Blockchains, Cryptocurrencies & the New Decentralized Economy: Part 2 — Blockchain-Based Apps
Blockchain startups are building the apps of the future.
In Part 2 of this series, we develop the concept of decentralized applications, called “DApps.” These new, open-source applications are built using blockchain technology. They decentralize the delivery and operations of app-based products and services, which can have positive implications for users.
Decentralized apps have a low level of control and ownership by a centralized authority. They have less ownership over user data and product content, often charge lower fees, and are built in an open-source manner by a community of contributors. This stands in contrast to the centralized apps we currently carry on our cell phones such as Google, Uber, and Facebook, which own (and sometimes sell) our data, can charge high fees (e.g. to advertisers or users), and are built with a higher degree of proprietary software.
Decentralized apps also use their own digital currencies (app-coins, cryptocurrencies, or tokens) or a major digital currency such as the Ethereum blockchain network’s “ether,” as introduced in Part 1. The digital currencies support a new type of business and revenue model.
Many of the apps of the future could be built on a blockchain, funded by a new method of capital-raising (token sales and ICOs), and monetized by a new revenue model based on tokens. But above all, they are propelled by the ideal of decentralization.
A New Business Model
A decentralized application begins life as follows: A startup has an idea to build a decentralized version of some product or service in the form of a new application. The creators then write an academically oriented white paper explaining to the world the underlying technical details and use cases. They create and issue their own cryptocurrency to support the transactions of the product or service and to raise money. They hire more developers who believe in the mission, and they establish an online community of contributors and users who help implement and grow the project.
These projects are built either on their own blockchains or on top of a blockchain protocol layer such as Ethereum (which, unlike Bitcoin, can support the development of complex applications, as discussed in Part 1). We explain this architecture in Part 3.
There are a number of products and services that could be reinvented with a decentralized business model. These could include cloud storage, computer processing power, video game streaming, poker, gambling/predictions markets, crowdfunding, commodity investing, hedge funds, and media content distribution.
Existing blockchain-based startups providing these services include, respectively (with their corresponding cryptocurrencies): Storj.io (SJCX) and Sia (SC); Golem (GNT); First Blood (1ST); Virtue Poker (token not yet launched); Augur (REP) and Gnosis (GNO); WeiFund (token not yet launched); Digix (DGD); Melonport (MLN) and Numer.ai (Numeraire); and Steem (STEEM) and SingularDTV (SNGLS).
To illustrate a use case, Storj.io is an Ethereum-based decentralized cloud storage application; it allows users to rent storage capacity at a fraction of the cost of Dropbox by connecting them with users who have excess capacity. It brokers the peer-to-peer (P2P) exchange. Users can pay and receive payment for storage capacity in Storjcoin (SJCX).
A second interesting example is Brave, a web browser developed by the creator of JavaScript and Mozilla Firefox, Brendan Eich. It can block web trackers and ads, improving privacy, browsing speed, and the user experience. It intends to dis-intermediate middlemen from Internet advertising, instead establishing a decentralized digital ad exchange (based on Ethereum). Brave will pay publishers its Basic Attention Token (BAT) when users view ads. It will also pay users, in BAT, who elect to view ads.
Importantly, startup Lisk (LSK) has developed a sophisticated platform that helps DApp developers build and launch their programs more easily, lowering barriers to entry and supporting the creation of new DApps.
Not Your Parent’s Company
Even at an organizational level, DApps and blockchain projects are significantly more decentralized and democratized than traditional apps and companies.
Software development and leadership teams are often either spread across the world or based in urban co-working spaces. Within and beyond this core team, additional programmers and product developers contribute to software development as freelancers that are part of the community and ecosystem.
Communications with internal teams and the ecosystem are via Slack and Reddit. Announcements and communications to the broader public are via Medium and Twitter.
If you want to learn more about any of these DApps, I recommend following them on these platforms.
The startups pay developers and other contributors in either cryptocurrency or fiat currency. Note that the term “fiat currency” is widely used to differentiate traditional, government-issued currencies such as euros and U.S. dollars from cryptocurrencies.
Each month, dozens of new DApps launch and offer their tokens to the public, proliferating and decentralizing numerous use cases.
A New Product Delivery Model
How does this new decentralized organization deliver products and services? Notably, it retreats from owning, storing, or selling the product or service itself. Instead, it often simply either:
- Brokers the product or service between peers, or
- Retrieves, verifies, and delivers content to users without storing or owning the content or user data
In a DApp, content and user data are typically stored on the blockchain infrastructure layer rather than on a company’s proprietary platform, database, and servers (explained in Part 3). In this model, users retain ownership of their data.
A Platform for True P2P Applications
The blockchain infrastructure could enable a true “sharing economy” with a more direct peer-to-peer exchange of goods that is not brokered by a middleman extracting large rents.
In the case of decentralized cloud-storage DApp Storj.io, parties connect and exchange cloud storage capacity and payment for very low costs via the DApp. DApps like Storj.io provide a front-end interface for the parties to connect, and may or may not take a fee for providing the service.
Forthcoming DApps could attempt to replace Uber and AirBnB, allowing for more direct peer-to-peer transactions and obviating the need for a centralized platform.
“Blockchains are ideal as a shared database in which every user can read everything, but no single user has control over who can write what. This allows for the disintermediation of third-party trust brokers in networks, their monopoly rents and an increasing level of transparency and efficiency.”
- “Blockchain-Enabled Convergence,” Outlier Ventures
In these P2P transactions, terms can be negotiated and executed on smart contracts (written on Ethereum) so that parties can comfortably transact without knowing one another or having a guarantee from a central entity. The buzzword for this type of engagement is “trustless.”
Note that smart contracts require indication of real-world events (e.g., the home was damaged) by an “oracle,” who connects and feeds data or information about events that occur in the external world. Prominent oracles include Oraclize and Reality Keys. An oracle’s accuracy and trustworthiness needs to be well-founded, which is easier said than done. For further information, you can read this article.
Even a payment process for a P2P exchange DApp can occur over blockchains. Because of their very low transaction fees, the right kind of blockchains can enable micropayments, which are currently too costly when using traditional payments processors ($0.30 + 2.9% for PayPal and 1–4% for credit card processors).
A decentralized app can also foster a marketplace for the direct P2P exchange of goods. OpenBazaar illustrates this example; it allows users to buy and sell a variety of goods online with no marketplace or brokerage fees.
OpenBazaar FAQs
A New Token-Based Revenue Model
The cryptocurrency is the basis for the new decentralized revenue model.
As Fred Wilson at Union Square Ventures expresses, “The token that you sell in your ICO is the atomic unit of your business model. You are selling some of it to raise capital but the main purpose of the token is to monetize your product or service.”
This is big: A DApp effectively derives revenue when its cryptocurrency increases in value. The DApp’s leaders retain a percentage of the supply of the cryptocurrency that they create. As users consume tokens in exchange for receiving the product or service on the DApp, they boost the token’s demand, and the token rises in value. This effect increases the value of the organization’s retained tokens, effectively increasing the value of its assets.
It is important to note that the token must continue to be held in accounts, whether by users, investors, or others in the community. If the coin is simply spent or sold immediately when no longer in use, any appreciation in token value will not be sustained.
The founding team and developers can use the cryptocurrency, either directly or by converting it to fiat, to pay employees, developers, and contributors. Similar to offering equity shares, compensating employees in cryptocurrency incentivizes effort at work, since employees have “skin in the game” and benefit from the token’s price appreciation.
What’s more, even the DApp’s users who hold the token also participate in its upside; in this way, the DApp business model is considered better than free for users!
Further, the leadership team may pay external contributors from tokens set aside in an “ecosystem fund.” Finally, it can also convert its cryptocurrency to fiat to pay business and office expenses. Note that a crucial downside of a token-based compensation scheme is volatility and losses if the token value falls.
Who Buys Tokens?
Two types of people buy a DApp’s tokens: The first is users of the DApp platform who spend cryptocurrency as a medium of exchange to buy and sell its products and services. For example, when people want to rent excess cloud storage capacity with Storj.io, they can spend Storjcoin in the DApp.
The access that tokens provide leads to the perspective that they are analogous to API keys, or any type of access keys. Tokens grant access to the use of the application (DApp) or blockchain network (e.g., Ethereum). In this way, cryptocurrency has an intrinsic use and value, elevating it from intrinsically valueless fiat currency.
Thus, a token, or cryptocurrency, is both a medium of exchange like a standard currency and an access key like a paid API key.
The second type of buyer is speculators who want to invest, either in a primary issuance of tokens (ICOs), a pre-sale of new tokens, or in a secondary market on cryptocurrency exchanges. They hope the value of the token will rise, either from its use as a medium of exchange on the DApp or from interest by other speculators around the world.
Investors are attracted to cryptocurrencies because, in addition to this year’s headline-grabbing returns, they provide exposure to high-growth start-ups at attractive valuations and with the potential for excess risk-adjusted returns that are uncorrelated with other asset classes.
Expressed otherwise, “The particular value of any token will depend on a variety of factors described in the application code that created it (e.g. the total supply of tokens), as well as the market demand for the token, which could be driven by a desire to use the tokens (e.g. desire to attend the token-ticketed event or buy the token-denominated cloud storage) or by speculation over future use-value.”
Conclusion
Decentralized apps, or DApps, are an entirely new type of application with a redesigned business and service model that favors decentralization, or the devolution of control and monetary interest from a “centralized” company.
Notably, user data is stored on the blockchain infrastructure level, not within the application, leaving it in the hands of its true owners, the users. Prices for goods and services are also lower, as the application removes the middleman that may exist in a current service model.
DApps can be created for numerous business cases, such as for creating marketplaces for the direct exchange of goods in a peer-to-peer environment. Other examples of products and services that have already been decentralized on apps include web browsers and a peer-to-peer exchange of cloud storage capacity.
Cryptocurrencies, or tokens, are a novel method of monetizing a product or service. DApps issue native, unique currencies that are employed in the applications. They are then rewarded by the appreciation of their currencies when the application is used, in addition to any other fees they may charge. The cryptocurrency, rather than content, product sales, or brokerage fees, is the main driver of firm revenue.
If you are excited about DApps and want to start using them on your own, you can begin by exploring the ones listed in this article.
In Part 3 of this essay, we discuss the new Internet architecture and the decentralized “Web 3.0.” We explain how data is stored and shared on blockchains and decentralized storage layers, rather than within applications, and how this data openness promotes interoperability and interaction between users and applications with widespread and never-before-possible benefits.
- Update: Here is Part 3!
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