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https://github.com/DavidAJohnston/DecentralizedApplications

Decentralized Applications White Paper and Spec
https://github.com/DavidAJohnston/DecentralizedApplications

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Decentralized Applications White Paper and Spec

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README 

        
The General Theory of Decentralized Applications, Dapps

=======================================================



Authors: David Johnston, Sam Onat Yilmaz, Jeremy Kandah, Nikos

Bentenitis, Farzad Hashemi, Ron Gross, Shawn Wilkinson and Steven Mason



See also the previous version of this document [on Google Drive](https://docs.google.com/document/d/1Qh0KIQpy3Ob070BKHNA82fYGL0atlGSfmKCKJpS-QH8/edit?usp=sharing).



Table of Contents

-----------------



1.   Introduction

    1.   The emergence of Dapps

    2.   Definition of a Dapp

    3.   Bitcoin as a Dapp

    4.   Nomenclature and its importance

    5.   Classification of Dapps

    6.   The value of Dapps and their tokens

2.   The operation of a Dapp

    1.   Mechanisms for establishing consensus

    2.   Mechanisms for distributing tokens

    3.   Formation and development of a Dapp

3.   Legal model for the operation of Dapps

    1.   Issuance and holding of tokens

    2.   Non-profit organization

4.   Best practices for creating a Dapp and Frequently Asked

    Questions

    1.   What qualifies a software application as a Dapp?

    2.   What is a token?

    3.   How do tokens get distributed?

    4.   How do I start developing a Dapp?

    5.   Why is a DApp a profitable model for developers, users and

        contributors?

    6.   What is a user-behavior reward?

5.   The current state of type II and III Dapps

6.   Conclusion

7.   Appendix

    1.   Resources for an economic model of Dapps

    2.   A proposed metaphor for Dapps

    3.   Johnston’s Law



Introduction

------------



### The emergence of Dapps



A new model for building successful and massively scalable applications

is emerging. Bitcoin led the way with its open-source, peer-to-peer

nature, cryptographically-stored records (block chain), and limited

number of tokens that power the use of its features. In the last year

dozens of applications are adopting the Bitcoin model in order to succeed.

[Ethereum](https://www.ethereum.org/),

[Omni](http://www.omnilayer.org/) and the [SAFE Network](http://maidsafe.net/) are just a few

of those “decentralized applications” that use a variety of methods to

operate. Some use their own block chain (Ethereum), some use existing

blockchains and issue their own tokens (Omni Layer), and others operate at two layers above an existing block

chain and issue their own tokens (SAFE Network).



This paper describes why decentralized applications have the potential

to be immensely successful, how the different types of decentralized

applications can be classified, and introduces terminology that aims to

be accurate and helpful to the community. Finally, this paper postulates

that these decentralized applications will some day surpass the world’s

largest software corporations in utility, user-base, and network

valuation due to their superior incentivization structure, flexibility,

transparency, resiliency, and distributed nature.



### Definition of a Dapp



For an application to be considered a Dapp (pronounced Dee-app, similar to 

Email) it must meet the following criteria:



1.  The application must be completely

    [open-source](https://en.wikipedia.org/wiki/Open_source), it must

    operate autonomously, and with no entity controlling the majority of its

    tokens. The application may adapt its protocol in response to proposed

    improvements and market feedback but all changes must be decided by

    consensus of its users.



2.  The application's data and records of operation must be

    cryptographically stored in a public, decentralized 

    [blockchain](https://en.bitcoin.it/wiki/Block_chain) in order to avoid 

    any central points of failure.



3.  The application must use a cryptographic token (bitcoin or a token native 

    to its system) which is necessary for access to the application and any 

    contribution of value from (miners / farmers) should be rewarded in the application’s tokens.



4.  The application must generate tokens according to a standard crytptographic

    algorithm acting as a proof of the value nodes are contributing to the application 

    (Bitcoin uses the Proof of Work Algorithm).



### Bitcoin as a Dapp



Satoshi Nakamoto, the creator of Bitcoin described his invention as “A

Peer-to-Peer Electronic Cash

System[[2]](https://dl.dropboxusercontent.com#ftnt2)”. Bitcoin has been

shown to effectively solve the problems that arise from a trust-less and

scalable electronic cash system by using a peer-to-peer, distributed

ledger, the Bitcoin block chain. In addition to being a peer-to-peer

electronic cash system however, Bitcoin is also an application that

users can interact with through computer software). But most importantly

for the purposes of this paper, based on the criteria outlined above,

Bitcoin is a decentralized application. Here is why:



1.  All Bitcoin software applications are open-source, no entity

    (government, company, or organization) controls Bitcoin and all

    records related to the use of Bitcoin are open and public.



2.  Bitcoin generates its tokens, the bitcoins, with a predetermined

    algorithm that cannot be changed, and those tokens are necessary for

    Bitcoin to function. Bitcoin miners are rewarded with bitcoins for

    their contributions in securing the Bitcoin network.



3.  All changes to Bitcoin must be approved by a majority consensus of

    its users through the proof-of-work mechanism.



### Nomenclature and its importance



Decentralized applications were initially described as Decentralized

Autonomous Corporations, DAC, in an article written by Daniel Larimer,

of Invictus Innovations. This papers avoids the term corporation for two

reasons.



First, because it carries with it unnecessary preconceptions. For

instance, a corporation is established in a jurisdiction, it has shares,

a CEO, employees, etc. Dapps, like Bitcoin, have none of these

characteristics. In addition, the narrative is very important for the

way Dapps are perceived by various nations and jurisdictions. The same

way that governments struggle to learn and regulate Bitcoin because the

concept of currency is associated with it, governments might be

compelled to regulate an open-source computer program that is a

decentralized application.



Second, because traditional corporations may engage in several

techniques to raise capital (like selling shares of its stock and pay

dividends or borrowing against its stock and pay interest) that a Dapp

does not need. The concept of a Dapp is so powerful and elegant, because

it does not include these traditional corporate techniques. The

ownership of the Dapp’s tokens is all that is required for the holder to

use the system. It’s that simple. The value of the tokens is determined

by how much people value the application. All the incentives, all the

monetization, all the ways to raise support are built into this

beautifully simple structure. Dapps are not required to recreate the

functions that used to be necessary in centralized corporations in order

to balance the power of shareholders and offer returns for investors and

employees.



### Classification of Dapps



There are several characteristics according to which decentralized

applications can be classified. For the purposes of this paper, we will

classify Dapps based on whether they have their own block chain or they

use the block chain of another Dapp. Based on this criterion, there are

three types of Dapps.



**Type I** decentralized applications have their own block chain.

Bitcoin is the most famous example of a type I decentralized application

but Litecoin and other “alt-coins” are of the same type.



**Type II** decentralized applications use the block chain of a type I

decentralized application. Type II decentralized applications are

protocols and have tokens that are necessary for their function. The

Omni Protocol is an example of a type II decentralized application.



**Type III** decentralized applications use the protocol of a type II

decentralized application. Type III decentralized applications are

protocols and have tokens that are necessary for their function. For 

example the SAFE Network that uses the Omni Protocol to issue

‘safecoins’ that can be used to acquire distributed file storage is 

an example of a type III decentralized application.



A useful analogy for a type I Dapp is a computer operating system (like

Windows, Mac OS X, Linux, Android, iOS) for a type II Dapp a general

purpose software program (like a word processor, a spreadsheet software,

a file synchronization system such as Dropbox) and for type III Dapp, a

specialized software solution (like a mail-merge tool that uses a word

processor, an expense report macro that uses a spreadsheet, or a

blogging platform that uses Dropbox.) Using this analogy, it may be

expected that due to network effects and the ecosystem surrounding each

decentralized application, there will be a few type I Dapps, more type

II Dapps and even more type III Dapps.



At this point, it is important to mention that there are currently

several excellent open-source projects that leverage type I Dapps.

Colored coins and CoinJoin, for example, are based on the Bitcoin block

chain and provide useful features to their users. These projects however

cannot be classified as type II Dapps, according to our definition,

because they don’t issue and manage a token. (The development and

operation of these projects depends on donations instead.)



### The value of Dapps and their tokens

For a complete analysis about why tokens associated with Dapps, and the networks powering the Dapps are valuable, [see this paper](https://docs.google.com/document/d/1Qh0KIQpy3Ob070BKHNA82fYGL0atlGSfmKCKJpS-QH8/edit).



The operation of a Dapp

-----------------------



### Mechanisms for establishing consensus



There are two common mechanism by which Dapps can establish consensus:

the **proof-of-work**, POW, mechanism and the **proof of stake**, POS,

mechanism.



With the proof-of-work mechanism, decisions about changes in a Dapp are

made based on the amount of work that each stakeholder contributes to

the operation of the Dapp. Bitcoin uses that approach for its day-to-day

operation. The mechanism for establishing consensus through POW is

commonly called mining.



With the proof-of-stake mechanism, decisions about changes in the Dapp

are made based on the percent ownership that various stakeholders have

over the application. For instance, the vote of a stakeholder who

controls 10% of the tokens issued by a Dapp, carries a 10% weight. The

Omni Protocol is based on the POS mechanism.



The two mechanisms can be used in parallel, as is the case with

[Peercoin](http://peercoin.net/). Such a combination allows a Dapp to

operate with less energy consumption than proof-of-work alone, and

allows it to be more resistant to [51%

attacks](https://en.bitcoin.it/wiki/Weaknesses).



### Mechanisms for distributing tokens



There are three common mechanisms by which Dapps can distribute their

tokens: mining, fund-raising and development.



With the mining mechanism, tokens are distributed to those who

contribute most work to the operation of a Dapp. Taking Bitcoin as an

example, bitcoins are distributed through a predetermined algorithm to

the miners that verify transactions and maintain the Bitcoin block

chain.



With the fund-raising mechanism, tokens are distributed to those who

fund the initial development of the DApp. Taking the Master Protocol as

an example, Mastercoins were initially distributed to those who sent

bitcoins to a given address at the rate of 100 Mastercoins per bitcoin

sent. The bitcoins collected were then used to fund the development of

applications that promoted the development of the Master Protocol.



With the development mechanism, tokens are generated using a predefined

mechanism and are only available for the development of the DA. For

example, in addition to its fund-raising mechanism, the Master Protocol

used the collaboration mechanism to fund its future development. An

additional 10% of the Mastercoins generated through fund-raising was set

aside for development of the Master Protocol. Those Mastercoins become

available through a pre-determined schedule and are distributed via a

community-driven bounty system where decisions are made based on the

proof-of-stake mechanism.



To summarize: Tokens of a Dapp that establishes consensus through

proof-of-work are distributed by mining, by people buying directly from

miners and by trading for goods and services; that is the case with

Bitcoin. Tokens of a Dapp that establishes consensus through

proof-of-stake are distributed based on the contribution of stakeholders

during a fundraiser, by people collaborating on the development of the

Dapp and by trading for goods and services; that is the case with the

Omni Protocol.



### Formation and development of a Dapp



Development of decentralized applications takes place in three steps.



**Step 1: A whitepaper is published describing the Dapp and its

features**



As in the case of Bitcoin, the most common way by which a Dapp takes

form is by the public release of a whitepaper that describes the

protocol, its features, and its implementation. After the public

release, feedback from the community is necessary for the further

development of the DA.



**Step 2: Initial tokens are distributed**



If the Dapp is using the mining mechanism to distribute its tokens, a

reference software program is released so that it can be used for

mining. In the case of Bitcoin, a reference software program was

released and the initial transaction block was created.



If the Dapp is using the fund-raising mechanism, a wallet software

becomes available to the stakeholders of the Dapp, so that they can

exchange the tokens of the DA. In the case of Mastercoin, an Exodus

fund-raising address and a wallet script were publicly released.



If the Dapp is using the development mechanism, a bounty system is put

in place that allows the suggestion of tasks to be performed, the

tracking of the people who are working on those tasks and the criteria

by which bounties can be awarded.



**Step 3: The ownership stake of the Dapp is spread**



As tokens from mining, fund-raising and collaboration are distributed to

a greater number of participants, the ownership of the Dapp becomes less

and less centralized and participants that held a majority stake at

earlier have less and less control. As the Dapp matures, participants

with more diverse skills are incentivized to make valuable

contributions, and the ownership of the Dapp is distributed further.

Through market forces the tokens of a Dapp are transferred to those who

value it the most. Those individuals then can contribute to the

development of the Dapp in the areas that they have an expertise.



The case of Bitcoin illustrates the point. By some estimates, Satoshi

Nakamoto mined many of the first 1,000,000 bitcoins. As developers

contributed code to Bitcoin and miners contributed computational power

to the Bitcoin network, the market began to value bitcoins more highly.

As the system matured even more, people with diverse skills started

valuing Bitcoin and contributing to its development. Now that more than

12 million bitcoins are in circulation and Satoshi Nakamoto’s high

original ownership stake has been diluted.



Legal model for the operation of Dapps

--------------------------------------



Operating under open-source licenses allows Dapps to be open for

innovation without restrictions of copyright or patent. In addition, by

being completely open-source, decentralized applications can operate

under the legal model of open-source software. Bitcoin, for example,

uses the MIT open-source software license. The Master Protocol

similarly, requires all code that is based on it to be open-source and

available to the community.



### Issuance and holding of tokens



From a technical perspective, those issuing tokens as part of a

crowd-sale are selling access to software for the users of that

software. The private keys associated with the tokens that the users

purchase are literally the passwords that the users need to access a

Dapp’s software. From a tax perspective, those holding tokens are

holding digital property. If the tokens have no market value outside of

their use in the Dapp, it is hard to determine their actual value.



Because very few jurisdictions have publicly given guidance on how

tokens issued by Dapps will be treated from a regulatory and tax

perspective, legal expert in the particular jurisdictions should be

consulted.



### Non-profit organization



There are no legal entities required for a Dapp to operate because it is

not a company. Owners of tokens do not need to be represented by a

corporation and contributor do not need any specific legal entity

either. However, sometimes tokens are issued by a non-profit

organization that will never receive financial benefits from the Dapp.

Such an organization will have the following responsibilities:



1.  Issuance of initial tokens

2.  Holding of developer tokens

3.  Management of bounty payments

4.  Determining the Dapp direction



Ideally, the non-profit organization will make decisions in a

decentralized manner, using a “proof of stake” voting mechanism for any

decision.



Best practices for creating a Dapp and Frequently Asked Questions

-----------------------------------------------------------------



### What qualifies a software application as a Dapp?



1.  The application must be completely open-source, it must operate

    autonomously, with no entity controlling the majority of its tokens,

    and its data and records of operation must be cryptographically

    stored in a public, decentralized block chain.



2.  The application must generate tokens according to a standard

    algorithm or set of criteria and possibly distribute some or all of

    its tokens at the beginning of its operation. These tokens must be

    necessary for the use of the application and any contribution from

    users should be rewarded by payment in the application’s tokens.



3.  The application may adapt its protocol in response to proposed

    improvements and market feedback but all changes must be decided by

    majority consensus of its users.



### What is a token?



The purpose of a token is to allow access to a computer application. For

example, an individual must own a number of bitcoins in order to be able

to perform any transaction on the Bitcoin network. Tokens in Dapps do

not represent any underlying asset, they do not give rights to a

dividend, and no equity is represented through them. Although the value

of a Dapp token may increase or decrease over time, tokens are not

equity securities.



### How do tokens get distributed?



There are several ways by which the tokens of a Dapp may be distributed:



1.  Crowd-sale tokens: An initial one-time sale of tokens is a common

    way to initially fund a Dapp. The funds raised from such a

    crowd-sale should be controlled by an entity that is independent of

    the founders, commonly a Foundation.



2.  Developer tokens: A portion of the tokens can be set aside for

    developers working on the project. As the market sets a valuation

    for the project, the developer tokens will gain value, attracting

    additional contributors to the project.



3.  Premined tokens: It is best if no tokens are premined because most

    communities and investors are negatively predisposed to it. A

    premine may be successful only if a meaningful reason is provided by

    the founders.



4.  Minable tokens: Distribution of tokens by mining incentivizes the

    community to contribute resources to the Dapp. In Bitcoin for

    example, there is a block reward every ten minutes, that

    incentivizes miners to provide hashing power to Bitcoin. Similarly,

    Dapps need to determine how to incentivize the network to contribute

    the required resource as this is the most important decision about

    the token distribution.



### How do I start developing a Dapp?



To develop a Dapp it is advised to follow these steps:



1.  Create a whitepaper that has at least the following sections:

    -   Intentions and goals of the Dapp

    -   Plans for token distribution

    -   Mechanism for establishing consensus

    -   Structure of the non-profit that oversees the Dapp

    -   Management of developer bounties

    -   Technical description of the Dapp



2.  Gain community engagement by releasing the plan and by revising it

    based on feedback.

3.  Set a date when the community can contribute to the crowd-sale.

4.  Sell the initial tokens based on your whitepaper and establish a

    non-profit to oversee the development of the Dapp.

5.  Begin executing your idea while the non-profit plans future

    development.



### Why is a Dapp a profitable model for developers, users and contributors?



The model allows contributors to get involved with the project as

purchasers of tokens, as project contributors or as providers of

resources to the network. All of these contributors benefit from the

exchange of the tokens and from the possible appreciation of their

value.



### What is a user-behavior reward?



A user-behavior reward is given to contributors that provide utility to

the network. The whitepaper should outline what constitutes utility for

the DApp. (For example, hashing power is utility on the Bitcoin network

and it is rewarded.) Utility should be measurable, like in the case of a

data storage Dapp, amount of storage is measurable.



The current state of type II and III Dapps

------------------------------------------



One mechanism by which type II Dapps can leverage the block chain of

type I Dapps is by embedding additional data to the transactions taking

place in the type I DA. The Master Protocol, for example, embeds

additional data on the transactions of the Bitcoin network. Although

currently (February 2014) Mastercoin embeds its additional data in an

ad-hoc way into the Bitcoin block chain, the release of the 0.9 version

of the Bitcoin reference client will provide a standard method for that

embedding. By using the methodology of “provably prune-able outputs,”

type II decentralized applications that are based on Bitcoin will be

able to embed data in a systematic way and Bitcoin miners will have the

option to prune those data.



Given this development, several type III Dapps are in various stages of

development. They include:



-   MaidSafe provides a “proof of resource” mechanism and decentralized

    data structure for storing files privately or publicly in the cloud.

-   StorJ provides a front-end, Dropbox-like cloud storage of files

    utilizing MaidSafe and other systems in the back-end.

-   Ethereum provides consensus-based scripting and computing resources.

-   OpenGarden provides mesh network-based Internet services.

-   Scalion provides an incentivized version of the Tor Network with

    nodes serving as Tor relays and exits.

-   Shared Miles provides a proof of transportation mechanism that

    allows for an open source transportation standard.

-   BlockAuth provides a multi signature OAuth-style system for sharing

    private data with third parties.

-   API Protocol provides an open source standard for hosting,

    normalizing, and sharing API data.



Conclusion

----------



Dapps have the potential to become self-sustaining because they empower

their stakeholders to invest in the development of the Dapp. Because of

that, it is conceivable that Dapps for payments, data storage, bandwidth

and cloud computing may one day surpass the valuation of multinational

corporations like Visa, Dropbox, Comcast, and Amazon that are are

currently active in the space.



* * * * *



Appendix

--------



### Resources for an economic model of Dapps



-   [A comparison between Metcalfe’s, Zipf’s and Bitcoin’s

    law](https://i.imgur.com/AWEfTjZ.jpg).



    “In fact there is a strong correlation (R2 = 0.82) between number of

    users and price. All these things are not understood by too many

    people, unfortunately. Also the price doesn’t grow linearly with the

    number of users but instead with the power of 1.45 of the number of

    users. That is nice because for the price to increase 1000 times you

    need only 140 times the number of users of today. We have about 2

    million BTC users.” . Credit for

    images and quote

    [gsantostasi](http://www.reddit.com/r/Bitcoin/comments/21pujs/bitcoin_compared_with_metcalfes_and_zipfs_law/).



-   [Correlation between the value of a Dapp and Metcalfe’s

    Law](http://imgur.com/RDPz54G). Credit for image [Peter

    R](https://bitcointalk.org/index.php?topic=400235.msg5882283#msg5882283).



### Johnston’s Law



“Everything that can be decentralized, will be decentralized”. David A.

Johnston



Based on the economic and efficiency advantages of decentralized

applications its clear that existing centralized services will be

displaced over time by decentralized alternatives. This shift is likely

to come most quickly for services in which the network effect advantages

of Metcalfe’s Law are most critical to the success of the service

provider.



http://www.johnstonslaw.org/