the current situation, this choice has proven to be more harmful than beneficial for a public chain that has not yet built sufficient economic interests—ultimately leading to a half-hearted involvement from the foundation and mutual disdain from existing users.

Resolving this dilemma is extremely difficult, and hoping for a short-term emergence of a charismatic leader like Andre Cronje to drive development is as unlikely as a "great man descending from the sky."

Project Loss and Existing Cycle

All public chains lacking user and liquidity injection inevitably fall into a rug spiral:

Project exit → Retail investor confidence and finances damaged, leaving the ecosystem → Liquidity further deteriorates, normal project parties earn less and less or even cannot earn → Project exit.

The situation on Dfinity is particularly severe. Taking the NFT sector as an example, in the early days of the ecosystem, there was only one NFT exchange, Entrepot, which adopted a review system for NFT listings. After passing the review, NFTs were sold on the platform, which allowed for relatively good development of the early NFT ecosystem, and the price increases were quite considerable. For example, in February 2022, Entrepot was still performing well:

However, the platform's own limitations led to a surge of rug projects, immediately impacting the newly emerging NFTs. As projects like CCC and Yumi joined the NFT exchange wars, Entrepot further relaxed its review of NFT projects to retain market share, leading to a situation where new projects went from being sold out immediately to being ignored.

Normal operating project parties also choose to exit due to the downturn of the public chain. For instance, Dmail, which initially adhered to the Dfinity ecosystem, ultimately turned to a multi-chain ecosystem after several unsuccessful attempts and subsequently collaborated with Sei, Worldcoin, and others.

Compared to the ecosystems of other public chains, the most significant difference for Dfinity is that its DeFi sector is the most underdeveloped part of the entire ecosystem, mainly for several reasons:

First, Dfinity has not introduced EVM, making it impossible to easily fork various classic projects like Avalanche or Fantom;

Second, the token standards within the ecosystem are still not unified, significantly weakening liquidity within the ecosystem;

Third, and most importantly, Dfinity's unique architecture distinguishes it from traditional public chains in terms of global transaction atomicity. Canisters interact asynchronously, lacking a globally visible ledger, making the development of DeFi projects very difficult.

From the data on destroyed ICP and total transaction volume of ICP, it is evident that the ICP ecosystem has fallen into a very awkward situation:

Conclusion

It is not difficult to understand the public's enthusiasm for Dfinity in 2021. After all, the number of cryptographers on the ICP team is the highest among all public chain projects, and the team lineup is incredibly luxurious: Intel, IBM, Coinbase, Facebook, Google wasm…

At the same time, a number of well-known VCs are investors in ICP, including top institutions like A16Z, Polychain, and Multicoin. The slogan of ICP, "Decentralized AWS," is also eye-catching, enticing countless people to invest real money, hoping for the arrival of the next milestone paradigm that surpasses Ethereum and EOS.

However, Dfinity's technology has not benefited its ecological construction—despite Dfinity's technical features being quite unique today, such as reverse gas, the scalability of Canisters, and the architecture itself being infinitely horizontally scalable, these features have not delivered the expected results in the public chain battle.

Moreover, Dfinity's governance system also faces challenges, including a large number of junk proposals and issues of excessive democratization, which have been mentioned earlier. As a once strong candidate for "ETH killer," it still possesses many potentials and advantages that other public chains lack, and these technical features are important chips for its development. However, at the same time, the ICP Foundation and its ecosystem must confront the current challenges and strive to find new paths.