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Aug 31, 2023
Educational
Should my dApp have a token?
by Orderly Network
should-your-dapp-have-a-token

The role of tokens within decentralized applications is a focal point of discussion in shaping the economic, functional, and user experience aspects of these innovative platforms. As blockchain technology continues to redefine how we interact with digital services, understanding the rationale behind integrating a token into your dApp becomes essential.

This article delves into the considerations, benefits, and potential drawbacks of incorporating tokens within your dApp, providing insights to guide your decision-making process.

What are Decentralized Applications?

Decentralized applications (dApps) are software applications that run on decentralized networks, like blockchains. Unlike traditional apps controlled by single entities, dApps operate without a central authority. They use smart contracts — self-executing code — to automate processes and transactions, making them secure and transparent.

Key characteristics of dApps include open-source code, decentralized data storage, and the potential for user ownership and control. Many dApps have their own tokens or cryptocurrencies, which facilitate various functions within the app’s ecosystem. Decentralization also empowers users by reducing censorship risk and enabling direct peer-to-peer interactions.

Types of dApps range from financial platforms and gaming applications to supply chain management and social networks. By utilizing blockchain technology, dApps offer increased transparency, security, and user empowerment, while reshaping how we interact with digital services.

Does a DApp Need a Token?

A decentralized application (dApp) does not necessarily need a token. While tokens are commonly used in dApps to facilitate various functionalities and economic interactions, they are not a strict requirement for every dApp.

The decision to incorporate a token should be based on the specific goals and needs of your dApp. These needs could include, the utility and functionality of the dApp, its governance model, economic model, and user incentive, among other things.

In some cases, dApps can function perfectly well without a native token. For instance, if your dApp focuses on providing information, social networking, or simple utilities, a token might not be necessary. However, if your dApp involves economic interactions, decentralized governance, or unique value propositions, a token could enhance its capabilities.

Use Cases of DApp Tokens

Utility Tokens

Many dApp tokens serve as utility tokens within the dApp’s ecosystem. They provide access to certain features, services, or benefits within the application. For instance, a social media dApp could use tokens for premium content access or ad-free experiences.

Governance Tokens

Governance tokens enable holders to participate in the decision-making processes of the dApp’s development and growth. Token holders can vote on proposals, upgrades, and changes to the platform, fostering a decentralized governance model.

Staking and Rewards

Tokens can be staked to earn rewards or incentives. Staking provides liquidity to the ecosystem and supports network security. Users who stake tokens can earn additional tokens, fostering user engagement.

Transaction Fees

Some dApp tokens are used to pay for transaction fees within the ecosystem. Users need these tokens to perform actions like transferring assets, interacting with smart contracts, or participating in activities like gaming and trading.

Liquidity Provision

Liquidity pools are formed when users deposit tokens into a smart contract. In return, they receive liquidity provider (LP) tokens that represent their share of the pool. These LP tokens can be traded or used to earn a portion of the fees generated by the pool.

Choosing the Right Blockchain for Dapps

The choice of blockchain for a dApp is crucial as it determines the platform’s capabilities, scalability, and user base. Some of the most important factors to consider when choosing a blockchain for your dApp include scalability, consensus mechanism, smart contract functionality, and interoperability.

Scalability

Your project team should consider the blockchain’s capacity to handle a large number of transactions and users as some blockchains, like Ethereum, have faced scalability issues during periods of high demand. You should opt for blockchains that offer high throughput and low latency to ensure smooth operation.

Consensus Mechanism

Different blockchains use varying consensus mechanisms, such as Proof of Work (PoW), Proof of Stake (PoS), Delegated Proof of Stake (DPoS), and more. Each mechanism has its own benefits and drawbacks in terms of security, energy efficiency, and decentralization.

Smart Contract Functionality

Ensure the blockchain supports smart contracts, as they are the foundation for building dApps. Evaluate the programming languages and tools available for writing and deploying smart contracts on the chosen blockchain.

Interoperability

Consider whether the blockchain is compatible with other networks and protocols. Interoperability allows your dApp to communicate and share data with other ecosystems, enhancing its utility and reach. Ensure to treat interoperability as a top priority as it holds the key to your project’s expansion in the future.

To put all of these points into context, certain blockchains are known to possess qualities that give them a competitive edge over others. For example, Ethereum is known to be the pioneer of Dapps, while the BNB Chain is popular for its low transaction cost. Similarly, Polkadot is known for interoperability and scalability, while the NEAR Protocol offers scalability and low transaction costs.

Orderly Network is originally built on Near Protocol, therefore, projects built on Orderly are already at an advantage in terms of scalability and cost. Additionally, in line with our goal to deliver an omnichain CLOB infra layer for dApps, our EVM expansion is already underway thus tapping into the most robust dApp ecosystem and improving the reach of dApps built on Orderly.

##Generating Revenue with Dapps Generating revenue with a decentralized application (dApp) involves creating sustainable monetization strategies that align with the dApp’s value proposition. While there’s no guaranteed strategy, here are the most common ways to dApps generate revenue:

Transaction Fees

Transaction fees are charges applied to each user transaction on your dApp. These fees are typically collected in the native token of the blockchain platform on which your dApp operates. They can provide a consistent revenue stream, particularly if your dApp facilitates frequent transactions like trading, lending, or swapping.

Staking and Yield Farming

Staking involves users locking up a certain amount of your dApp’s tokens to earn rewards, usually in the form of additional tokens. Yield farming extends this concept by allowing users to provide liquidity to decentralized exchanges and earn tokens in return.

Marketplace Fees

If your dApp functions as a marketplace for goods or services, you can charge a percentage fee on each transaction made through your platform. This revenue model is similar to transaction fees but specifically applies to marketplace transactions.

Crowdfunding

Crowdfunding involves raising funds for your dApp’s development. The most common forms of crowdfunding include IDOs and IEOs.

Identifying High-Risk DApps

While decentralized applications hold tremendous potential, it is not uncommon for some to carry higher risks. Oftentimes, this is due to the hidden agenda of the project team. Here are a few ways you can identify high-risk dApps.

Research the Project and its Developers

Look into the project’s website, social media profiles, and any available information about the development team. Check their LinkedIn profiles and professional backgrounds. Established and experienced teams are more likely to deliver on their promises.

Whitepaper and Documentation

A whitepaper is a detailed document outlining the project’s concept, technical details, use cases, market analysis, and more. A high-quality whitepaper demonstrates that the project has a clear plan and vision. Pay attention to the level of technical detail and how well the concepts are explained.

Code and Smart Contracts

If you are a developer, then you can consider checking the project’s smart contracts. If the dApp’s code is open-source, you can review it on platforms like GitHub. Analyze the code’s quality, its organization, and whether it’s actively maintained. Smart contracts, which are self-executing contracts with the terms of the agreement directly written into code, should be secure and audited to avoid vulnerabilities.

Security Audits

A security audit involves independent experts reviewing the code and smart contracts for vulnerabilities. Look for evidence that the project has undergone audits by reputable firms. Check whether identified issues have been addressed, and be cautious if the project hasn’t been properly audited.

Tokenomics and Use Case

Tokenomics refers to the economics of the project’s token. Understand how tokens are generated, distributed, and used within the ecosystem. Investigate whether the token serves a real purpose within the dApp or if it’s mainly used for speculative trading.

User Reviews and Feedback

Look for user experiences shared on forums, social media, and review platforms. Honest feedback can reveal both positive and negative aspects of the dApp. Consider both sides of the feedback to form a balanced perspective.

In summary, identifying high-risk dApps involves a thorough investigation into various aspects of the project, from its technical details to the credibility of its team and the transparency of its operations.

Creating a DApp Token

Creating a decentralized application (dApp) token involves several technical and strategic steps. Here’s an outline of the typical process:

Define Tokenomics

Tokenomics involves consciously defining the essence of the token you are about to create. Therefore, decide on the purpose of your token within the dApp ecosystem. Will it be used for transactions, governance, staking, rewards, or something else? Determine the total token supply, token name, symbol, and decimal places for precision.

Choose Blockchain Platform

Select a blockchain platform that supports the creation of tokens. Ethereum, Binance Smart Chain, and others are popular choices. The choice of platform affects factors like token standards and smart contract development.

Select Token Standard

Choose a token standard that aligns with the requirements and purpose of your application. Ethereum’s ERC-20 is widely used for fungible tokens, while ERC-721 is for non-fungible tokens (NFTs). Each platform may have its own token standards.

Develop a Smart Contract

Write the smart contract code that governs the behavior of your token. For Ethereum-based tokens, you will likely use Solidity. The smart contract should define functions for transferring tokens, checking balances, and handling other token-related actions.

Implement Security Measures

Security is paramount. Follow best practices to secure your smart contract against vulnerabilities like reentrancy attacks and integer overflows. It is usually recommended that you consider hiring reputable independent smart contract auditing firms to audit your codebase and smart contracts.

Test on Testnet

Deploy your smart contract on a testnet to identify and fix any issues before going live. Testnets are blockchain testing environments where project teams can test functions and perfect features before making them available to the public. This step helps ensure that your token behaves as intended without risking real assets.

Deploy on Mainnet

Once your smart contract is tested and certified to be secure, the next line of action is to deploy it on the mainnet. The mainnet is the live blockchain network; it is where your dApp and tokens become accessible to the general public.

Create User Interfaces

Develop user interfaces for users to interact with your dApp and the token. By interface, we mean the different mediums through which users can use your application. This could include a web interface, mobile app, or browser extension.

Maintain and Upgrade

Maintenance and upgrades are essential components of all applications. Therefore, your team must regularly monitor your dApp and token for any issues. If necessary, release updates or upgrades to improve functionality, security, or features.

Conclusion

In conclusion, the decision of whether a dApp should have a token depends on its objectives and the needs of its users. Dapp tokens can provide governance, utility, and foster community participation, adding significant value to the decentralized application. However, it is essential to carefully consider the use cases, potential risks, and blockchain platform before incorporating a token. By understanding the nuances of dApp tokens, developers can create innovative and sustainable dApps that resonate with users worldwide.

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