Cryptocurrencies

What is Internet Computer? The Beginner’s Guide

Internet Computer (ICP) has become one of the top 10 cryptocurrencies. The project has the ambitious goal of replacing the internet as a whole with a decentralized system that achieves the transfer speeds of the traditional internet. What is Internet Computer all about? This article goes through the history, technology, and the ICP token of the Internet Computer.

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Internet Computer is a special type of platform

First, let’s put the Internet Computer in the correct category in the world of cryptocurrencies. AboutBitcoin divides cryptocurrencies into three clearly different categories: currencies, platforms, and tokens.

Bitcoin is the most well-known cryptocurrency in the currency category. It functions as a P2P digital currency and store of value. Projects like Litecoin, Bitcoin Cash, and Monero belong to this category as well.

Platforms are operating systems for smart contracts and decentralized applications (Dapps). You can think of platforms like Android or iOS. Ethereum is the number one platform. Other popular platforms are Solana, Polkadot, and Cardano.

Tokens are always minted on an existing platform and don’t have their own blockchain. Tokens are usually either governance or utility tokens and they have usage inside a specific application. Uniswap, Aave, and Chainlink are well-known tokens.

Internet Computer should be placed into the platform category. However, it has more ambitious objectives than traditional platforms. Internet Computer is trying to create a new kind of smart contract platform. It also wants to restructure the internet and create an alternative to centralized operators like Amazon or Facebook.

Founder Dominic Williams gives an introduction to the project in the following video.

One should note that parts of the program code are not open source. Running a node requires approval from the protocol and the purchase of hardware specified by the DFINITY Foundation, which established the Internet Computer.

The closed-source code is partly understandable in light of the fact that the project competes with the world’s tech giants. However, many cryptocurrency analysts have raised concerns about this, as they believe that real cryptocurrency projects should be open-source and decentralized.

Internet Computer has been developed for years

Internet Computer was founded as DFINITY in October 2016 by serial entrepreneur Dominic Williams, who has over 20 years of experience in computer science. Williams has been active in the crypto scene since 2014.

The development of Internet Computer is the responsibility of the DFINITY Foundation. It is a Swiss-based non-profit foundation launched in 2016. Since 2016, approximately 200 programmers and researchers with impressive academic merit have worked with the project.

Internet Computer received a significant amount of funding from well-known venture capitalists such as Andreessen Horowitz and Polychain Capital.

A Software Development Kit (SDK) for smart contracts was launched in 2018 with a specially created programming language for Internet Computer called Motoko.

The development process has taken more than four years. It has been divided into different stages called Copper, Tungsten, Sodium, and Mercury.

During the Copper phase, Internet Computer launched the LinkedUp application at the World Economic Forum in Davos in early 2020. LinkedUp is a decentralized version of the popular LinkedIn app.

A few months later, Tungsten opened up the development of Internet Computer to third parties.  CanCan, a distributed version of TikTok, was published soon after.

The Sodium stage brought administrative structures (governance) and ICP token details to the project. The Internet Computer MainNet was published in the Mercury phase. This took place in May 2021. The ICP token was immediately listed on major exchanges such as Coinbase and Binance.

Is Internet Computer a challenger to Amazon?

Although blockchains and cryptocurrency projects have gained considerable popularity in recent years, the structure of the internet is still very much in the hands of centralized technology giants. For example, Amazon and Facebook have spread much wider from their original business models and managed to build themselves internet empires.

Many crypto projects must use services provided by these companies, for example, to store data or to host websites. Will the decentralized network and the Internet of Value (Web 3.0) be really decentralized if large companies are able to shut down nodes and websites?

Internet Computer believes it has found a solution to this problem. The aim of the project is to make the whole internet decentralized and incentive, rather than using these features only at the application and data level.

How does Internet Computer work?

The Internet Computer blockchain consists of data centers with multiple nodes. Different data centers are connected together and form subnets (sidechains). Each of these subnet sidechains can have its own Proof of Stake blockchain using the Threshold Relay consensus mechanism.

For each subnet sidechain, a certain number of nodes are selected to produce blocks. This depends on how much each node has staked ICP tokens. Subnet sidechains function almost like parachains in Polkadot.

internet computer design

Image from Messari.io

There is one key difference between Internet Computer and other platforms. There are no traditional smart contracts in the ICP protocol. Instead, applications will be built using so-called canisters.

Canisters are like smart contracts but more flexible and efficient. Canisters can automatically create new versions of themselves in other subnet sidechains. Canisters can therefore be thought of as some kind of extremely scalable smart contracts.

There can be lots of canisters running at the same time, which means blockchain sharding is kind of built-in. Since each subnet sidechain contains only a handful nodes, the Internet Computer blockchain can process transactions in a matter of seconds.

icp canisters

Internet Computer runs almost like the traditional internet. There is also an additional bonus. When a decentralized app (Dapp) is created by using a canister, there are no transaction fees.

The structure of the Internet Computer also includes an identity protocol, which allows users to communicate with different applications on the platform. The identity can be connected to the user’s mobile phone, computer, or USB key.

When creating an identity, the system creates a crypto wallet address for the user. The authentication is based on the device that the user connects to the identity. The method differs from other cryptocurrency wallets.

The Network Nervous System (NNS).

The entire architecture of Internet Computer data centers, nodes, subnets, canisters, and users is controlled by Network Nervous System (NNS).

The NNS acts like a digital government doing its administrative work at various levels. At the data center level, NNS decides which data centers can join the Internet Computer network.

At the node level, NNS identifies nodes that behave in violation of protocol rules and removes them from subnet sidechains. NNS will also ultimately decide the composition of the sidechains.

At the canister level, NNS decides on software updates for canisters. Eventually, at the user level, the NNS decides on the properties and tokenomics of the ICP-token.

NNS itself includes canisters that control the operation of Internet Computer and operate in a subnet sidechain created specifically for NNS. The first one is the registry canister, which tracks the network of data centers, nodes, and subnet sidechains.

The ledger canister contains information about identities, transactions, and tokens of the Internet Computer. The third canister is the governance canister which allows owners of ICP tokens to vote on upgrades to the Internet Computer protocol.

The ICP-token

Internet Computer’s ICP token has three use cases

  1. It is the administrative token of Internet Computer through the NNS.
  2. Canisters are paid ICP tokens to maintain applications and websites.
  3. ICP token owners earn ICP tokens as a reward for their participation in protocol voting and data centers earn ICP for the data storage they provide to the protocol.

ICP tokens are locked into the protocol for NNS voting. The minimum period for locking is 6 months and the maximum is 8 years. The longer you lock the ICP, the more weight your votes have.

What is noteworthy about Internet Computer, for example, compared to Ethereum, is that users themselves do not pay the transaction costs of the protocol. This is done by developers and companies.

This is reminiscent of the traditional internet, where developers and businesses pay to use the Amazon Web Services cloud computing platform, for example. Thus, Internet Computer app users themselves don’t need ICP tokens and they don’t even have to understand that the app they’re using runs on blockchain.

Internet Computer’s Cycles

In addition to the ICP token, the structure of the Internet Computer includes the so-called cycles. You can think of them as stablecoins in the Internet Computer ecosystem. Software developers and companies exchange ICP tokens for cycles to load the balance for the transaction fees required by canisters.

ICP tokens are exchanged for cycles at a rate of 1 SDR = 1 trillion cycles. The SDR is a basket of fiat currencies created by the IMF. For example, if one SDR is worth $1 and one ICP is worth $100, replacing one ICP token into cycles would give the app developer access to 100 trillion cycles.

Tying the cycle value to the SDR currency allows software developers to anticipate the amount of canister fees. Cycles can also be traded in Internet Computer decentralized exchange applications or used as a digital currency.

cycles

The cycles used for canister payments are burned, i.e. removed from the circulation, which means that theoretically, the ICP token could be a deflationary currency if the protocol has enough usage.

Inflationary pressure on tokens is created by the previously mentioned voting and participation fees for token holders and data storage providers.

ICP tokens do not have a maximum amount. The inflation rate drops every year from 10% to 5% over time. Approximately 25% of the tokens have been sold to early investors prior to the public launch of the token.

Internet Computer as an investment

After its May 2021 release, the ICP token briefly climbed to number four in the cryptocurrency rankings. It has dropped since but is still ranked in the top 10.

A further decline may be expected for ICP since many early investors are more than 1000x in profit from their original investments. These investors were able to buy ICP tokens at prices of a few cents and they are not limited by strict cooling-off periods for their token sales.

This means that ICP has currently a lot of sell pressure in the background. The launch also coincided with a general downturn in cryptocurrencies. Data centers that earn ICP to provide data storage may also have sold ICP to fund their operations.

As previously stated, Internet Computer applications do not require ICP tokens to be used. It’s only developers who create applications for the protocol. This raises the question of the demand for ICP. One must remember that using ICP as an administrative token requires it to be locked for at least six months.

Data centers should also not own a large number of ICP tokens. In this sense, Internet Computer’s tokenomics differ from other data currencies like Filecoin, where data providers must stake the native tokens. The demand for ICP comes only from price speculators and application developers who need Cycles (stablecoins).

The incentive structure to attract software developers seems rather weak. This is also unlikely to be facilitated by the 20-year roadmap announced by the project, so there is no great rush in its development.

The role of DFINITY Foundation

Many analysts have raised concerns about the decentralization (or the lack of) Internet Computer. Most of the project code is closed and patented. Even if the structure of the project is technically decentralized, the NNS, presumably largely managed by the DFINITY Foundation, is also a single point of failure.

Even if the DFINITY Foundation (and those close to it) don’t own more than 50 % of ICP tokens, they’re probably the only ones willing to lock their tokens into the protocol for eight years.

As stated earlier in the article, the longer ICP tokens are locked, the more weight the votes will have. Such voters will also earn more ICP tokens through inflation. These ICPs can be re-locked into administration. Since the protocol clearly favors people who own large amounts of ICP tokens, these entities are likely to control the Internet Computer.

Although canisters are technically unstoppable, NNS can vote to close unwanted applications. Basically, NNS could do the same for individuals if everyone uses Internet Computer software on their phone. The NNS would thus decide which individuals are excluded from the system.

Internet identity has also raised concerns about privacy. The project has been designing a new operating system for smartphones that would need an Internet Computer identity to use. NNS would also take care of software updates for this plan, which goes by the name Endorphin.

Internet Computer has the potential to replace the internet controlled by technology giants, making it more efficient, secure and even easier to use. Project leader Dominic Williams has even speculated about operating the 2.0 version of Ethereum in the canister of Internet Computer:

internet-computer-tweet

The question is whether the project is intended to crown itself as the ruler of the internet in the place of Amazon and Facebook. Compared to Internet Computer’s plans, the current internet may not be as centralized as we think it is, as information has been siloed into the hands of several actors. Facebook, for example, often does not have access to information collected by national governments about its citizens and vice versa.

If Internet Computer were a fully open source project, this problem would not exist. Anyone could view the project code, copy it, and develop it in the direction they want. Internet Computer plans to publish all code open in the future. Hopefully, by the time it does so, it will not be too late.

Internet Computer price and how to buy ICP

Internet Computer (ICP) is listed on the top crypto exchanges, such as Binance. A deposit to Binance can be made easily with a credit card, SEPA transfer, or cryptocurrencies. Binance offers internet computer exchange pairs ICP/USDT, ICP/BUSD, ICP/BNB, and ICP/BTC.

Buy ICP from Binance

You can also purchase ICP tokens from Coinbase and KuCoin.

ICP tokens can be stored not only by centralized intermediaries but also by the project’s own wallet application, which requires the creation of an Internet computer internet identity.

The official website of the Internet Computer can be found at dfinity.org and its Twitter is @dfinity.

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