Pertinent terminology

The following concepts are worth citing in the context of decentralization. The terminology introduced here is often used in the literature concerning decentralization and its applications.

Smart contracts

A smart contract is a software program that usually runs on a blockchain. Smart contracts do not necessarily need a blockchain to run; however, due to the security benefits that blockchain technology provides, blockchain has become a standard decentralized execution platform for smart contracts.

A smart contract usually contains some business logic and a limited amount of data. The business logic is executed if specific criteria are met. Actors or participants in the blockchain use these smart contracts, or they run autonomously on behalf of the network participants.

More information on smart contracts will be provided in Chapter 10, Smart Contracts.

Autonomous agents

An Autonomous Agent (AA) is an artificially intelligent software entity that acts on the behalf of its owner to achieve some desirable goals without requiring any or minimal intervention from its owner.

Decentralized organizations

DOs are software programs that run on a blockchain and are based on the idea of actual organizations with people and protocols. Once a DO is added to the blockchain in the form of a smart contract or a set of smart contracts, it becomes decentralized and parties interact with each other based on the code defined within the DO software.

Decentralized autonomous organizations

Just like DOs, a decentralized autonomous organization (DAO) is also a computer program that runs on top of a blockchain, and embedded within it are governance and business logic rules. DAOs and DOs are fundamentally the same thing. The main difference, however, is that DAOs are autonomous, which means that they are fully automated and contain artificially intelligent logic. DOs, on the other hand, lack this feature and rely on human input to execute business logic.

Ethereum blockchain led the way with the introduction of DAOs. In a DAO, the code is considered the governing entity rather than people or paper contracts. However, a human curator maintains this code and acts as a proposal evaluator for the community. DAOs are capable of hiring external contractors if enough input is received from the token holders (participants).

The most famous DAO project is The DAO, which raised $168 million in its crowdfunding phase. The DAO project was designed to be a venture capital fund aimed at providing a decentralized business model with no single entity as owner. Unfortunately, this project was hacked due to a bug in the DAO code, and millions of dollars' worth of ether currency (ETH) was siphoned out of the project and into a child DAO created by hackers. A major network change (hard fork) was required on the Ethereum blockchain to reverse the impact of the hack and initiate the recovery of the funds. This incident opened up the debate on the security, quality, and need for thorough testing of the code in smart contracts in order to ensure their integrity and adequate control. There are other projects underway, especially in academia, that are seeking to formalize smart contract coding and testing.

Currently, DAOs do not have any legal status, even though they may contain some intelligent code that enforces certain protocols and conditions. However, these rules have no value in the real-world legal system at present. One day, perhaps an AA (that is, a piece of code that runs without human intervention) commissioned by a law enforcement agency or regulator will contain rules and regulations that could be embedded in a DAO for the purpose of ensuring its integrity from a legalistic and compliance perspective. The fact that DAOs are purely decentralized entities enables them to run in any jurisdiction. Thus, they raise a big question as to how the current legal system could be applied to such a varied mix of jurisdictions and geographies.

Decentralized autonomous corporations

Decentralized autonomous corporations (DACs) are similar to DAOs in concept, though considered to be a subset of them. The definitions of DACs and DAOs may sometimes overlap, but the general distinction is that DAOs are usually considered to be nonprofit, whereas DACs can earn a profit via shares offered to the participants and to whom they can pay dividends. DACs can run a business automatically without human intervention based on the logic programmed into them.

Decentralized autonomous societies

Decentralized autonomous societies (DASes) are a concept whereby an entire society can function on a blockchain with the help of multiple, complex smart contracts and a combination of DAOs and decentralized applications (DApps) running autonomously. This model does not necessarily translate to a free-for-all approach, nor is it based on an entirely libertarian ideology; instead, many services that a government commonly offers can be delivered via blockchains, such as government identity card systems, passports, and records of deeds, marriages, and births. Another theory is that, if a government is corrupt and central systems do not provide the levels of trust that a society needs, then that society can start its own virtual one on a blockchain that is driven by decentralized consensus and transparency. This concept might look like a libertarian's or cypherpunk's dream, but it is entirely possible on a blockchain.

Decentralized applications

All the ideas mentioned up to this point come under the broader umbrella of decentralized applications, abbreviated to DApps. DAOs, DACs, and DOs are DApps that run on top of a blockchain in a peer-to-peer network. They represent the latest advancement in decentralization technology.

DApps at a fundamental level are software programs that execute using either of the following methods. They are categorized as Type 1, Type 2, or Type 3 DApps:

1. Type 1: Run on their own dedicated blockchain, for example, standard smart contract based DApps running on Ethereum. If required, they make use of a native token, for example, ETH on Ethereum blockchain.

   For example, Ethlance is a DApp that makes use of ETH to provide a job market. More information about Ethlance can be found at https://ethlance.com.

2. Type 2: Use an existing established blockchain. that is, make use of Type 1 blockchain and bear custom protocols and tokens, for example, smart contract based tokenization DApps running Ethereum blockchain.An example is DAI, which is built on top of Ethereum blockchain, but contains its own stable coins and mechanism of distribution and control. Another example is Golem, which has its own token GNT and a transaction framework built on top of Ethereum blockchain to provide a decentralized marketplace for computing power where users share their computing power with each other in a peer-to-peer network.

   A prime example of Type 2 DApps is the OMNI network, which is a software layer built on top of Bitcoin to support trading of custom digital assets and digital currencies. More information on the OMNI network can be found at https://www.omnilayer.org.

   More information on the Golem network is available at https://golem.network.

   More information on DAI is available at https://makerdao.com/en/.

3. Type 3: Use the protocols of Type 2 DApps; for example, the SAFE Network uses the OMNI network protocol.

Another example to understand the difference between different types of DApps is the USDT token (Tethers). The original USDT uses the OMNI layer (a Type 2 DApp) on top of the Bitcoin network. USDT is also available on Ethereum using ERC20 tokens. This example shows that a USDT can be considered a Type 3 DApp, where the OMNI layer protocol (a Type 2 DApp) is used, which is itself built on Bitcoin (a Type 1 DApp). Also, from an Ethereum point of view USDT can also be considered a Type 3 DApp in that it makes use of the Type 1 DApp Ethereum blockchain using the ERC 20 standard, which was built to operate on Ethereum.

More information can be found about Tether at https://tether.to.

There are thousands of different DApps running on various platforms (blockchains) now. There are various categories of these DApps covering media, social, finance, games, insurance, and health. There are various decentralized platforms (or blockchains) running, such as Ethereum, EOS, NEO, Loom, and Steem. The highest number of DApps currently is on Ethereum.

Requirements of a DApp

For an application to be considered decentralized, it must meet the following criteria. This definition was provided in a whitepaper by Johnston et al. in 2015, The General Theory of Decentralized Applications, DApps:

1. The DApp should be fully open source and autonomous, and no single entity should be in control of a majority of its tokens. All changes to the application must be consensus-driven based on the feedback given by the community.
2. Data and records of operations of the application must be cryptographically secured and stored on a public, decentralized blockchain to avoid any central points of failure.
3. A cryptographic token must be used by the application to provide access for and incentivize those who contribute value to the applications, for example, miners in Bitcoin.
4. The tokens (if applicable) must be generated by the decentralized application using consensus and an applicable cryptographic algorithm. This generation of tokens acts as a proof of the value to contributors (for example, miners).

Generally, DApps now provide all sorts of different services, including but not limited to financial applications, gaming, social media, and health.

Operations of a DApp

Establishment of consensus by a DApp can be achieved using consensus algorithms such as PoW and Proof of Stake (PoS). So far, only PoW has been found to be incredibly resistant to attacks, as is evident from the success of and trust people have put in the Bitcoin network. Furthermore, a DApp can distribute tokens (coins) via mining, fundraising, and development.

Design of a DApp

A DApp—pronounced Dee-App, or now more commonly rhyming with app—is a software application that runs on a decentralized network such as a distributed ledger. They have recently become very popular due to the development of various decentralized platforms such as Ethereum, EOS, and Tezos.

Traditional apps commonly consist of a user interface and usually a web server or an application server and a backend database. This is a common client/server architecture. This is visualized in the following diagram:

Figure 2.7: Traditional application architecture (generic client/server)

A DApp on the other hand has a blockchain as a backend and can be visualized as depicted in the following diagram. The key element that plays a vital role in the creation of a DApp is a smart contract that runs on the blockchain and has business logic embedded within it:

Figure 2.8: Generic DApp architecture

Note that the frontend in either a DApp or app architecture can either be a thick client, a mobile app, or a web frontend (a web user interface). However, it is usually a web frontend commonly written using a JavaScript framework such as React or Angular.

The following comparison table highlights the key properties of and differences between these different types of decentralized entities:

Having covered the main concepts of DApps, it will be useful to explore some specific examples.

DApp examples

Examples of some DApps are provided here.

KYC-Chain

This application provides the facility to manage Know Your Customer (KYC) data securely and conveniently based on smart contracts.

OpenBazaar

This is a decentralized peer-to-peer network that enables commercial activities directly between sellers and buyers instead of relying on a central party, such as eBay or Amazon. It should be noted that this system is not built on top of a blockchain; instead, distributed hash tables are used in a peer-to-peer network to enable direct communication and data sharing among peers. It makes use of Bitcoin and various other cryptocurrencies as a payment method.

Lazooz

This is the decentralized equivalent of Uber. It allows peer-to-peer ride sharing and users to be incentivized by proof of movement, and they can earn Zooz coins.

Now that we have covered the pertinent terminology, DApps, and relevant examples, let's now look at what platforms can be used to build and host DApps.