In Creating Better Web3 Experiences, Developers Must Anticipate Regulatory Scrutiny

The refrain is all too common – in order to onboard the next 100 million users to Web3, we need to build better user experiences. But building better experiences isn’t simple. Of course, there are technical design challenges that must be overcome. The less-understood challenge, however, is a regulatory one. Making products that address both technical and regulatory hurdles is vital as developers continue to build accessible and streamlined Web3 dapps.

Mark Lurie is the CEO and founder of Shipyard Software.

The Web3 user experience, or UX, is indeed terrible across the board.

To use a Web3 dapp (decentralized application), users need convert fiat to crypto through an exchange and set up a crypto wallet with a long and confusing seed phrase, which they then must keep protected as they navigate the clunky world of Web3.

Meanwhile, each action on a Web3 game, non-fungible token (NFT) platform or decentralized-finance (DeFi) protocol requires signing a confusing and occasionally alarming set of transaction information, often coupled with a gas fee regardless of whether the transaction is successful.

With all these minor inconveniences stacked atop one another, it’s no wonder the industry has such a hard time gaining more users.

Read more: Are Dapps the Future of the Creator Economy?

What’s less understood is why it is so hard to create an intuitive, streamlined dapp UX.

By comparison, signing up for and using centralized exchanges is amazingly simple. Although there are a few steps required to create an account, exchanges like Coinbase and Kraken don’t require users to have any technical ability.

That ease of use suggests that overcoming impediments to a good user experience in Web3 isn't as simple as assigning a talented designer. Instead, it requires both a technical and regulatory approach

The technical challenge in designing Web3 UX is how to do so without executing transactions on behalf of the user, which would require access to the user’s private key and thus compromise the security of his or her funds.

Approaches to this problem include multi-party computation, wherein a private key is split across multiple entities and devices instead of requiring a single user to write it down and keep it safe. Other approaches have been suggested by Ethereum co-founder Vitalik Buterin, who emphasized the importance of account abstraction at the blockchain level as a solution so that a dapp could pay for a user’s gas fee, thereby creating a smoother user experience. These are promising approaches, each of which helps prevent the possibility of a dapp using funds without the user’s permission. Many developers are familiar with this security problem because it is inherently technical.

But developers are typically less aware of regulatory considerations that also need to be designed around, particularly when it comes to what the dapp’s code is and isn’t programmed to do. For example, dapps may have regulatory issues if the code could have been written to stop a user from performing a problematic transaction, but the developers failed to do so. In other words, if a user needs the dapp in order to sign a transaction, it can be argued that the dapp can unilaterally block a transaction from happening. As a result, there may still be regulatory issues to contend with even if the security of the dapp isn't at issue.

In another case, what if the transaction interacts with an address that has been blacklisted by the Treasury Department's Office of Foreign Assets Control and the dapp could have but didn’t prevent it? Alternatively, will the Commodity Futures Trading Commission think it is the dapp’s responsibility to prevent a retail user from purchasing a derivative? What if the transaction manipulates the market? What will the Financial Action Task Force, a global group that fights money laundering, think? Perhaps it will label the dapp as a financial intermediary and attempt to impose a know-your-customer/anti-money-laundering (KYC/AML) requirement on the dapp.

Read more: FATF Agrees on Action Plan to Drive Implementation of Global Crypto Norms

Moreover, dapp developers need to consider not just the regulations of today, but also those that might come tomorrow. Governments may decide that a protocol’s veto rights incur direct responsibility and pass legislation accordingly. A KYC obligation would add new user frictions into the dapp onboarding experience and might require the dapp to hire a small army of compliance professionals.

All of which is to say, dapp developers need to be aware of the full regulatory landscape if they want to design robust product that will facilitate a better user experience without compromising many of the benefits and principles of self-custody in the first place.

If Web3 builders want to build something genuinely useful for the masses, it isn’t as easy as simply creating a non-custodial protocol and pretending that the laws applied to financial custodians and intermediaries don’t matter – how the protocol grants or blocks permissions on how user funds are used must also be considered. This means the only way for designers to know what new UX features are available to them, and what design decisions won’t potentially get their project blacklisted, is to understand the regulations that apply to centralized financial custodians and intermediaries, and what regulations might apply to emergent Web3 protocols in the future.

Every user experience is designed to increase the likelihood that a user will arrive at a specific decision or outcome. The builders who anticipate future policy hurdles and consider today’s imperfect crypto regulations as they write their design playbook will ultimately design thoughtful, seamless Web3 user experiences that will make it easier for the next 100 million users to get on board.