If you haven’t been immersed in decentralized systems for long some of the language might still be a bit foreign to you. Or maybe there’s just so much technical jargon you can’t keep track of it all. Whatever the reason, this will help clear some things up around dApps (decentralized applications) and protocols.
It’s not the same, but let’s start with an internet analogy
To help set the stage, here’s an example borrowed from technology a little more familiar to everyone. The internet we use today has many protocols. You know them as SMTP, HTTP, TCP/IP ( simple mail transfer protocol, hypertext transfer protocol, and internet protocol, respectively). And on the internet there are applications such as Facebook and Google Search. Obviously the list is much much longer than that, but you get the picture. In terms of the internet, most of the value ended up siloed in the applications in the form of data because people generally saw that investing in applications generated high returns and investing in protocols generated low returns. With blockchain, however, an immense amount of value is found in the protocol layer, which is why they have been coined “fat” protocols. All the open, shared data is found in this layer in blockchain technology. Access to tokens also incentivize the innovation of protocols, adding further value to that layer.
What is a protocol?
A protocol is essentially the set of rules or methodology governing a blockchain or a dApp. It defines how decisions are made, how things get done, and how common problems facing decentralized systems are to be addressed. With all the data the protocol will be processing, it defines how the data will be transmitted (both sending and receiving) and how it will be structured. While the protocol defines the rules behind the transactions, the blockchain does the actual tracking of the transactions.
Protocols define how consensus will be reached, how transactions are validated, and how networks participate. Consensus isn’t simply voting; it is group decision making with the goal of benefiting the entire group. Consensus seeks agreement, collaboration, cooperation, and inclusiveness — just to name a few. Clearly this is not your average app building like you’d find on the web.
Protocols can be at the base level of the blockchain and be the layer on which dApps are built, or they can also serve as the base for even more protocols. You surely know the largest public blockchains and their protocols are Bitcoin and Ethereum. No protocol can do everything, though, so some protocols are built on other protocols to add capabilities and create the best possible user experience when dApps are subsequently built on them. And with so many industries and potential uses there is lots of need for variety in protocols.
If web protocols have applications then blockchain-based protocols have dApps.
dApps = where users find value
A dApp could be an exchange like Coinbase, for example. It’s the actual product that the consumer uses or interacts with. They are built on protocols and don’t require any coding on the part of the user. The thought behind dApps is that they are applications built on a decentralized ledger by the people and for the people. Because they don’t need to generate revenue, they can, in fact, compete with the big names. To be as community driven as they intend, there are some rules that they must follow. Their records are to be open and public, demonstrating complete transparency. They must operate autonomously, with no entity controlling the majority of the tokens. And adaptations must be made based on feedback and the market and decided on by consensus.
Two of the most common forms of consensus are Proof of Work (POW) and Proof of Stake (POS). POW, used by Bitcoin, means that decisions about changes are made based on the amount of work each stakeholder has contributed to the dApp. One of the main alternatives for consensus is through POS where weight in decisions is based on the percent ownership of tokens (i.e., if a stakeholder holds 10% of the tokens their decision carries 10% of the weight).
Data and records of dApps are stored cryptographically in a public, decentralized blockchain; this provides a permanent ledger that anyone can refer to at any time. dApps generate tokens based on a standard cryptographic algorithm that cannot be changed. The tokens incentivize people to contribute to the betterment of the dApp.
Three types of dApps
There are three different types of dApps, each one building on the previous one.
Type 1: The first type of dApp has its own blockchain. Ethereum and Bitcoin are good examples of Type 1 dApps. In more familiar technology, you could draw the analogy to a computer operating system like Windows or Mac OS X.
Type 2 : The second type of dApps uses an existing blockchain and protocol upon which they build their own protocol and tokens. In the blockchain world you could use Omni Layer, the digital currency and communications protocol built on the Bitcoin blockchain, as an example of this. And the familiar technology analogy would be using a program like a word processor that runs on your computer’s operating system.
Type 3: The third type of dApp is built on a Type 2 dApp (an application that runs on a protocol that runs on a blockchain). For example, SAFE Network uses Omni, which runs on Bitcoin. Decentralized exchanges are likely Type 3 dApps. The equivalent in your everyday life would be a blogging platform that uses DropBox or a mail-merge tool that uses a word processor.
dApps used to include “corporation” in their name, but that changed because of the many ways they are not like a corporation. They function as a non-profit in that they don’t have shares, a CEO, or employees.
The basic process for establishing a dApp is to produce a white paper that establishes the intentions and goals of the application, the features that will help meet those goals, the roadmap of developing those features, the plan for token distribution, the plan for consensus, and the team that will bring it all to fruition. Once the white paper has been produced and enough interest is garnered, the initial tokens can be distributed and the ownership stake can be spread by incentivizing contributions to improve the development of the app. Users must own tokens in order to perform any transactions on a dApp.
There is clearly a lot of value in the protocol layer of blockchains. With a value in the billions that shows that the people involved see value in data being open and accessible to all and not siloed in each application as is the case with the internet. The way blockchain has been designed to be built by the people and for the people with the current protocols, we can now begin building dApps that challenge the giants out there and not leave our information and actions under the control of central agencies. To the future of protocols and dApps!