James Giancotti

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DApps 101: Decoding Legality, Privacy, and Token Security

Over the past few years, the overwhelming popularity of blockchain platforms such as Ethereum and EOS have introduced the world to a new computing paradigm: decentralized applications.
Unlike a conventional application that you would find on your smartphone, decentralized applications are not owned and run by a single entity or authority. These apps, also called DApps, offer a host of well-documented advantages, including censorship resistance, trustlessness, and reliability.
However, since blockchain-based decentralized applications are still few and far in between, the thought of interacting with one can seem overwhelming and confusing at first. The objective of this article is to answer some of the most common questions related to DApps in three distinct sections - legality, privacy, and digital asset security.

Understanding the Legality of DApps

Even prior to the introduction of blockchain-based applications, decentralized apps have existed in the form of peer-to-peer platforms such as BitTorrent and TOR. After cryptocurrencies such as Bitcoin exploded in popularity, however, enterprising developers quickly realized that there are many use cases of the technology that are yet untapped.
Sometime in 2017, the number of DApps on the market started growing exponentially. According to data from the State of the DApps, the number of new releases grew from a mere 10 in January 2017 to 72 just one year later. By December 2018, the number of new DApps per month had grown to 177. Today, there are over 2,500 unique DApps across a variety of blockchain platforms. However, many first-time DApp users are unable to determine whether or not they are legal to use. Let us begin by addressing this common concern.

Are DApps Legal to Use?

Since the DApp ecosystem is still in its infancy, many jurisdictions around the world have limited to no regulation on the matter. While the legality of DApps has remained mostly unquestioned so far, governments have begun introducing new regulations on digital currencies.
In spite of the common belief that cryptocurrencies are illegal, the fact is that Bitcoin and other cryptocurrencies are considered illegal in only 4% of all countries in the world.
All other nations do not actively prohibit their citizens from using digital tokens as either currency, commodity, or property. It is also worth noting that many DApps do not require you to use their accompanying digital currency at all.
For instance, let’s take the case of Brave Browser’s Basic Attention Token (BAT). In Brave’s ecosystem, users are rewarded for engaging and viewing advertisements from time to time. Users can use their earned BAT within the Brave ecosystem itself, in order to tip content creators or donate to the Brave development team.
Since these tokens never leave the platform and the ecosystem, Brave’s product is indistinguishable from any other non-blockchain platform with a virtual economy. Similarly, many other DApps on the market offer tokens with some underlying utility. So far, none of them have come under legal scrutiny, save for exceptional cases where nefarious or fraudulent activity was suspected.

How Can I Use DApps If Crypto Is Illegal In My Country?

Even if you are living in one of the few countries where cryptocurrencies are considered illegal, chances are that you can use decentralized applications without restriction.
Alluva, for instance, is a cryptocurrency price prediction platform that does not require users to purchase or trade tokens in order to participate. New users can simply create an account and access the platform’s functionality.
While a handful of governments are divided on the subject of token economies, the vast majority of them do not have any restriction on DApps themselves. In the case of Alluva, the act of simply making a price prediction is not illegal in any part of the world.

I’ve Earned Some Tokens From A DApp, How Can I Withdraw My Balance In Fiat?

Many DApps allow users to earn tokens on the platform for free, with no upfront investment mandated. As a result, first-time DApp users are often left wondering how they can convert their holdings into fiat currency. The answer is simple: cryptocurrency exchanges or peer to peer trading.
In the case of a cryptocurrency exchange, you will likely have to complete a Know Your Customer (KYC) verification process in accordance with local rules and regulations. Once your personal information and supporting documents have been verified by the exchange, you can proceed to immediately trade your holdings against other tokens or fiat currencies.
Sometimes, banks or financial institutions may not allow their account holders to use their accounts for cryptocurrency trading. Many DApps are still usable and beneficial because they allow their tokens to be directly exchanged for products and services, which means you can turn those tokens into tangible objects directly, saving yourself the effort of converting it to fiat with which you can purchase those very things.

Do I Need To Pay Taxes On My Earnings From A DApp?

Whether or not you need to pay taxes on your crypto gains depends entirely on which part of the world you reside in. While some nations tax crypto earnings as part of other income, others treat it as Capital Gains.
As for the amount of tax you need to pay, it is worth noting that some countries boast rates that are as high as 50%. Reaching out to a local tax expert for advice specific to your region is always a safe bet. For the most part, however, this information is easy to find.

Understanding How DApps Handle User Privacy

Privacy has become increasingly difficult to take for granted on the internet, especially in light of the recent Facebook-Cambridge Analytica scandal and the Equifax data leak. However, the problem of centralized control over the vast amount of information that flows via the Internet extends far beyond the boundaries of social media and private companies.
As the decentralized application ecosystem continues to grow bigger every year, it is important to understand the privacy-related intricacies of using a DApp.
In this section, we look at user privacy implications, questions, and opportunities of DApps. A DApp is governed by a distributed authority, which means that all changes must be decided by the consensus or a majority of its users before they are implemented.
Ideally, all records of a decentralized application’s operations are stored on a public and decentralized blockchain to avoid pitfalls of centralization. The distributed decision-making process is enabled by validators of the blockchain via one of the deployed algorithms that implement a consensus mechanism such as Proof-of-Work (PoW), or Proof-of-Stake (PoS).

Centralization Of Data And User Privacy Crisis

User privacy has become a hot topic of debate in the last couple of years as more and more data security breaches and user privacy scandals have surfaced. The huge tech behemoths that hold the largest amounts of user data are extremely centralized.
As the Cambridge Analytica scandal unfolded in early 2018, gross negligence on the part of Facebook in handling its user data made regulators and the general public uneasy. The string of news stories about Facebook’s inability to secure user data has made arguments in favor of decentralization and data protection louder.
In another recent example, more than 540 million records about Facebook users were exposed in April 2019, as claimed by the cybersecurity firm, UpGuard. This data was stored on Amazon’s cloud computing servers. Centralization is not just a problem for the storage of data but also for access to the Internet’s app ecosystem.
In May 2019, a group of iOS developers sued Apple for its monopoly on the App Store. Apple takes a 30 percent cut from all the app sales on the App Store.
Decentralized applications, are different from conventional digital applications in that they are not run or controlled by a centralized entity. They run on a distributed computing system and the governance of a DApp is decentralized, as the decision-making process requires validation from a large number of users. But what does this mean for user privacy and security?
A few of the most prominent questions in this regard are answered below.

Is My Data Safe On A DApp?

DApps are run on a blockchain and distributed computing systems, so the stored data is not vulnerable to one single point of failure compared to the centralized storage of big tech companies such as Facebook. The data security on a blockchain is ensured by cryptographic verification methods such as the Zero Knowledge Proof (ZKP) method.
ZKP is a cryptographic verification method, which enables secure and private transactions. In a method like ZKP, a prover can prove to a verifier that they know a particular bit of information without having to disclose any sensitive data. This means DApps run on an architecture that embeds the privacy of the user by default.

I Want To Be Anonymous. What Details Are Shared With Third Parties?

DApps respect user privacy and virtually no user data is shared with third parties that can link a user with his/her sensitive financial transaction details. Most apps never share any identifiable user data as privacy and data safety is a serious consideration for many cryptocurrency enthusiasts and potential users.
Increased user privacy is one of the key drivers of the rising adoption of blockchain. Since DApps use a blockchain, which decentralizes the data storage and processing using distributed computing systems, user data is not shared and exposed to third parties. Except for a few fringe cases, your anonymity will be preserved as your wallet and transactions are not directly linked to your personally identifiable information.

Why Do I Need To Do KYC On DApps?

DApps, despite being decentralized, still have to comply with the legal requirements of the country they are based in. KYC, or Know Your Customer, gives DApps a way to be legally compliant and cross-regulatory hurdles before bringing the benefits of the blockchain revolution to their users. DApps understand user KYC by using a digital identity proof, which is majorly issued, in the form of a digital certificate. A digital certificate is issued by an authorized agency, which uses encryption to issue private keys to the user. The issuing agency generates one public key while issuing the certificate. This public key is used to decrypt the certificate, which also holds the private key information of the user to whom the certificate has been issued. KYC data used by DApps are not linked with the user’s identity information and hence does not expose the user privacy.

Understanding How DApps Safeguard User Capital

While the first practical implementation of a blockchain was developed by Bitcoin founder Satoshi Nakamoto, developers have found a myriad of non-financial applications for the technology. The Decentralized Application (DApp) paradigm is arguably the most promising among them, challenging many long-standing notions about the internet and the rest of the digital ecosystem. Given that the technology is still relatively nascent, the vast majority of the world’s population has still not had a chance to try it out. As DApps become increasingly common though, your first interaction should be easy and comfortable.
In this section, we take a nuanced look at how DApps handle the safety and security of user capital, including crypto tokens, on the platform. Furthermore, we will explore how you can safeguard your digital assets and insulate yourself from unnecessary risks.

Are My Tokens Safe On A DApp Platform?

Many users, new to the DApp ecosystem understandably find themselves worried about the security and ownership of their token holdings. As with any cryptocurrency though, DApp owners have no claim over your tokens until you manually initiate a transaction to the platform’s wallet address. Furthermore, since digital currencies are inherently decentralized, transactions can be publicly viewed and audited on the blockchain by anyone at any time. After all, one of the primary advantages of technology is increased transparency.
Digital cryptocurrency wallets allow you to be your own bank and are an irrevocable storage solution. If you would rather trust a third party for convenience, exchanges or online service providers provide a way to store your tokens as well. In general, however, using a local wallet is recommended, as it allows you to exercise a greater degree of control over your tokens and safeguard them appropriately.

How Can I Trust A DApp To Not Scam Me And Other Users?

While the vast majority of DApps in existence operate within legal bounds, the unfortunate reality is that a handful of them do not. As a user, some prior due diligence can go a long way in determining whether a project is trustworthy or not. Generally, this means reviewing each DApp’s fundamentals, starting with its white paper, development team, and the functionality of the platform. DApps that boast legitimate public associations with major companies also demonstrate increased commitment to the project.
Applications designed to siphon user capital usually show a noticeable lacking in some or all of these aspects as they require significant human and monetary resources to fulfill. Legitimate DApps also tend to have a community following on popular social networks such as Reddit, Discord, and Telegram. Healthy discussion between users and developers is yet another positive indicator for decentralized applications.

Do All DApp Tokens Experience Significant Price Volatility? Can Tokens Lose Value Overnight?

While major cryptocurrencies such as Bitcoin and Ethereum are known to be volatile, not all DApp-specific tokens follow this trend. Project owners are motivated to keep token prices stable and accessible to attract new users. Since DApps are built to fulfil a specific purpose, there is little speculative component to their token prices. The same cannot be said for mainstream cryptocurrencies such as Bitcoin and Ethereum, which see massive price jumps due to the market dynamics of supply and demand.
As stated previously, the best way to safeguard your capital is to perform a basic background check on the DApps you’re interested in, especially ones that seem obscure. All in all, a DApp or blockchain-based project with strong fundamentals is more likely to maintain a steady valuation than one surrounded by controversy.

Conclusion

With that, we’ve covered most of the common doubts and concerns regarding the decentralized app ecosystem. As the blockchain-enabled DApp ecosystem grows further to bring the benefits of decentralization to more users, developers are constantly striving to provide a secure and friction-less platform for participating in it.

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