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Blockchain Act. 26 Mar 2018

What does the future of internet look like? Welcome to the age of tokenomics

Distributed ledger technologies (DLT) are providing the breeding ground for a new type of apps that do not run on servers, but on decentralized networks. In a recent report, BBVA Research takes a look at the potential implications of this new generation of apps (DApps) and their role in shaping the future of Internet.

Is the internet broken?

Although the internet was originally built on open protocols, most of the services we use on it today are being provided by centralized applications running on servers owned by internet titans such as Google or Amazon.  This level of centralization in what originally was a decentralized network has become a cause of growing concerns for some reputable voices, to the point that they are spreading the idea that the “Internet is broken.” Can it be fixed?

Leveraging Distributed Ledger Technologies “new kinds of internet applications are being built, known as decentralized applications or DApps," says BBVA Research’s latest Digital Economy Outlook report. What are DApps? A DApp is an Internet application that runs on a decentralized network. No single node in the network has complete control over a DApp, explains the report. What advantages do they offer? They are “flexible, transparent, distributed and resilient.”

Many times, when people talk about DApps, they have blockchain in mind. Why? Depending on the functionality of the DApp, different data structures are used to store application data.  For example, the Bitcoin DApp uses the blockchain data structure.

A new economic model, ‘tokenomics’

The DApp space is currently an emerging field. A recurring question, according to BBVA Research, is how to monetize a DApp. “The way for a developer to make money with an open-source DApp is to allocate scarce resources in the network by issuing a limited amount of a proprietary token. Users need this token to use the network.  Owners of scarce resources get paid in tokens.”

As the network grows to include more users, the existence of a fixed amount of tokens from the outset makes the value of the tokens increase as well, explains the report. This model can be applied to any kind of DApp.  The design of the role of the token, how they are distributed and how to govern the token “monetary” policy is already known as “tokenomics.”

Crypto-tokens are assets that don’t behave in a traditional way, and this will probably result in the appearance of new economic models,” says Javier Sebástián, Principal Economist at BBVA Research's Digital Regulation and Trends unit.

There are two more features that define a DApp: they have no central point of failure, because there is no central server, and they have decentralized consensus, that allows participants agree on something in a decentralized way.

The way towards web 3.0

So far, there aren’t any standalone DApps that meet the four abovementioned criteria, however, “they are coming,” says BBVA Research’s report. In fact, “practically all the applications we habitually use have an equivalent DApp being developed, in what is already know as the “Web 3.0”, a DLT-based Internet instead of the current server-based Internet.”

Regarding the future, BBVA Research says there are still "uncertainties," such as the “lack of sufficient incentives to generate such platforms with a user experience comparable to centralized alternatives, or how a DApp connects to centralized payment or logistics systems.” However, “if these challenges are overcome, the combination of DLTs as infrastructure and DApps as consumer-facing service provisioning instruments, together with the development of “tokenomics” could potentially represent a quantum leap towards a totally different way of doing businesses and, eventually, the birth of a whole new type of economy,” concludes the report.

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