Differences between appcoins and tokens of the main protocol in Ethereum

The Ethereum blockchain is a “primary broth”, the main ingredient of which is the bytecode that constantly mutates and changes its configuration. With the advent of the ERC20 token standard, these small but very useful building blocks began to be intensively reproduced and mounted in still rather rude systems, which over time are rapidly growing in complexity and find new areas of application. Each new building block added to the overall toolbox accelerates innovation and adds new applications and smart contracts to Ethereum.

However, for a more efficient development of these applications, it is necessary to adopt a philosophy of standardization and delineation of functions. Unfortunately, a culture formed around token sales has created motivations that run counter to this good practice. This is due to the fact that token sales are used to create network effects around specific applications (Dapps), rather than around common building blocks (protocols) that, in fact, make these applications possible.

Protocols

Cryptoeconomic Protocols
In relation to the blockchain, the term “protocol” usually refers to a set of cryptoeconomic rules that support distributed consensus in a P2P network. With this definition, there is one protocol per blockchain and one native token per protocol (with several exceptions). However, consensus is not the only application of cryptoeconomic protocols.

In a more general sense, cryptoeconomic protocols create financial incentives that motivate a network of rational economic agents to coordinate behavior that leads to the completion of some process. To motivate the desired behavior, a native token (or protocol token) is used as a “carrot and stick”. Active participation in the protocol may be optional, however, the process that it conducts affects the entire network (in the context of the POW blockchain: miners are responsible for the reliability of the entire network, but miners are only part of the nodes (nodes), and the entire network subsidizes miners through emission) .

Network protocols
Manage communications between nodes (nodes). The value of the network protocol lies in its interoperability, while the nodes do not require artificial financial incentives.

Protocols built into smart contracts
Ethereum smart contracts are an ideal conductor for both cryptoeconomic and network protocols. These statically described logical blocks are deployed in an environment in which the network itself and the consensus mechanism are already under the control of the Ethereum client, and the global Ethereum P2P network has direct access to the contract functionality.

Using an open interface (ABI), they can serve as an open infrastructure that other smart contracts can use. Smart contracts are also able to control digital assets and implement their own monetary policy, giving developers the opportunity to create complex financial motivations, which, in turn, can conduct cryptoeconomic protocols. Moreover, the planned Casper Ethereum consensus mechanism will be implemented as a smart contract.

Smart contracts serving as protocols on the Ethereum blockchain. They will be called non-native cryptoeconomic and network protocols.

Ideally, protocols should be designed as independent units that can be combined and configured for different uses.

Applications vs. Protocols

Augur is a decentralized prediction market application built on two protocols: the decentralized oracle protocol and the exchange protocol. The oracle protocol is a non-native cryptoeconomic protocol that provides coordination of a network of nodes in order to create consensus based on the results of real-world events in which nodes are motivated by reputation tokens (REP).

Exchange Protocol – a non-native network protocol that provides messaging and moving tokens between buyers and sellers; It also gives access to the answers of the prediction market. Important points:

The functionality of one protocol is independent of another;
Many nodes using each protocol do not necessarily overlap;
Both protocols can be used for various applications not related to the prediction markets.

This means that the protocols are separate and independent of any particular application or use case.

Appcoins

Decentralized applications (Dapps) usually do not require native tokens for their functioning, in the sense as is customary in cryptoeconomic protocols. Instead, Dapps create value by providing access to protocols, and end users pay transaction fees for convenience. A reasonable motivational structure of an appcoin can be, for example:

A digital subscription or membership that is sold to users in exchange for reduced or zero fees (for example, DVIP), or more clearly;
Digital securities that are sold to investors for shares in Dapp’s future profits (can be codified in smart contracts or legally binding agreements).

Unfortunately, due to the peculiarities of regulating the issue of securities, Dapp developers are not able to attract financing through the public sale of unregistered shares. So, although appcoin promotions provide the most logical incentives for both developers and investors, structuring appcoins in this way is now too risky.

Nonetheless, open crowdsales are too tempting a source of funding for Dapp developers, and given that traditional venture capitalists are just asking the world of digital assets, there are no alternatives to crowdsales. The next logical step for Dapp developers is to get financing, for example, in ETH, selling tokens structured in such a way as to avoid classification as stocks anyway (Howey test).

The Coinbase-developed Template for Applying the Securities Law to Blockchain Tokens attempts to formalize the differences between blockchain tokens (which in this article refers to non-hate cryptoeconomic protocol tokens) and securities. Functionality or “utility” turns out to be key characteristics that distinguish a blockchain token from a security.

Buying a token that has a specific function that is available only to its owner (access to functionality) seems more reasonable than buying a token that gives a share in future profit.

Limited Choice Problem

Caught in the center of the winding paths of motivation, opportunities and limitations, DApp developers are forced to create coins as a result, tied to the basic Dapp smart contract system, in the name of “functionality and“ usefulness ”, but in reality they have no other purpose than to attract financing, avoiding Attention of regulators to the securities market.

There is a problem here. Appcoins that are directly tied to the Dapp smart contract system are the exact opposite of standardization: many incompatible contracts with different levels of quality and reliability, but with the same functionality. What does a regular user get? Enlarged attack surface, multiple configuration processes, all kinds of appcoins and training curves.

Metcalfe’s law associates the value of a network with the total number of nodes in it. Redundancy kills network effects by fragmenting the network. The result is negative for everyone.

Redundancy

The general argument is that the added cost of servicing an unnecessary appcoin will cause the appcoin to cease to exist. In general, this is an argument against parallel implementations of one type of smart contract. Parallel redundancy can occur in the absence of appcoins: parallel smart contracts can only operate with ETH. In this case, everything is simple: standardization of common protocols will easily eliminate parallel redundancy.

Conclusions

Appcoins and protocol tokens represent two different classes of digital assets. Protocol tokens provide the financial motivation necessary to maintain the crypto-economic protocol. Decentralized applications provide access to protocols for a specific use case and do not have cryptoeconomic mechanisms. The current trend of linking DApp to their underlying protocols leads to redundancy of smart contracts, which entails additional costs for end users.