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The new cryptocurrency called ICP, or Internet Computer Protocol made quite the splash when it launched on US-based Coinbase Pro followed by a bevy of other exchanges like Huobi, Binance, and OKEx in quick succession earlier this month. The token saw extreme price volatility with its price shooting up to $600 and then falling back over 50% to $280 within a couple of hours before heading back up shortly. The price has been falling relatively consistently since then, which isn’t something atypical of an ICO.
Even after such extreme price volatility, ICP has gathered a lot of eyeballs and has made its way into the top 15 cryptocurrencies by market capitalization within days of its ICO, still maintaining that position at number 11 at the time of writing. The platform has raised $121 million in equity funding, with investors including Andreessen Horowitz, Polychain Capital, and Scalar Capital, among others, giving it a current market capitalization of over $16 billion, while it was valued at over $70 billion at its peak price. Such never-seen-before numbers call for a deeper look into Internet Computer Protocol.
What is ICP?
The Internet Computer was founded by the long-time computer scientist Domonic Williams in 2014 or 2016 (its origins are a bit unclear). When it was founded, it sought to take Ethereum’s world computer idea to the next level by becoming, well, the internet computer. The Dfinity website now describes the Internet Computer as,
“The last original Layer 1 blockchain project is launching a revolutionary public network that provides a limitless environment for smart contracts that run at web speed, serve web, scale, and reduce compute costs by a million times or more.”
The startup’s goal is to reinvent the internet into a more open environment that let’s more people build on it, trying to reverse the current oligopoly that the Big Tech firms like Google, Facebook, and Amazon enjoy.
The internet as we know it today works on multiple layers of protocols that developed over the history of technology. Most other crypto projects work on one of these layers, usually the application layer, in order to solve a problem. The thing that set’s Internet Computer apart is that it aims to replace that entire stack of layers.
The Internet Computer Protocol is managed and developed by Dfinity, a non-profit organization registered in Zurich, Switzerland. Their team consists of 188 of the brightest cryptographers, crypto engineers, and research scientists in the world. They have research centres in Palo Alto, San Francisco, and Zurich.
The Internet Computer extends the functionality of the public Internet so that it can host backend software, bypassing the need for server computers and cloud services. Developers can create websites, enterprise IT systems, and internet services by installing their code directly on the public Internet.
How does ICP work?
ICP might be one of the most complicated projects in crypto right now, so trying to understand it may feel like eating broccoli, but with the disruption potential it has, we really should at least try to understand what’s going on.
The Internet Computer Protocol, the underlying blockchain protocol that Internet Computer is based on, is made up of a hierarchy of building blocks.
One of the elements that make ICP unique is the Network Nervous System (NNS), which is responsible for controlling, configuring, and managing the network.
ICP consists of a series of data centres spread around the world. Data centers join the network by applying to the NNS, which is responsible for inducting data centers. Each data center contains multiple nodes, and nodes from multiple data centers are grouped together to form something called a subnet. Each subnet forms a proof-of-stake blockchain that uses a unique consensus mechanism that runs the blockchains, called Threshold Relay, from which randomness is produced, driving the other systems that the network depends on to operate effectively. A subset of nodes in each subnet is selected to produce a block in the blockchain based on their stakes ICP tokens. Effectively, it’s an advanced version of the proof-of-stake consensus mechanism.
The subnets host decentralized applications (DApps) running on the Internet Computer. One example is CanCan, the decentralized Internet Computer version of the popular video-sharing app TikTok which was made with just a thousand lines of code. The big difference between regular DApps and Internet Computer DApps is that whereas regular DApps use a collection of smart contracts, DApps based on Internet Computer use canisters.
Canisters are like a more advanced version of smart contracts. They can automatically create new versions of themselves on other subnets to support additional users and can be leveraged by other developers building DApps. Because subnets only consist of a handful of nodes running in huge powerful data centers, they enable transactions and applications to run at speeds comparable to the regular internet. Users also do not need to pay any fees while interacting with canister apps.
The other huge difference between Internet Computer and other crypto blockchains is that users require an Internet Identity to interact with DApps on the Internet Computer. This identity can be paired to any of your devices and a wallet address is automatically generated and linked to your internet identity.
Internet Computer Token Economics
At the time of launch, there would be just over 469 million ICP tokens with no maximum supply. It has a diminishing annual inflation rate, starting at 10% at genesis and gradually decreasing to 5% around genesis + 8 years.
Of the total supply at Genesis, nearly 25% was sold to pre-seed investors for about $4.1 million, which they call financial contributors. The first private sale for ICP tokens raised around $20.54 million for about 7% of their total supply. The second private sale round raised over $100 million for 5% of their supply. Dfinity calls them team contributors.
Out of the rest of the supply, a little under 1% was transferred to users who signed up for their newsletter in the form of an airdrop. Those users got quite a deal as they received 147 tokens each in September 2020, which would be worth over $16,000 today. The rest of the supply is reserved for the Dfinity Foundation.
There are two types of tokens in the ICP ecosystem, the ICP native tokens, and the canister tokens. The ICP tokens can be used for two main things within the ecosystem:
- Governance – Users can lock them inside the Network Nervous System to create “neurons,” which can vote on proposals and earn voting rewards. The minimum lock-up period is 6 months, and the maximum is 8 years. The users who participate get a cut in ICP’s inflation in proportion to their stake and lock-up period.
- Computation – Users can convert them into cycles, which are used to power computation by software canisters running on the Internet Computer. In simple words, whoever decides to build on the Internet Computer or transact on the network must buy ICP tokens and convert them into cycles to use as fuel. Cycles are comparable to Ethereum’s gas fees.
The canister tokens could be created by any canister in unlimited quantities, with customisable identity. Just like any other token built using Ethereum or BSC smart contracts with their own unique properties.
The Internet Computer is quite an unusual project within the crypto landscape. They don’t aim to replace some parts of the digital ecosystem, but they aim to replace the entire internet itself. This makes a lot of people uncomfortable, and if we put a microscope to their policies, the concerns seem justified.
The first and biggest concern people have is the Internet Identity. In Dfinity’s perfect world, users would have a single identity that’s tied to absolutely everything they do online. In a 2018 interview, Dominic Williams, the creator, also said they plan to follow the laws of every country they operate in. What this means is that if ICP or the government decide they don’t like what someone is doing on the internet, it’s game over for them. This raises huge online privacy concerns.
The Network Nervous System developed by Dfinity is also considered to have too much power. It makes decisions at the data center level, node level, and the subnet level for the whole network. Although users can stake their tokens to vote on governance issues, the Dfinity foundation is the largest stakeholder, and since the longer you stake the more voting power you get, Dfinity has a direct advantage over everyone else.
The project is also not completely open-source. Dfinity has released the code for some of its components recently, but most of the project is not open source. The source code for some parts of the project is public, but no one is allowed to use it for building their own project. Open source is the norm for crypto projects, especially ones operating at this scale. This raises the question, is ICP more about ending the monopoly of internet giants or more about consolidating that control?