A new model allowing the creation and development of highly scalable applications has been emerging for a few years now. Bitcoin has been leading the way since its inception in 2008 due to its open-source nature, its cryptographically stored records (blockchain), and the limited number of currencies in circulation (coins or tokens) that can be used for the application’s functionality.
Over the last 3 years, dozens of applications have adopted the Bitcoin model (and its open-source code mainly) to develop a whole bunch of decentralized applications (DApps). Ethereum, Omni and the SAFE network are just a few of these “decentralized applications” that use a variety of complex methods to operate.
Some use their own blockchain (like Ethereum for example), some use existing blockchains and issue their own crypto currencies (Omni Layer), and others operate two layers above an existing blockchain and issue their own coins (SAFE Network).
To conclude this introduction, this paper first and foremost opens the discussion that these decentralized applications may one day surpass the software of the world’s largest corporations in utility, user base, and network capitalization due to their superior incentive structure, flexibility, transparency, resiliency, and distributed, decentralized nature.
DApps, these decentralized applications explained
For an application to be considered a Dapp (pronounced Dee-app), it must meet the following criteria:
– The application must be completely open-source, it must operate autonomously and without a central entity that controls a majority of its corners. The application can adapt its protocol in response to proposed improvements and market feedback, but all changes must be decided by consensus of its users and key stakeholders.
– The application’s data and records must be stored cryptographically in a decentralized public blockchain to avoid any points of weakness.
– The application must use a cryptographic token (Sort of currency, Bitcoin or any other native coin or token in its system) that is required to access the application and any valuable contribution (miners for example) should be rewarded in currency.
– The application must generate tokens/coins according to a cryptographic algorithm that acts as a proof of the value exchanged that the different nodes in the network contribute to the application (Bitcoin uses the Proof of Work Algorithm).
Bitcoin, the mother of all DApps
Satoshi Nakamoto, the creator of Bitcoin, described his invention as “a peer-to-peer electronic payment system. Bitcoin was developed to effectively solve the problems that arise from an electronic payment system that no one would trust and scale using a distributed, decentralized and shared ledger for security purposes, the so-called Bitcoin Blockchain.
In addition to being a peer-to-peer electronic payment system, Bitcoin is also an application with which users can interact with computer software. But Bitcoin is above all a decentralized application.
All of Bitcoin’s software applications are open-source, no single entity (government, company or organization) controls Bitcoin, and all records related to Bitcoin’s use are open and public.
Bitcoin generates its tokens, Bitcoins, with a predetermined algorithm that cannot be changed, and these currencies are necessary for the Bitcoin network to function. Bitcoin miners are rewarded with new Bitcoins for their contribution to the security of the Bitcoin network (they provide the computing power to verify the authenticity of transactions made on the blockchain).
Some semantic definitions
Decentralized applications were originally described as decentralized autonomous corporations in a paper written by Daniel Larimer of Invictus Innovations. This paper avoids using the word “corporation” at all for two reasons:
First, because it carries unnecessary bias. For example, a company is established in a certain jurisdiction, it usually has a CEO, employees, shares, etc. DApps, like Bitcoin, have none of these characteristics! In addition, the choice of words is very important to how DApps are perceived by various countries and jurisdictions. Just as different governments around the world struggle to understand and better regulate Bitcoin because of the concept of a currency associated with it, governments may be forced to regulate an open source computer software that is a decentralized application in itself.
Second, because traditional companies can raise capital in a variety of ways (such as selling shares of their stock and paying dividends or borrowing against their stock and paying various interests). A Dapp doesn’t need any of this to finance itself. The concept of a DApp is so powerful and innovative because it does not work via these techniques that apply to traditional businesses. Ownership of the currency of a DApp is all that is required for the owner to use the system. It’s not much more complicated than that. The value of the tokens is determined by the amount of people who value the application and its project (law of supply and demand). All the incentives, all the monetization, all the ways to increase support for the project are built into this remarkably simplified structure.
DApps are not needed to recreate the functions that were needed in centralized companies to balance shareholder power and provide returns to investors and employees.
Classification of DApps
There are several characteristics according to which decentralized applications can be classified. Here we will classify Dapps according to the type of Blockchain they use (some of them use the blockchain of another Dapp, or a modified version).
According to this criterion, there are three types of Dapps:
– Type 1 decentralized applications have their own blockchain. Bitcoin is the most famous example of a Type 1 decentralized application, but Litecoin and other “alt-coins” are also of the same type.
– Type 2 decentralized applications use the blockchain of a Type 1 decentralized application. Type 2 decentralized applications are particular protocols that issue and use tokens necessary for their operation. The Omni protocol is an example of a Type 2 decentralized application.
– Type 3 decentralized applications use the protocol of a Type 2 decentralized application. Type 3 decentralized applications are unique protocols and also use tokens necessary for their function. For example, the SAFE network that uses the Omni protocol to issue “safecoins” (used to acquire distributed file storage credits) is an example of a Type III decentralized application.
A useful analogy for a Type 1 DApp would be a computer operating system (such as Windows, Mac OS X, Linux) for a Type 2 Dapp a general purpose software (such as a word processor, spreadsheet,…) and for Type 3, a specialized software solution (such as a mail merge tool that uses a word processor, an expense report macro that uses a spreadsheet…).
Using this analogy, we can expect that, due to network effects and the ecosystem surrounding each decentralized application, before long there will be a few Type 1 Dapps, more Type 2 Dapps, and many more Type 3 Dapps on the market.
At this point, it is important to mention that there are currently several excellent open source projects that take advantage of Type 1 Dapps. Colored coins and CoinJoin, for example, are based on the Bitcoin blockchain and provide useful features to their users. However, these projects cannot be classified as Type 2 Dapps, according to our definition, because they do not issue and use coins (rather, the development and operation of these projects depends on donations received).
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