The content of this page was updated in July 2019, with an excerpt from the book Token Economy by Shermin Voshmgir.

As opposed to centralized applications that run on a single computer, decentralized applications run on a P2P network of computers. They have existed since the advent of P2P networks.

Decentralized applications don‘t necessarily need to run on top of a blockchain network. Tor, BitTorrent, Popcorn Time, BitMessage, are examples for decentralized applications that run on a P2P network, but not on a blockchain – which is a special kind of P2P network (read more: Origins of Bitcoin and Web3).

Decentralized applications are a piece of so ware that communicates with the blockchain, which manages the state of all network actors. The interface of the decentralized applications does not look any different than any website or mobile app today. The smart contract represents the core logic of a decentralized application. Smart contracts are integral building blocks of blockchains, that process information from external sensors or events and help the blockchain manage the state of all network actors.

The frontend of a decentralized application represents what you see, and the backend represents the entire business logic. This business logic is represented by one or several smart contracts interacting with the underlying blockchain. The frontend, as well as files like a photo, a video, or audio, could be hosted on decentralized storage networks such as Swarm or IPFS. Traditional Web applications use HTML, CSS, and javascript or the like to render a webpage. This page interacts with a centralized database, where all the data is stored. When you use a service like Twitter, Facebook, Amazon, or Airbnb, for example, the webpage will call an API to process your personal data and other necessary information stored on their servers, to display them on the page. User ID and passwords are used for identification and authentication, with low levels of security, since personalized data is stored on the server of the service provider.

Traditional websites: Front End → API → Database.

Decentralized applications are similar to a traditional Web application. The frontend uses the exact same technology to render the page. It contains a “wallet” that communicates with the blockchain. The wallet manages cryptographic keys and the blockchain address. Public-key infrastructure is used for user identification and authentication. Instead of an API connecting to a database, a wallet so – ware triggers activities of a smart contract, which interacts with a blockchain: Web3 compatible website:

Front End (including wallet) → Smart Contract → Blockchain.

In contrast to Web2 applications, Web3 applications need a connection to the blockchain, which is managed by a special application called “wallet.” It keeps a record of the private keys and blockchain address, which represents the unique 30 identities and point of reference. Without a so ware that manages our digital identity, we will not be able to interact with the blockchain. The Web3, therefore, builds on the current Web2 stack and introduces additional elements on an application level. In the backend, the Web3 adds a whole new infrastructure layer for decentralized applications to interact with – the decentralized protocol stack. Decentralized apps need to have a component that manages a user’s private keys, with which one can sign transactions on the state layer, the blockchain (read more: Token Security – Cryptography).

Illustration of a DApp that uses a blockchain with smart contracts combined with the pillars of Swarm and Whisper.

Source: Ethereum Stack exchange

Full text and high-resolution graphics available as paperback & ebook: Token Economy, by Shermin Voshmgir, 2019

About the Author: Shermin Voshmgir is the Author of the Book “Token Economy“. She is the director of the Research Institute for Cryptoconomics at the Vienna University of Economics, and the founder of BlockchainHub Berlin. In the past, she was a curator of TheDAO, and advisor to various startups like Jolocom, Wunder and the Estonian E-residency program. In addition to her studies at the Vienna University of Economics, she studied film and drama in Madrid. Her past work experience ranges from Internet startups, research & art. She is Austrian, with Iranian roots, and lives between Vienna and Berlin.

About the Book: Blockchains & smart contracts have made it easy for anyone to create a token with just a few lines of code. They can represent anything from an asset to an access right, like gold, diamonds, a fraction of a Picasso painting or an entry ticket to a concert. Tokens could also be used to reward social media contributions, incentivize the reduction of CO2 emissions, or even ones attention for watching an ad. While it has become easy to create a token, which is collectively managed by a public infrastructure like a blockchain, the understanding of how to apply these tokens is still vague. The book refers to tokens, instead of cryptocurrencies, and explains why the term “token” is the more accurate term, as many of the tokens have never been designed with the purpose to represent a currency. However, since tokens do have similarities to fiat currencies, the role of money as a medium of exchange is analyzed at length in this book. This book gives an overview of the mechanisms and state of blockchain, the socio-economic implications of tokens, and deep dives into selected tokens use cases: Basic Attention Token, Steemit, Token Curated Registries (TCRs), purpose-driven tokens, stable tokens, asset tokens, fractional ownership tokens, Libra & Calibra (Facebook), and many more.