Decentralized applications: Welcome to the future

The most revolutionary and controversial manifestation of Ethereum is the self-governing and decentralized application (DAPP). DAPPs can manage things like digital assets and DAOs.

DAPPs were created to replace centralized management of assets and organizations. This structure has a lot of appeal because many people believe that absolute power corrupts absolutely. For those who are fearful of losing control, this type of structure has massive implications.

New DAPPs are popping up every day. You can explore and discover new ones built on Ethereum by going to https://dappradar.com. DappRadar updates a list of all the latest Ethereum Dapps and gives you a preview of what they do. One of the first ever created was Etheria (see Figure 5-1).

The power of decentralized autonomous organizations

DAOs are a type of Ethereum application that represents a virtual entity within Ethereum. When you create a DAO, you can invite others to participate in the governance of the organization. The participants can remain anonymous and never meet, which could trigger Know Your Customer (KYC) rules (the process a business must go through to verifying the identity of its clients) and anti-money laundering (AML; the laws and regulations designed to stop the practice of generating income through illegal means) compliance issues.

DAOs have been created for raising funds for investing, but they could also be designed for civic or nonprofit purposes. Ethereum gives you a basic framework for governance. It’s up to the organizers to determine what’s being governed. Ethereum has created templates for you to help in the creation of DAOs.

Figure 5-2 shows a depiction of the organization of an Ethereum application.

Here’s how DAOs basically work:

1. A group of people writes a smart contract to govern the organization.

2. People add funds to the DAO and are given tokens that represent ownership.

   This structure works kind of like stock in a company, but the members have control of the funds from day one.

3. When the funds have been raised, the DAO begins to operate by having members propose how to spend the money. Voting may be affected by how much Ether the member risks or stakes in the DOA.
4. The members vote on these proposals.
5. When the predetermined time has passed and the predetermined number of votes has accrued, the proposal passes or fails.
6. Individuals act as contractors to service the DAO.

Unlike most traditional investment vehicles, where a central party makes decisions about investments, the members of a DAO control 100 percent of the assets. They vote on new investments and other decisions. This type of structure threatens to displace traditional financial managers.

DAOs are built with code that can’t be changed on the fly. The appeal of this is that malicious hackers can’t monkey with the funds in a traditional sense. Hackers can still find ways to execute the code in unexpected ways and withdraw funds. The immutable nature of a DAO’s code makes it nearly impossible to fix any bugs once the DAO is live in Ethereum.

Understanding smart contracts

Ethereum smart contracts are like contractual agreements, except there is no central party to enforce the contract. The Ethereum protocol “enforces” smart contracts by attaching economic pressure. They can also enforce implementation of a requirement if it lives within Ethereum, because Ethereum can prove certain conditions were or were not met. If it doesn’t live within Ethereum, it’s much harder to enforce.

Ethereum smart contracts are not yet legally enforceable and may never be because the perception is that you don’t need outside authorities enforcing agreements. Legal systems are controlled by governments. As they stand now, governments are central authorities — some with more or less consent and democratic principles. Within an Ethereum smart contract, each participant has an inalienable vote.

Ethereum smart contracts do not include artificial intelligence. This is a cool possibility in the near future. But for now, Ethereum is just software code that runs on a blockchain.

Ethereum smart contracts are not safe. The DAO hack is a great example of the type of dangers that can occur. It is still early days, and putting a lot of money into an unproven system isn’t smart. Instead, experiment with small amounts until all the bugs have been worked out of new contracts.

Discovering the cryptocurrency Ether

Ether is the name of the cryptocurrency for the Ethereum blockchain. It was named after the substance that was believed to permeate all space and make the universe possible. In that sense, Ether is the substance that makes Ethereum possible. Ether incentivizes the network to secure itself through proof-of-work mining, like how the token Bitcoin incentivizes the Bitcoin network. Ether is needed to execute any code within the Ethereum network. When utilized to execute a contract in Ethereum, Ether is referred to as gas.

Executing the code within a smart contract also costs some amount of ether. This feature gives the token added utility. As long as individuals want to use Ethereum for applications and contracts, ether will hold a value beyond speculation.

The wild growth in the value of ether has made it a popular token to speculate on. It’s widely traded on exchanges around the world. Some new hedge funds are looking at it as an investment vehicle. However, the volatile nature and low market depth make ether a risky investment.

Mining for ether

Ethereum is kept running by a network of computers all over the world that are processing the contracts and securing the network. These computers are sometimes referred to as nodes, and they’re mining crypto Ether.

In order to reward individuals for the time and cost involved in mining, there is a prize of five ethers about every 12 seconds. The prize is given to the node that was able to create the latest block in the Ethereum blockchain.

All new blocks have a list of the latest transactions. The proof-of-work consensus algorithm guarantees that prizes are won most often by nodes with the most computational power. Computers that aren’t as powerful can win, too — it just takes longer. If you want to try your hand at mining ether, you can do it with your home computer, but it will take a very long time to successfully mine a block and win ether.

Mining ether is not for the technical novice. You need to be familiar with command line. If you don’t have a clue what command line is, you probably want to skip this process. Also, be sure to follow the most up-to-date instructions on the Ethereum GitHub (http://github.com/ethereum).

Setting up your Ethereum wallet

To set up your Ethereum wallet, follow these steps:

1. Go to www.ethereum.org.

2. Click the Download button.

   You have to scroll down the page a bit to find the button.

   Be sure to save the Ethereum wallet download someplace you can find it later.

3. Open the Ethereum wallet.

   You may need to check for updates to the software under Help.

4. Choose Develop in the drop-down menu.

5. Select One of the Test Networks such as Robsten or Rinkeby.

   Here you get set up to mine test ether. This process is much less time-consuming then real ether mining, but it still takes some time — currently, it’s about two hours.

6. Create a strong password.

   Don’t forget to save your password someplace safe.

7. Click through the startup menu.

   The Ethereum team has a few tutorials that are interesting to review while you’re waiting on your test net to download. The download may take ten minutes or so.

8. Choose Develop ⇒ Start Mining.

   Don’t skip this step. You need the ether for later projects.

You’ve just set up your wallet, and you’re earning test ether for your future smart contract projects.

Test net and congress

The next phase of your DAO project is setting up the framework for your DAO. Follow these steps:

1. In your Ethereum wallet, choose Develop ⇒ Network ⇒ Test Net.

2. Click the Contracts tab and then click New Contract.

   The Ethereum team has set up a few test templates for DAOs.

3. Paste the code you copied in the preceding section into the Solidity code box.

Make sure you’re selecting Solidity Contract Source Code on the tab and not Contract Byte Code.

4. From the Contract Picker, choose Congress.

5. Pick some variables when prompted to do so.

   Here are your options:

   • The minimum quorum for proposals is the fewest votes a proposal needs to have before it can be executed.
   • The minutes for debate is the shortest amount of time, in minutes, that needs to pass before it can be executed.
   • The margin of votes for a majority. Proposals pass if there are more than 50 percent of the votes plus the margin. Leave it at 0 for a simple majority.

Governance and voting

Now you’re going to name and set up the governance of your DAO. You need to set up a minimum quorum for proposals (how many votes a new proposal needs to have before it is passed). You also set up the margin of votes for a majority (how many votes a plan needs to pass) and the time allotted for discussing new plans.

1. Name your new DAO.

   This is kind of like naming a company.

2. For Debate Times, select 5 minutes.

   This is how long new proposals are open for conversation.

3. Leave Margin of Votes for Majority set to 0.

   This sets up how the democracy of your contract works.

4. Confirm the price of the DAO.

   You’ve mined some Ether in the test net via your wallet when you first set up it up. If you skipped that step, go back and do it now. You need a little of the test net Ether to build your DAO.

5. Click Deploy and type your password.

   The DAO may take some time to deploy. When you arrive at your new dashboard, scroll down, and you’ll be able to see your DAO being produced.

6. Click the New icon.

   A new unique icon will generate that represents your DAO.

Congratulations! You’ve created your first DAO.

Putting money in a DAO

Don’t trust large sums of money to untested and contracts and contracts that haven’t been fully vetted. Large contracts are more often targeted by hackers. The DAO hack described earlier in this chapter (see the sidebar “With great power comes … great power”) showed that even well thought-out contracts have unexpected weaknesses.

Although, smart contracts and blockchains let you conduct business with anyone around the world, it’s still the early days. You can mitigate your risk by working only with known and trusted parties.

The security landscape will constantly be evolving with new bugs. Reviewing all new best practices is imperative. Manage the amount of money you’re putting at risk and roll out contracts slowly and in phases. Ethereum is a new technology, and mature solutions are not yet built.

Building smarter smart contracts

Smart contract programming requires a different mind-set than standard contract writing. There is no third party to make things right if the contract executes in a way that you didn’t expect or intend. The immutable and distributed nature of blockchains makes it tough to change an unwanted outcome.

Your contract will have flaws and may fail. Build safety valves into your contracts so you can respond to bugs and vulnerabilities as they come up. Smart contracts also need an off switch that let you pull the plug and pause your contract when things are going wrong.

If your contract is big enough, offer bug-hunting bounties that incentivizes the community to find vulnerabilities and flaws in your contract.

As with many things, the complexity of your contract also increases the likelihood of errors and attack vectors. Keep your contract logic simple. Build out small modules that hold each section of the contract. Creating a contract in this manner will help you compartmentalize any issues.

Finding bugs in the system

Don’t reinvent the wheel by building your own tools such as random number generators. Instead, leverage the work that the community has already done and that has been well tested.

You can only control for things within your own contract. Be cautious of external contract calls. They can execute malicious code and take away your control.

The Ethereum community has an excellent known bug list and even more helpful tips on how to build secure smart contracts on its GitHub page at https://github.com/ethereum/wiki/wiki/safety.

Seeing up your GitHub account

GitHub is a development platform for storing code you develop. GitHub offers free accounts for open-source projects. So, if you’re comfortable sharing the code you’ve developed, GitHub is a fantastic source for managing your projects and building software. GitHub also offers a paid version if you want to keep your code private. For the purposes of this section, a free account will work great.

To open a GitHub account, follow these steps:

1. Open the Brave web browser.

   If you don’t yet have the Brave browser, go to Chapter 3.

2. Navigate to https://github.com.
3. Enter your desired credentials.
4. Click Sign Up for GitHub.

You’re all set.

Requesting KETH on the Gitter Faucet

To request KETH, follow these steps:

1. Open the Brave web browser.
2. Navigate to https://gitter.im/kovan-testnet/faucet.
3. Click Sign In to Start Talking.
4. Select Sign In with GitHub.

Next, you’ll grab your MetaMask account address so you can paste it into the social chat window and allow one of the community members to send you some KETH. Follow these steps:

1. Open your MetaMask account.

   To open your MetaMask account, click the fox icon in the upper-right corner of your Brave browser window.

2. From your MetaMask account, click the pull-down tab.
3. Select Kovan Test Network.
4. Copy your MetaMask address by clicking Account 1.

Now you’re ready to request some test Ether called KETH form the Kovan community. You’ll take your Kovan Ethereum address from your MetaMask account and post it in the chat window. Make sure to only post your address. Follow these steps:

1. Navigate back to https://gitter.im/kovan-testnet/faucet.
2. Paste your copied address into the chat window.

Now you’ll need to wait because one of the community members will check out your GitHub account and make sure you aren’t spamming the network. This may take some time because the process of sending you KETH is done manually. You’ll see the KETH in your MetaMask account after the transaction is complete. This process took me three days, but I worked on it over a holiday weekend.

To set up your Polymath account, follow these steps:

1. Open the Brave web browser.
2. Navigate to https://tokenstudio.polymath.network.
3. Click Create Your Security Token.
4. Navigate to the fox icon for your MetaMask wallet.
5. Click Sign from within MetaMask.

Creating your tokens

Now that you have the prerequisite KETH needed to create your own token, you can finally get started. In this section, you use the Polymath smart contract to build a custom Ethereum ERC20 token.