Decentralised apps DApps

One of the social web's dirty little secrets is that nothing is for free. However, decentralised apps (DApps) may be able to make the relationship between service provider and user more transparent – and more flexible.

For years, 'web 2.0' services offered people free services with incredible value. Facebook is one example, and Google is another. People didn't generally have to pay for them financially, but were giving back in other, and sometimes controversial, ways.

The use of people's personal data is one such trade-off, but work is another. Every time you share a status update on Facebook or upload a Vine on Twitter, you're contributing to massive content bases that enhance the quality and value of these companies' services. It's a social contract many users aren't even conscious of.

So when Reddit announced that it wanted to return $5m to its users, possibly in the form of a cryptocurrency, that was a big deal. The company will give something back to users, besides merely its online service. They get a token, with a quantifiable financial value.

What they will be able to do with that token isn't yet clear, but it's likely it will become a form of currency to be used as payment and reward within the Reddit community. There is also a possibility for the value of such a token to shift over time.

This idea of creating tokens for use inside services and applications is relatively new, but the concept is starting to gain traction, and some hope that it will revolutionise online software and services. Welcome to the world of the DApp.

What is a DApp?

David Johnston, co-founder of the BitAngels investment project which funds cryptocurrency-focused ventures, knows a thing or two about decentralisation. Now, he's nearing the end of putting together the first DAPPS Fund, to help kickstart what he sees as a new class of application.

In his GitHub description of DApps, Johnston describes them as open-source applications that generate tokens according to a standard algorithm.

Tokens are used to reward any contribution made to the application, and they are also required to use it. Finally, by Johnston's definition, changes to the app's protocol must be made by majority consensus.

But where is the profit in a DApp, and how does that differ from other application business models?

Tom Ding, founder and CEO of crowdsale platform Koinify, believes that it takes a concept as old as currency and updates it for the 21st century.

Ding said:

"Before DApps, the only way you could make money from software is either charge for it (keep them secret or limited use), or charge for extra services (redhat model), or sell user information (Google model, most likely still keep it secret or half secret)."

DApps that issue their own tokens draw on the notion of seigniorage, which is the profit that an issuer of money can make by creating money.

Let's say a government spends 22.5 cents to produce and distribute a $20 banknote which will last around 7.5 years. The note costs the bank 3 cents each year over its lifetime. If the bank invests the proceeds from selling someone that note at a return of 50 cents per year, then it will make a profit of 47 cents a year. That's the bank's seigniorage.

A properly engineered DApp could have seigniorage too. Tokens are created based on contribution to the application, and (hopefully) gain value as the network effect kicks in and usage of the application increases. The people that contribute to the application's design, development, or operation accrue tokens, which increase in value.

That's seigniorage at work. No printing banknotes or loading them into vans here, though – it's done using the same basic cryptocurrency concepts that underpin bitcoin.

Bitcoin was the original decentralised app, according to Johnston, who draws on its success for inspiration.

"Think about the fact that bitcoin, now a $5bn market cap project, and it’s completely open source," he said. "There’s no CEO or marketing department. It’s been self-monetised by its own token. That’s pretty unique."

The DAPPs Fund

Johnston co-founded the DAPPS Fund in October last year, which earmarked millions in funding for teams participating at hackathons. The money goes to help kickstart the development for these token-based apps.

"I'm expecting this very young space to evolve very rapidly, and new models will emerge."

Joel Dietz, who founded token-based crowdsale platform Swarm, argues that DApps provide a new way for users of an application to set its price.

"This idea of a 'tokenizable' market-priced piece of software (or other type of network utility) has extremely high potential," he said. "It could combine the best of both worlds: profitability and collective effort."

In a DApp model, tokens don't represent equity in the system, says Johnston. They're a different kind of asset class, agrees Dietz. Just as bitcoins have been determined by many regulatory regimes as a commodity or property, they're likely to do the same with tokens, he suggests.

Crowdsale platforms had better hope that the regulators see things the same way, because the SEC is still mulling the equity crowdfunding concept.

Financing innovation

The decentralised application could go a long way towards financing innovation. Dietz suggests that the concept eliminates the need for proximity to angel investors, because they can be anywhere.

Startups could also use tokens to draw resources of other kinds from users, meaning that they may need to spend less on those resources. Bitcoin did it with transactional computing, while MaidSafe did it with storage.

Ding thinks that DApps could lead to innovation in different kinds of industry, based on key characteristics:

"The more commoditised (ie: an incremental rather than revolutionary model change) an industry is, the more likely it can be disrupted totally with the DApp model."

Ding puts retail banking, insurance, financial exchange, marketplaces, and content platforms towards the top of the list.

DApps need infrastructure to work. They need a method to produce and document the underlying cryptocurrency, and potentially a decentralised way to document transactions that take place on the app's network. They may also need platforms to sell the tokens in the first place.

At least one of those components may be easily available with no extra work, said Johnston, arguing that bitcoin's own block chain is the best place for many DApps to thrive.

"In my own estimation, a lot of these technologies won’t have to use a proof of work or proof of stake," he said. "If they build on top of the existing bitcoin blockchain, then they create security. That’s usually the best approach."

Consumer apps on the way

Notary chain systems like Factom create some of the infrastructure that will allow the bitcoin block chain to support future DApps. Factom lets people document thousands of transactions in a single blockchain hash, a feature those decentralised apps will need.

Swarm and Koinify create ways to crowdsell the tokens underpinning the apps, but they are platforms, aimed at startups and investors. Where are the applications that the average non-technical end-user is going to get excited about?

Johnston said that the first DAPP Fund was necessary to build out the infrastructure, and that more consumer-visible applications will come.

We're already starting to see some, including storage applications like Storj and MaidSafe, while ride-sharing network Zooz will generate tokens that can be used for transportation – and mined by moving.

Gems, the social networking service for which Koinify will launch a crowdsale on 1st December, will let advertisers pay for its tokens (XGEMs) to place ads and will award them to users of the network who choose to opt into ads.

Going forward

Johnston may have set out a manifesto for DApps, but it's not likely to be a static definition. If this model for distributed applications with thousands of stakeholders takes off, it'll outgrow those predefined characteristics pretty soon.

"I'm expecting this very young space to evolve very rapidly, and new models will emerge," Ding said. "For example, the separation of payment tokens, control tokens, and ownership tokens." Token distribution is another area where he thinks innovation will occur.

The chances are that the DApps of tomorrow may look very different to those of today, as people innovate and morph the business model. If the revenue-generation model it creates is as new and innovative as people like Johnston believe, then it could prove to be a platform for disruption.

DApps might also be a way forward for some industries currently grappling with revenue stresses caused by Internet encroachment on established operational models.

In the meantime, Johnston is already planning a DAPPS Fund II for late next year, after all the funds for the inaugural fund have been allocated in early 2015.

Decentralised image via Shutterstock

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CrowdfundingBitAngelsDavid JohnstonDApps

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