Blockchain Crash Course: Protocols, dApps, APIs and DEXs
The current primary focus of the MARKET protocol team is to build the product and grow community around it! While doing so, we have noticed some confusion in our interactions with interested parties about what MARKET Protocol is. The initial common misconception is that we are building a decentralized exchange where various assets, futures, and derivatives are traded. Well, that is not exactly the case.
To be precise, MARKET Protocol is a decentralized and trustless Ethereum-based derivatives trading protocol. It is a set of rules to replace the classic notion of traditional exchanges with a ‘decentralized exchange protocol’. An accompanying ecosystem of APIs and dApps will operate in a decentralized, user-friendly, reputable, and adjustable manner on the Ethereum network. The MARKET Protocol will give traders the opportunity to enter into trades by relying on the protocol and exchanges — third-party nodes to facilitate them.
To create a deeper understanding of the MARKET Protocol, a shift in perception is needed. We first need to define what is a protocol, what are dApps and APIs, and where do decentralized exchanges fit into place.
A protocol can be seen as a methodology agreed upon by two or more parties that establish a common set of rules that they can agree upon so as to enter into a binding agreement. Humans are known to establish protocols spontaneously, even in their formative years in schoolyards, for instance, where they come to agree on a common set of binding rules to play a game. Computer science has taken this notion further. The Encyclopaedia Britannica describes the computer science notion of protocols as:
“…a set of rules or procedures for transmitting data between electronic devices, such as computers. In order for computers to exchange information, there must be a preexisting agreement as to how the information will be structured and how each side will send and receive it.”
Protocols are therefore the set of rules that govern the network. Blockchain protocols usually include rules about consensus, transaction validation, and network participation.
Before we get into examples of blockchain based protocols, it is very important to explain why this layer is so revolutionary in terms of its value compared to web protocols. Many people are familiar with Google, its evaluation and services, without thinking what makes Google work in the first place.
The World Wide Web works on top of shared protocols like TCP/IP, HTTP, SMTP, etc., with the majority of the value captured and re-aggregated on the applications layer, mostly in the form of data. Blockchain, however, keeps the majority of its value in the base, protocol layer with only a fraction of that value distributed along at the applications layer. That’s why we call blockchain protocols “fat”.
The main reason for the outlined differences lies in the fact that blockchain protocol level assets can also be its native product. Bitcoin is a good example. Since Bitcoin, the protocol hinges upon a native asset, which is also used as the end product.
There are also examples of protocols like Ethereum which exists at all three layers — protocol, development platform, and native asset. Due to its architecture, Ethereum is able to facilitate other protocols and dApps built on top of its network. Since it was launched, many dApps have been built on top of the Ethereum blockchain. Many new, different protocols were also created to address some blockchain issues like NEO, Cardano or IOTA, which is not even a blockchain.
Like with Web protocols, there is not a single protocol that is able to satisfy all the market participants needs in a single layer. Therefore, there is a need to create a new protocol, for example, one that lies on top of another protocol like Ethereum as the base layer, for a specific use case.
MARKET Protocol is a protocol that is designed to enable trustless trading of decentralized derivatives. You can think of it as a layer on which application layers will be built on top of. Users will use applications to interact with the protocol so as to enter into trading agreements with each other. These dApps will be designed to use the protocol, or the rules specified by the MARKET Protocol.
The way protocol layer-based technologies develop will be the most important topic in the blockchain ecosystem. The main focus in this space should be creating systems that are able to work together in order to provide the best possible user experience.
dApps and APIs
With the ‘rules of engagement’ set by the MARKET Protocol, all that is needed is for its users to have a way to interact with it — and this is where applications come into the picture.
According to David Johnston, author of The General Theory of Decentralized Applications , for an application to be considered a dApp, it must be completely open-source, operate autonomously with no entity controlling the majority of its tokens. The application’s data and records of operation must also be cryptographically stored in a public, decentralized blockchain in order to avoid any central points of failure. Finally, the application must use a cryptographic token which is necessary for access to the application, and any contribution of value by miners or stakeholders should be rewarded in the application’s tokens.
Blockchain-based decentralized applications can be classified into three different types/layers based on their architecture:
- Type 1: dApps that have and run on their own blockchain, like Ethereum
- Type 2: decentralized applications that use the blockchain of a type 1 that are protocols and have tokens that are necessary for their function, like MARKET Protocol
- Type 3: decentralized applications that are built on top of and use the protocol of a type 1 or 2 decentralized application. Best example are decentralized exchanges built on top of an existing protocol layer, like DDEX or Radar Relay that operates on 0x protocol, a decentralized exchange built on top of Ethereum blockchain.
MARKET Protocol is a type of dApp that is a protocol that operates on top of a blockchain as its base layer. We are also in the process of creating a Type 3 dApp which should demonstrate the possibilities offered to our future platform users and Type 3 dApp creators. Those third parties will be incentivized to attract users to use their applications by setting fees to provide services. We anticipate all sorts of applications to be built that will allow participants to set the parameters for their intended trades.
Users with varying levels of experience will be able to use the MARKET Protocol dApp which is designed to provide tools for contract creation, oracle testing, and deployment. Users will also be able to browse previously deployed MARKET contracts that they would like to use as the basis for their trade. The next dApp that will be released will also be used in conjunction with the testnet environment to simulate trading and test their contracts and strategies.
As new applications evolve, many developers are interested in utilizing them in their current applications. The simplest way to integrate a part of an existing app is via API. Technically, API stands for Application Programming Interface. In simple terms, API is the part of the server that receives requests and sends responses. From the users perspective, APIs allow them to complete an action without leaving a website. A good API makes it easier to develop a computer program by providing all the building blocks. The building blocks then put together by the programmer into a web-based system, operating system, database system, and computer hardware or software library.
The MARKET developers would like to eventually provide an API layer to make interaction with the network easier. As an example, third-party order book hosts, called nodes, can be provided with an API that easily allows them to host an order book. Third parties that already host other trading services will be able to utilize the APIs to plug into the network and offer their users features that are exclusively available to MARKET Protocol users.
Although we anticipate third-party application providers to offer trading services to their users, this does not exclude people creating contracts and trading directly over the protocol without needing to use a third party contract supplier.
It is important to be able to distinguish between two often confused notions; a decentralized exchange, and a protocol that acts as a framework that allows for the use on a decentralized exchange. We covered what DEXs are and why are they important in one of our previous articles.
From a technological standpoint, a decentralized exchange is a Type 3 dApp, that usually runs on top of a protocol like MARKET and a blockchain like Ethereum as a first layer solution. A decentralized cryptocurrency exchange is one in which the architecture of the platform has no central controlling server, but rather a network of nodes, which makes them much harder to hack. The idea is that users remain in control of their private key management and wallets. If the exchange itself is compromised, the attacker should at least, in theory, not be able to gain access to a centralized database of user details or any private keys.
Although the concept of decentralized exchanges is great, they mostly support the basic cryptocurrency exchange trades from asset A to asset B. More advanced trading tools and features like derivatives trading, stop loss, as well as a host of other trading features is one of the reasons they haven’t yet achieved the same popularity as centralized exchanges.
MARKET Protocol leverages all the security features of the Ethereum blockchain and decentralized exchanges. We anticipate that the entire DEX ecosystem will mature and scale to achieve all benefits of centralized exchanges, without the issues related to centralized custody of funds and settlement.