If you are a potential investor in the blockchain space it can be difficult to differentiate between all the companies claiming to be the next ‘disruptor’ of an industry. The conflating of terms like blockchain technology, smart contracts and decentralised applications (DApps) can make due diligence of ICOs particularly fraught.
However, once you have filtered through the list of en vogue buzzwords in these projects’ press releases you need to understand what the project really entails, whether it will actually be decentralized and whether it even needs a blockchain to function.
DApps vs Blockchain-powered platforms
Decentralized applications (DApps) are software applications that are running their backend code on a blockchain and require no middleman to run. Once a decentralized blockchain is created its contracts (code) exists in an open state outside of the control of its creators.
To take the example of a social media dApp created on a blockchain where any user can 'tweet' messages. Once a tweet is posted, no one — including the app creators — can delete that post. Editing may be possible by the sender, but the original would be retained forever.
The most common features of DApps include
- Open Source. This means that its code base is publicly open to access for scrutiny and changes. It should be governed by autonomy and all changes must be decided by the consensus, or a majority, of its users.
- Decentralized. All records of the application’s operation must be stored on a public and decentralized blockchain.
- Incentivized. Validators of the blockchain should be incentivized by rewarding them accordingly with cryptographic tokens.
- Protocol. The application community must agree on a cryptographic algorithm to show proof of value, such as Proof of Work (PoW) or Proof of Stake (PoS).
Probably the most famous DApp launched to date is the Ethereum-based virtual cat collectibles game CryptoKitties. which allows users to buy and breed digital kittens and then sell them on to other collectors for a price paid in ether (ETH). The largely decentralized nature of this application makes it impossible to alter ownership or to produce fraudulent kittens, which means that value is provided to each kitten as it possesses digital scarcity.
While CryptoKitties may not be what Ethereum’s founders had in mind for the type of decentralized applications they would like to see on their network, it is an excellent use case for how a DApp can function successfully on the blockchain. Aside from CryptoKitties, which has emerged as the largest DApp on the Ethereum network, the most common type of DApps are decentralized exchanges for ERC20 tokens (Ethereum Request for Comments, a token that piggybacks on the Ethereum network and defines a common list of rules for all Ethereum tokens to follow), such as the EtherDelta exchange.
Blockchain platforms, on the other hand, utilize the blockchain as their underlying technology but are not necessarily decentralized in nature. In fact, the majority of blockchain projects today are not very decentralized, even though they like to claim that they are.
Blockchain platforms range from large-scale distributed ledger networks such as Ethereum, NEO, or Stellar to projects that use the blockchain as the underlying technology for their platforms such as the Steemit social media platform or the decentralized cloud storage service Storj.
However, there is also a wave of smaller projects — mostly launched through initial coin offerings — that aim to develop blockchain-based platforms that use the technology’s beneficial features to disrupt a certain sector. Examples of that would be Tierion’s healthcare data storage solution, Blocksafe’s gun-tracking solution, and Lumeno.us’ credit reporting solution.
How much Blockchain is really needed?
With the benefits of blockchain technology no longer being seriously questioned, a wave of new startups have followed that want to leverage it to build new solutions for specific sectors. However, a fair share of these solutions don’t really require a blockchain to function on.
This trend is very evident in the ICO market, where many entrepreneurs are jumping on the blockchain bandwagon with the hope of scoring easy funding through the sale of a new digital token. In reality, many of the newly launched companies that aim to disrupt “XYZ” sector using blockchain technology could develop the same type of products without the use of this new technology.
While it is possible — even likely — that blockchain technology will become the go-to solution for recording and transferring data, not every new software solution needs the blockchain as an underlying framework.
How decentralized are the newest “Decentralized Platforms” really?
The same goes for decentralized applications. Many new projects that are in the process of launching a token sale claim that their new platform will be decentralized. However, how often is that actually the case?
While the underlying blockchain that the project aims to utilize may be decentralized, which does add a layer of security to the network, the actual platforms that many of these startups are working on are far from decentralized. Instead, the word decentralization is simply thrown into their marketing materials in the hope of securing more funding during a token sale.
Running a decentralized application means giving up a substantial amount of influence within a platform. Once the DApp has been coded and launched, there should be little to no control about the contents of the application.
For that reason, so few large-scale DApps have yet been launched and it will likely take longer for the new decentralized economy, which many blockchain thought leaders envision, to take shape.