Crypto Alphabet

What are DApps (Decentralized Applications)?

A new model for building successful and massively scalable applications is emerging. Bitcoin led the way with its open-source, peer-to-peer nature, cryptographically-stored records (block chain), and limited number of tokens that power the use of its features. Ethereum, Omni and the SAFE Network are just a few of those «decentralized applications» that use a variety of methods to operate. Some use their own block chain (Ethereum), some use existing blockchains and issue their own tokens (Omni Layer), and others operate at two layers above an existing block chain and issue their own tokens (SAFE Network).

For an application to be considered a DApp it must meet the following criteria:

  • The application must be completely open-source, it must operate autonomously, and with no entity controlling the majority of its tokens. The application may adapt its protocol in response to proposed improvements and market feedback but all changes must be decided by consensus of its users.
  • The application’s data and records of operation must be cryptographically stored in a public, decentralized blockchain in order to avoid any central points of failure.
  • The application must use a cryptographic token (Bitcoin or a token native to its system) which is necessary for access to the application and any contribution of value from (miners / farmers) should be rewarded in the application’s tokens.
  • The application must generate tokens according to a standard crytptographic algorithm acting as a proof of the value nodes are contributing to the application (for example Bitcoin uses the Proof of Work Algorithm).

Classification of DApps:

  • Type I. Decentralized applications have their own block chain. Bitcoin is the most famous example of a type I decentralized application but Litecoin and other «alt-coins» are of the same type.
  • Type II. Decentralized applications use the block chain of a type I decentralized application. Type II decentralized applications are protocols and have tokens that are necessary for their function. The Omni Protocol is an example of a type II decentralized application.
  • Type III. Decentralized applications use the protocol of a type II decentralized application. Type III decentralized applications are protocols and have tokens that are necessary for their function. For example the SAFE Network that uses the Omni Protocol to issue «safecoins» that can be used to acquire distributed file storage is an example of a type III decentralized application.

A useful analogy for a type I Dapp is a computer operating system (like Windows, Mac OS X, Linux, Android, iOS) for a type II Dapp a general purpose software program (like a word processor, a spreadsheet software, a file synchronization system such as Dropbox) and for type III Dapp, a specialized software solution (like a mail-merge tool that uses a word processor, an expense report macro that uses a spreadsheet, or a blogging platform that uses Dropbox.) Using this analogy, it may be expected that due to network effects and the ecosystem surrounding each decentralized application, there will be a few type I Dapps, more type II Dapps and even more type III Dapps.

Development of decentralized applications takes place in three steps:

  • A Whitepaper is published describing the Dapp and its features.
    The most common way by which a DApp takes form is by the public release of a whitepaper that describes the protocol, its features, and its implementation. After the public release, feedback from the community is necessary for the further development of the DA.
  • Initial tokens are distributed.
    If the DApp is using the mining mechanism to distribute its tokens, a reference software program is released so that it can be used for mining.
    If the DApp is using the fund-raising mechanism, a wallet software becomes available to the stakeholders of the DApp, so that they can exchange the tokens of the DApp.
    If the DApp is using the development mechanism, a bounty system is put in place that allows the suggestion of tasks to be performed, the tracking of the people who are working on those tasks and the criteria by which bounties can be awarded.
  • The ownership stake of the DApp is spread.
    As tokens from mining, fund-raising and collaboration are distributed to a greater number of participants, the ownership of the DApp becomes less and less centralized and participants that held a majority stake at an earlier point have less and less control. As the DApp matures, participants with more diverse skills are incentivized to make valuable contributions, and the ownership of the Dapp is distributed further. Through market forces the tokens of a DApp are transferred to those who value it the most. Those individuals then can contribute to the development of the DApp in the areas since they have an expertise.

Operating under open-source licenses allows DApps to be open for innovation without restrictions of copyright or patent. In addition, by being completely open-source, decentralized applications can operate under the legal model of open-source software.

DApps have the potential to become self-sustaining because they empower their stakeholders to invest in the development of the DApp. Because of that, it is conceivable that DApps for payments, data storage, bandwidth and cloud computing may one day surpass the valuation of multinational corporations like Visa, Dropbox, Comcast, and Amazon that are currently active in the space.