The Future of Blockchain Applications: Decentralized Protocols
The rapid increase in demand for public blockchain networks such as Bitcoin and Ethereum has made it considerably more challenging for developers to implement the necessary scaling solutions to sustain the capacity of blockchains. Without efficient scaling, the transaction fees and costs of running decentralized applications will increase for both the developers and users.
The anticipated success of Sharding, Plasma and ZK-SNARKs integration, as well as improvements to the consensus protocol of Ethereum, will facilitate the commercial success of decentralized applications in upcoming years. This will allow for decentralized applications to surpass centralized platforms with respect to user base and transaction volumes.
“To date, it is the most successful decentralized application and cryptocurrency exchange on the Ethereum protocol by the number of Ether transactions it processes on a daily basis.”
“I'm announcing that 100 percent of my OmiseGo + Kyber Network advisor shares will either be donated to charity (AMF, GiveD, SENS etc) or used to privately fund Ethereum second-layer infrastructure (state channels, multisig wallets etc), or some combination of the two. [Rules for funding Ethereum infrastructures are projects] must be 100 percent open source, no baked-in profit scheme (incl ICO token), must be good”, Buterin tweeted.
The Business Model of Successful DApps
After announcing his intention to create a personal fund which would provide capital and resources to non-ICO open-source projects, Buterin gave high praise to the structure of EtherDelta. To date, it is the most successful decentralized application and cryptocurrency exchange on the Ethereum protocol by the number of Ether transactions it processes on a daily basis. Given its daily volume of over 40,000 transactions, as demonstrated by public Ethereum blockchain explorer Etherscan, EtherDelta accounts for 14 percent of the entire Ethereum network’s daily transaction volume.
Through off-blockchain ecosystems and sustainable business models, it is possible for decentralized applications to operate with maximum efficiency. By processing the transfer of assets, crypto-tokens and cryptocurrencies on a platform that leverages the security of a public blockchain network like Ethereum, this can very well be achieved. The development team of EtherDelta has managed to run the platform without an ICO or external funding from venture capital firms. This is thanks to their sustainable revenue stream, which comes from the fees it charges traders on its decentralized cryptocurrency platform. EtherDelta receives 0.3 percent in fees from traders executing orders against someone else's order; every other operation or activity on the EtherDelta platform such as deposits, withdrawals or placing an order is free of charge.
This low-fee structure and transparent business model has allowed EtherDelta to grow rapidly over the past few years, as shown by the increase in its daily transaction volume. Furthermore, because of its decentralized structure, EtherDelta does not require users to comply with strict Know Your Customer (KYC) and Anti-Money Laundering (AML) policies. These policies were enforced in 2016 by the three major cryptocurrency exchange markets, including Japan, the US and South Korea. By virtue of its simplicity, the popularity of EtherDelta has continued to grow within the cryptocurrency market and could see it evolve into the largest decentralized application on Ethereum.
“An important feature of EtherDelta is that placing an order doesn't involve an Ethereum transaction. Placing an order involves signing a message, which doesn't cost a gas fee. This means that placing an order on EtherDelta is completely free: there's no Ethereum transaction fee and there's no fee if the order trades. The one and only platform fee EtherDelta charges is a 0.3% fee paid by the person executing an order (paid in the instrument being sold)”, explained the EtherDelta development team.
Fred Ehrsam, the co-founder of Coinbase and former Goldman Sachs trader, revealed in a research paper that EtherDelta currently handles 2 percent of the trading volume of centralized exchanges. Ehrsam noted that, “neither currently use an underlying decentralized exchange protocol. They are small at the moment — EtherDelta does about 2% of the largest centralized exchange’s volume per day”.
Due to its decentralized structure and dependence on the Ethereum network, EtherDelta is limited to that volume. Nevertheless, non-ICO and sustainable decentralized applications will eventually be able to compete with centralized service providers, trading platforms and exchanges. This will be supported and enabled by hard forks, like the latest Byzantium hard fork, and the integration of various Ethereum scaling solutions, such as sharding and Plasma, into the network.
EtherDelta is still described as a decentralized exchange protocol, not as a decentralized exchange. Ehrsam emphasized that in order for EtherDelta and other platforms, such as OasisDEX, to evolve into decentralized exchanges, they will need to support order books. However, this is not currently possible due to Ethereum’s scalability issues.
“A decentralized exchange has some combination of decentralized properties. At the moment, this most likely means some mix of 1) on-blockchain trade clearing, 2) ability for users to retain control of their funds, and 3) hosting an order book in some decentralized manner — this is currently inefficient with current levels of blockchain scaling”, added Ehrsam.
CryptoCribs is another popular decentralized application on the Ethereum protocol which achieved success with a non-ICO model. Essentially, CryptoCribs operates as a decentralized AirBnB — allowing homeowners to list their properties on the platform and users to rent rooms, houses and spaces for a certain period of time. Within a month, CryptoCribs added 100 new listings on its bitcoin and Ethereum-accepting platform. CryptoCribs’ increase in popularity could be attributed to its simple and transparent business model, much like that of EtherDelta, the fee structure of the CryptoCribs platform is explicitly outlined in its official whitepaper.
“CryptoCribs is committed to paying more than lip service to the community idea. We will set out with a total service fee of 10%, which is already substantially lower than the average Airbnb fee”, as stated in the whitepaper. “The service fee will be equally split between the hosts and guests. Initially, it will thus be 5% for each user. However, with every booking and “five coin” review (hereinafter a “community event”), the service fee of the user is reduced. The reduction follows a rewards schedule that works as follow.”
Many users have indeed taken to Ethereum forums, such as the Ethereum Subreddit and Twitter, to complain about the inefficiency of EtherDelta in executing orders and processing trades. However, EtherDelta and other decentralized applications on the Ethereum protocol, including CryptoCribs, will undoubtedly be able to optimize their smart contracts and scale proportionally once the Ethereum network improves as a whole.
What’s cuter than a kindle of kittens? ‘Anything else’ would be the likely response of the Ethereum community, as crypto-felines continue to disrupt the network. Cryptokitties, an online game built on the Ethereum blockchain, has quickly become the most used contract in the Ethereum network which, as a result, has created significant transaction delays.
Turns out there are a lot of cat lovers in the crypto community: since the project’s launch in November, over 180,000 people signed up and spent over $20 million in ETH buying and selling their digital pets.
While some call Cryptokitties a gas guzzler, others believe that the game might help bring blockchain to the mainstream. Seems like we finally found the puuurrrfect use case for blockchain.
To contact the editor responsible for this story:
Margarita Khartanovich at [email protected]