Now that we have some high-level knowledge about what DApps are and how they are different from centralized apps, let's explore some of the popular and useful DApps. While exploring these DApps, we will explore them at a level that is enough to understand how they work and tackle various issues instead of diving too deep.
Bitcoin is a decentralized currency. Bitcoin is the most popular DApp and its success is what showed how powerful DApps can be and encouraged people to build other DApps.
Before we get into further details about how Bitcoin works and why people and the government consider it to be a currency, we need to learn what ledgers and blockchains are.
A ledger is basically a list of transactions. A database is different from a ledger. In a ledger, we can only append new transactions, whereas in a database, we can append, modify, and delete transactions. A database can be used to implement a ledger.
A blockchain is a data structure used to create a decentralized ledger. A blockchain is composed of blocks in a serialized manner. A block contains a set of transactions, a hash of the previous block, timestamp (indicating when the block was created), block reward, block number, and so on. Every block contains a hash of the previous block, thus creating a chain of blocks linked with each other. Every node in the network holds a copy of the blockchain.
Proof-of-work, proof-of-stake, and so on are various consensus protocols used to keep the blockchain secure. Depending on the consensus protocol, the blocks are created and added to the blockchain differently. In proof-of-work, blocks are created by a procedure called mining, which keeps the blockchain safe. In the proof-of-work protocol, mining involves solving complex puzzles. We will learn more about blockchain and its consensus protocols later in this book.
The blockchain in the Bitcoin network holds Bitcoin transactions. Bitcoins are supplied to the network by rewarding new Bitcoins to the nodes that successfully mine blocks.
Note
The major advantage of blockchain data structure is that it automates auditing and makes an application transparent yet secure. It can prevent fraud and corruption. It can be used to solve many other problems depending on how you implement and use it.
First of all, Bitcoin is not an internal currency; rather, it's a decentralized currency. Internal currencies are mostly legal because they are an asset and their use is obvious.
The main question is whether currency-only DApps are legal or not. The straight answer is that it's legal in many countries. Very few countries have made it illegal and most are yet to decide.
Here are a few reasons why some countries have made it illegal and most are yet to decide:
- Due to the identity issue in DApps, user accounts don't have any identity associated with them in Bitcoin; therefore, it can be used for money laundering
- These virtual currencies are very volatile, so there is a higher risk of people losing money
- It is really easy to evade taxes when using virtual currencies
Why would someone use Bitcoin?
The Bitcoin network is used to only send/receive Bitcoins and nothing else. So you must be wondering why there would be demand for Bitcoin.
Here are some reasons why people use Bitcoin:
- The major advantage of using Bitcoin is that it makes sending and receiving payments anywhere in the world easy and fast
- Online payment transaction fees are expensive compared to Bitcoin transaction fees
- Hackers can steal your payment information from merchants, but in the case of Bitcoin, stealing Bitcoin addresses is completely useless because for a transaction to be valid, it must be signed with its associated private key, which the user doesn't need to share with anyone to make a payment.
Ethereum is a decentralized platform that allows us to run DApps on top of it. These DApps are written using smart contracts. One or more smart contracts can form a DApp together. An Ethereum smart contract is a program that runs on Ethereum. A smart contract runs exactly as programmed without any possibility of downtime, censorship, fraud, and third-party interference.
The main advantage of using Ethereum to run smart contracts is that it makes it easy for smart contracts to interact with each other. Also, you don't have to worry about integrating consensus protocol and other things; instead, you just need to write the application logic. Obviously, you cannot build any kind of DApp using Ethereum; you can build only those kinds of DApps whose features are supported by Ethereum.
Ethereum has an internal currency called ether. To deploy smart contracts or execute functions of the smart contracts, you need ether.
This book is dedicated to building DApps using Ethereum. Throughout this book, you will learn every bit of Ethereum in depth.
Hyperledger is a project dedicated to building technologies to build permissioned DApps. Hyperledger fabric (or simply fabric) is an implementation of the Hyperledger project. Other implementations include Intel Sawtooth and R3 Corda.
Fabric is a permissioned decentralized platform that allows us to run permissioned DApps (called chaincodes) on top of it. We need to deploy our own instance of fabric and then deploy our permissioned DApps on top of it. Every node in the network runs an instance of fabric. Fabric is a plug-and-play system where you can easily plug and play various consensus protocols and features.
Hyperledger uses the blockchain data structure. Hyperledger-based blockchains can currently choose to have no consensus protocols (that is, the NoOps protocol) or else use the PBFT (Practical Byzantine Fault Tolerance) consensus protocol. It has a special node called certificate authority, which controls who can join the network and what they can do.
IPFS (InterPlanetary File System) is a decentralized filesystem. IPFS uses DHT (distributed hash table) and Merkle DAG (directed acyclic graph) data structures. It uses a protocol similar to BitTorrent to decide how to move data around the network. One of the advanced features of IPFS is that it supports file versioning. To achieve file versioning, it uses data structures similar to Git.
Although it called a decentralized filesystem, it doesn't adhere to a major property of a filesystem; that is, when we store something in a filesystem, it is guaranteed to be there until deleted. But IPFS doesn't work that way. Every node doesn't hold all files; it stores the files it needs. Therefore, if a file is less popular, then obviously many nodes won't have it; therefore, there is a huge chance of the file disappearing from the network. Due to this, many people prefer to call IPFS a decentralized peer-to-peer file-sharing application. Or else, you can think of IPFS as BitTorrent, which is completely decentralized; that is, it doesn't have a tracker and has some advanced features.
Let's look at an overview of how IPFS works. When we store a file in IPFS, it's split into chunks < 256 KB and hashes of each of these chunks are generated. Nodes in the network hold the IPFS files they need and their hashes in a hash table.
There are four types of IPFS files: blob, list, tree, and commit. A blob represents a chunk of an actual file that's stored in IPFS. A list represents a complete file as it holds the list of blobs and other lists. As lists can hold other lists, it helps in data compression over the network. A tree represents a directory as it holds a list of blobs, lists, other trees, and commits. And a commit file represents a snapshot in the version history of any other file. As lists, trees, and commits have links to other IPFS files, they form a Merkle DAG.
So when we want to download a file from the network, we just need the hash of the IPFS list file. Or if we want to download a directory, then we just need the hash of the IPFS tree file.
As every file is identified by a hash, the names are not easy to remember. If we update a file, then we need to share a new hash with everyone that wants to download that file. To tackle this issue, IPFS uses the IPNS feature, which allows IPFS files to be pointed using self-certified names or human-friendly names.
The major reason that is stopping IPFS from becoming a decentralized filesystem is that nodes only store the files they need. Filecoin is a decentralized filesystem similar to IPFS with an internal currency to incentivize nodes to store files, thus increasing file availability and making it more like a filesystem.
Nodes in the network will earn Filecoins to rent disk space, and to store/retrieve files, you need to spend Filecoins.
Along with IPFS technologies, Filecoin uses the blockchain data structure and the proof-of- retrievability consensus protocol.
At the time of writing this, Filecoin is still under development, so many things are still unclear.
Namecoin is a decentralized key-value database. It has an internal currency too, called Namecoins. Namecoin uses the blockchain data structure and the proof-of-work consensus protocol.
In Namecoin, you can store key-value pairs of data. To register a key-value pair, you need to spend Namecoins. Once you register, you need to update it once in every 35,999 blocks; otherwise, the value associated with the key will expire. To update, you need Namecoins as well. There is no need to renew the keys; that is, you don't need to spend any Namecoins to keep the key after you have registered it.
Namecoin has a namespace feature that allows users to organize different kinds of keys. Anyone can create namespaces or use existing ones to organize keys.
Some of the most popular namespaces are a (application specific data), d (domain name specifications), ds (secure domain name), id (identity), is (secure identity), p (product), and so on.
To access a website, a browser first finds the IP address associated with the domain. These domain name and IP address mappings are stored in DNS servers, which are controlled by large companies and governments. Therefore, domain names are prone to censorship. Governments and companies usually block domain names if the website is doing something illegal or making loss for them or due to some other reason.
Due to this, there was a need for a decentralized domain name database. As Namecoin stores key-value data just like DNS servers, Namecoin can be used to implement a decentralized DNS, and this is what it has already been used for. The d and ds namespaces contain keys ending with .bit, representing .bit domain names. Technically, a namespace doesn't have any naming convention for the keys but all the nodes and clients of Namecoin agree to this naming convention. If we try to store invalid keys in d and ds namespaces, then clients will filter invalid keys.
A browser that supports .bit domains needs to look up in the Namecoin's d and ds namespace to find the IP address associated with the .bit domain.
The difference between the d and ds namespaces is that ds stores domains that support TLS and d stores the ones that don't support TLS. We have made DNS decentralized; similarly, we can also make the issuing of TLS certificates decentralized.
This is how TLS works in Namecoin. Users create self-signed certificates and store the certificate hash in Namecoin. When a client that supports TLS for .bit domains tries to access a secured .bit domain, it will match the hash of the certificate returned by the server with the hash stored in Namecoin, and if they match, then they proceed with further communication with the server.
Note
A decentralized DNS formed using Namecoin is the first solution to the Zooko triangle. The Zooko triangle defines applications that have three properties, that is, decentralized, identity, and secure. Digital identity is used not only to represent a person, but it can also represent a domain, company, or something else.
Dash is a decentralized currency similar to Bitcoin. Dash uses the blockchain data structure and the proof-of-work consensus protocol. Dash solves some of the major issues that are caused by Bitcoin. Here are some issues related to Bitcoin:
- Transactions take a few minutes to complete, and in today's world, we need transactions to complete instantly. This is because the mining difficulty in the Bitcoin network is adjusted in such a way that a block gets created once in an average of every 10 minutes. We will learn more about mining later on in this book.
- Although accounts don't have an identity associated with them, trading Bitcoins for real currency on an exchange or buying stuff with Bitcoins is traceable; therefore, these exchanges or merchants can reveal your identity to governments or other authorities. If you are running your own node to send/receive transactions, then your ISP can see the Bitcoin address and trace the owner using the IP address because broadcasted messages in the Bitcoin network are not encrypted.
Dash aims to solve these problems by making transactions settle almost instantly and making it impossible to identify the real person behind an account. It also prevents your ISP from tracking you.
In the Bitcoin network, there are two kinds of nodes, that is, miners and ordinary nodes. But in Dash, there are three kinds of nodes, that is, miners, masternodes, and ordinary nodes. Masternodes are what makes Dash so special.
Decentralized governance and budgeting
To host a masternode, you need to have 1,000 Dashes and a static IP address. In the Dash network, both masternodes and miners earn Dashes. When a block is mined, 45% reward goes to the miner, 45% goes to the masternodes, and 10% is reserved for the budget system.
Masternodes enable decentralized governance and budgeting. Due to the decentralized governance and budgeting system, Dash is called a DAO because that's exactly what it is.
Masternodes in the network act like shareholders; that is, they have rights to take decisions regarding where the 10% Dash goes. This 10% Dash is usually used to funds other projects. Each masternode is given the ability to use one vote to approve a project.
Discussions on project proposals happen out of the network. But the voting happens in the network.
Note
Masternodes can provide a possible solution to verify user identity in DApps; that is, masternodes can democratically select a node to verify user identity. The person or business behind this node can manually verify user documents. A part of this reward can also go to this node. If the node doesn't provide good service, then the masternodes can vote for a different node. This can be a fine solution to the decentralized identity issue.
Instead of just approving or rejecting a proposal, masternodes also form a service layer that provides various services. The reason that masternodes provide services is that the more services they provide, the more feature-rich the network becomes, thus increasing users and transactions, which increases prices for Dash currency and the block reward also gets high, therefore helping masternodes earn more profit.
Masternodes provide services such as PrivateSend (a coin-mixing service that provides anonymity), InstantSend (a service that provides almost instant transactions), DAPI (a service that provides a decentralized API so that users don't need to run a node), and so on.
At a given time, only 10 masternodes are selected. The selection algorithm uses the current block hash to select the masternodes. Then, we request a service from them. The response that's received from the majority of nodes is said to be the correct one. This is how consensus is achieved for services provided by the masternodes.
The proof-of-service consensus protocol is used to make sure that the masternodes are online, are responding, and have their blockchain up-to-date.
BigChainDB allows you to deploy your own permissioned or permissionless decentralized database. It uses the blockchain data structure along with various other database-specific data structures. BigChainDB, at the time of writing this, is still under development, so many things are not clear yet.
It also provides many other features, such as rich permissions, querying, linear scaling, and native support for multi-assets and the federation consensus protocol.
OpenBazaar is a decentralized e-commerce platform. You can buy or sell goods using OpenBazaar. Users are not anonymous in the OpenBazaar network as their IP address is recorded. A node can be a buyer, seller, or a moderator.
It uses a Kademlia-style distributed hash table data structure. A seller must host a node and keep it running in order to make the items visible in the network.
It prevents account spam by using the proof-of-work consensus protocol. It prevents ratings and reviews spam using proof-of-burn, CHECKLOCKTIMEVERIFY, and security deposit consensus protocols.
Buyers and sellers trade using Bitcoins. A buyer can add a moderator while making a purchase. The moderator is responsible for resolving a dispute if anything happens between the buyer and the seller. Anyone can be a moderator in the network. Moderators earn commission by resolving disputes.
Ripple is decentralized remittance platform. It lets us transfer fiat currencies, digital currencies, and commodities. It uses the blockchain data structure and has its own consensus protocol. In ripple docs, you will not find the term blocks and blockchain; they use the term ledger instead.
In ripple, money and commodity transfer happens via a trust chain in a manner similar to how it happens in a hawala network. In ripple, there are two kinds of nodes, that is, gateways and regular nodes. Gateways support deposit and withdrawal of one or more currencies and/or commodities. To become a gateway in a ripple network, you need permission as gateways to form a trust chain. Gateways are usually registered financial institutions, exchanges, merchants, and so on.
Every user and gateway has an account address. Every user needs to add a list of gateways they trust by adding the gateway addresses to the trust list. There is no consensus to find whom to trust; it all depends on the user, and the user takes the risk of trusting a gateway. Even gateways can add the list of gateways they trust.
Let's look at an example of how user X living in India can send 500 USD to user Y living in the USA. Assuming that there is a gateway XX in India, which takes cash (physical cash or card payments on their website) and gives you only the INR balance on ripple, X will visit the XX office or website and deposit 30,000 INR and then XX will broadcast a transaction saying I owe X 30,000 INR. Now assume that there is a gateway YY in the USA, which allows only USD transactions and Y trusts YY gateway. Now, say, gateways XX and YY don't trust each other. As X and Y don't trust a common gateway, XX and YY don't trust each other, and finally, XX and YY don't support the same currency. Therefore, for X to send money to Y, he needs to find intermediary gateways to form a trust chain. Assume there is another gateway, ZZ, that is trusted by both XX and YY and it supports USD and INR. So now X can send a transaction by transferring 50,000 INR from XX to ZZ and it gets converted to USD by ZZ and then ZZ sends the money to YY, asking YY to give the money to Y. Now instead of X owing Y $500, YY owes $500 to Y, ZZ owes $500 to YY, and XX owes 30,000 INR to ZZ. But it's all fine because they trust each other, whereas earlier, X and Y didn't trust each other. But XX, YY, and ZZ can transfer the money outside of ripple whenever they want to, or else a reverse transaction will deduct this value.
Ripple also has an internal currency called XRP (or ripples). Every transaction sent to the network costs some ripples. As XRP is the ripple's native currency, it can be sent to anyone in the network without trust. XRP can also be used while forming a trust chain. Remember that every gateway has its own currency exchange rate. XRP isn't generated by a mining process; instead, there are total of 100 billion XRPs generated in the beginning and owned by the ripple company itself. XRP is supplied manually depending on various factors.
All the transactions are recorded in the decentralized ledger, which forms an immutable history. Consensus is required to make sure that all nodes have the same ledger at a given point of time. In ripple, there is a third kind of node called validators, which are part of the consensus protocol. Validators are responsible for validating transactions. Anyone can become a validator. But other nodes keep a list of validators that can be actually trusted. This list is known as UNL (unique node list). A validator also has a UNL; that is, the validators it trusts as validators also want to reach a consensus. Currently, ripple decides the list of validators that can be trusted, but if the network thinks that validators selected by ripple are not trustworthy, then they can modify the list in their node software.
You can form a ledger by taking the previous ledger and applying all the transactions that have happened since then. So to agree on the current ledger, nodes must agree on the previous ledger and the set of transactions that have happened since then. After a new ledger is created, a node (both regular nodes and validators) starts a timer (of a few seconds, approximately 5 seconds) and collects the new transactions that arrived during the creation of the previous ledger. When the timer expires, it takes those transactions that are valid according to at least 80% of the UNLs and forms the next ledger. Validators broadcast a proposal (a set of transactions they think are valid to form the next ledger) to the network. Validators can broadcast proposals for the same ledger multiple times with a different set of transactions if they decide to change the list of valid transactions depending on proposals from their UNLs and other factors. So you only need to wait 5-10 seconds for your transaction to be confirmed by the network.
Some people wonder whether this can lead to many different versions of the ledger since each node may have a different UNL. As long as there is a minimal degree of inter-connectivity between UNLs, a consensus will rapidly be reached. This is primarily because every honest node's primary goal is to achieve a consensus.
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