DESCRIPTION OF BUSINESS

EXECUTIVE SUMMARY

The Internet, as we know it today, is dominated by a handful of entities. They have enormous power over the stakeholders: their users and developers building on top. Everyone has to play by the rules of these giant entities. They extract the maximum possible value during the process and hinder innovation.

DFINITY’s Internet Computer aims to become the first version of the public Internet free of platform risk. It was created under the narrative that, to foster innovation, a version of the Internet that doesn’t operate by the rules of traditional providers is needed. The Foundation raised a significant amount of money from several different well-known blockchain investors to achieve this goal. DFINITY was first conceptualised and founded by Dominic Williams1, a British tech entrepreneur and blockchain researcher. Since its creation in 2016, the foundation has grown phenomenally, continuing to recruit researchers, scientists, cryptographers and professionals of all areas. The Internet Computer launched its Mainnet in May 2021.

The Internet Computer is based on the Internet Computer Protocol (ICP), an advanced blockchain protocol that runs on a network of independent data centres worldwide. It uses canisters —an evolution of smart contracts with higher scalability and additional functionalities— to create interoperable computing units designed for internet-scale services.

Using the Internet Computer, developers can create websites, enterprise IT systems and Internet services by installing their code directly on the public Internet, to later dispense with server computers and commercial cloud services.

However, the project is not without criticism. The community has voiced concerns around the project’s approach to decentralization, governance, and tokenomics. These reactions emanated due to the unfavourable public market price performance of ICP tokens and the finds from the resulting community scrutiny. The path that the project’s leadership takes toward resolving these concerns will determine the future success of the DFINITY and ICP tokens.

Our researchers gave The Internet Computer a final rating of 69.2%. The breakdown of this rating is available at the end of this report.

PRODUCT & COMPANY DESCRIPTION

The Internet Computer Protocol (ICP) is being developed by the DFINITY Foundation, a non-profit organisation based in Zurich, Switzerland. It aims to build the ‘Internet Computer’ to extend serverless cloud functionalities to the Internet.

DFINITY describes the ICP as the next evolution, or a new layer of the Internet itself, expected to enable more secure software and new open internet services. In essence, it offers a new kind of Layer-1 public blockchain and smart contracts platform just like Ethereum’s, with extended functionalities for websites, enterprise systems, data hosting and other use cases.

Instead of using a public blockchain like Ethereum or Bitcoin, where users can run specific software to verify transactions (called nodes) and support the network, ICP nodes are hosted on independent data centres. Independent actors run these centres. The network is still in its early days but showing signs of growth.

Mission

The Internet Computers mission is “to reverse Big Tech’s monopolisation of the Internet and ensure a more collaborative future by implementing open Internet services. The end goal of this is to transition the Internet as we know it to a decentralised model (Web 3.0) with community governance.

Success Factors

Likely drivers of success for this project are:

  •  The project is well-funded, with $166 Million raised to develop and deploy the Internet
    Computer’s technology.
  • A growing, highly incentivised developer community.
  • A ready, launched network.
  • Growing signs of practical use cases.
  • The Foundation’s interest is to manage and sponsor dedicated research teams

MARKET CONDITIONS AND COMPETITION

Market Conditions

DFINITY launched when Ethereum was at its peak of popularity, facing severe scaling problems. At the time, and currently, thanks to the rise of DeFi and the public’s growing interest, Ethereum’s network seemed (and is still) constantly clogged by a high number of transactions. This, along with the current fee auction system, causes the transaction fees to grow quickly, rendering the network too expensive to use by everyday users.

Ethereum Average Gas Price Chart. Source: etherscan.io

Competition

Competition is fierce in the public infrastructure sector of the blockchain industry. Ethereum  paved the way for this kind of projects, which gained them a tremendous first-mover advantage. Since Ethereum is the most used smart contracts platform, has more developers than any other ecosystem by a factor of 4, and its miners extract more value4 than any other blockchain, the ICP would face it as its main competition.

Miner Revenue – Bitcoin vs Ethereum (7MDA) Source: www.theblockcrypto.com

For example, Cardano launched its Mainnet earlier this year and is on its way to implementing smart contract functionalities while enjoying a growing, loyal community. Polkadot saw a recent rise in popularity but have just managed to launch a test network of parachains. Binance Smart Chain (BSC) runs an environment compatible with Ethereum and managed to briefly steal a market share from it, as many dApps took advantage of this not to be affected by high fees. However, BSC’s popularity is quickly diluting as Ethereum approaches major updates.

Traditional Competition

DFINITY’s competition is not limited to blockchain native players: It expands to traditional Internet providers as well. Some companies that could qualify as industry giants stand to lose market share if ICP penetrates their niche, making them likely to push back against it. This potentially intensifies the competitive pressures for DFINITY.

How is the project different from its competitors?

DFINITY’s Internet Computer is different from its competitors in terms of its technical approach. Public blockchains like Ethereum or Cardano are essentially transaction settlement layers. Smart contracts on these platforms are executed in the same way that transactions are, creating inefficiencies. On the Internet Computer, nodes are computers hosted in data centres, which means that traditional software can run on them. This difference makes the Internet Computer more of a decentralised computer rather than a transaction settlement layer.

DFINITY strives to improve upon traditional competition in many ways:

  1. By creating “an open Internet that is free from censorship.”
  2. By eliminating platform risk.
  3. By creating data centres that are spread across the globe and governed by NNS.

TECHNOLOGY REVIEW

Product

The Internet Computer is based on the Internet Computer Protocol (ICP), an advanced blockchain protocol that runs on a worldwide network of independent data centres. It uses canisters —an evolution of smart contracts with higher scalability and additional functionalities— to create interoperable computing units designed for scalable services. The platform can serve user experiences directly to web browsers and smartphones, extending the functionality of the global, current version of the Internet to make it able to natively host software, transforming it into a public computing platform. DFINITY is effectively enabling systems to be built directly onto the Internet.

Using the Internet Computer, developers can create websites, enterprise IT systems and Internet services by installing their code directly on the public Internet, to later dispense with server computers and commercial cloud services. Through DFINITY’s Network Nervous System (NNS), users and developers decide how the network operates and evolves, giving control of the Internet to users instead of centralised entities while maintaining net neutrality and fairness.

Screenshot from DFINITY’s Explorer Dashboard.

It is worth mentioning that the Foundation published the source code of the three primary components of the Internet Computer in May 2021. This includes the replica, node manager, and NNS canisters being made public. However, the building systems, testing infrastructure, later.

All the code for the Internet Computer is licensed under the Apache 2.0 license, except for a few components licensed under the Internet Computer Community Source License and Internet Computer Shared Community Source License, which are more restrictive than the Apache 2.0 license to protect the Intellectual Property (IP) of the DFINITY Foundation. This licensing policy is in contrast to many open-sourced decentralised projects, which remain entirely open. You can find the open-source policy of DFINITY here.

As per Electric Capital’s updated Developer Report, DFINITY is among one of the fastest-growing blockchain developer communities. Such a growth rate is a very positive sign from a product adoption perspective.

DFINITY’s developer community shows signs of fast growth. Source: Electric Capital.

Programming Language - Motoko

Internet Computer’s programming language, Motoko, is open-source to provide the same development experience to both internal and external contributors. The introduction of a new programming language can undoubtedly introduce technical negativities, at least until the developer community gets comfortable with it.

The DFINITY Internet Computer ecosystem also shows multiple projects commencing to form using the network. Some of these projects have reportedly raised funding, as seen from public records. To name some, Fleek, a developer platform, raised $4 million; Enso Finance, a DeFi trading platform, received $5 million in a funding round led by Polychain and Dfinity Beacon Fund; Tacen, a crypto exchange, raised $2.3 million. Another notable project is Wrapping IC Cycles, a web plug-in wallet.

DFINITY Ecosystem. Source.

Consensus Mechanism

As we examined above, the Internet Computer works like a computer rather than a blockchain. However, network stakeholders still need to reach a consensus to ensure the security and finality of all computations.

At a higher level, the Internet Computer has a consensus protocol that consists of four components:

Firstly, block makers create candidate blocks to extend the blockchain. A notarisation process ensures valid blocks are identified. Then, a random beacon is used to rank block makers and reduce the number of  notarised blocks in each round. Lastly, an asynchronous finalisation mechanism lets users know when blockchain consensus occurs without relying on networking assumptions. You can find more details about each component in DFINITY’s Medium page.

Additionally, researchers from the DFINITY Foundation have released a scientific paper explaining the Internet Computer Consensus (ICP).

Governance: ICP’s Network Nervous System

A key feature in the DFINITY blockchain is the Network Nervous System (NNS). NNS is an open algorithmic governance system to organize, track, and manage the Internet Computer’s nodes and subnets. It is noteworthy that anyone becoming a node provider has to be approved from governance.

This is fundamentally different to public blockchains like Bitcoin and Ethereum, where anyone can run a node to provide support to the network without any permission.

NNS voting mechanism. Source: CoinGecko.

ROADMAP

DFINITY does not have a roadmap published in a traditional sense. The Foundation instead focused on a technical roadmap outlining the release of their network in six stages, starting from November 2019 until May 2021.

DFINITY’s Roadmap detailing its six stages.

With the release of the sixth stage, ‘Mercury: Beta Launch’, which completes the Mainnet launch, DFINITY released a 20-year roadmap explaining where they want the project to be in five years, ten years and 20 years.

DFINITY notes that this roadmap expresses their aspirations and plans for the future rather than guarantees. You can find a 20-year roadmap here.

TEAM

 

DFINITY was first conceptualised and founded by Dominic Williams, a British tech entrepreneur and blockchain researcher. Before working in crypto, Dominic founded ‘Fight My Monster’, an MMO video game/social network for 8-12 year old kids that grew to almost 3M accounts and was the fastest-growing kids game in Europe for some time. Dominic created various distributed systems supporting it.

Other important members of the team are:

Eric Bravick, VP of Engineering, held an extensive number of Senior roles in crypto and Data Science. He has been associated with a diverse number of entities, namely, Coral Protocol, Spirion, Core Convergence and Electric Forge.

Jan Camenisch (CTO) is a leading scientist in the area of privacy and cryptography. He has published over 130 widely cited papers, holds about 140 patents, and has received several awards for his work, including the 2010 ACM SIGSAC Outstanding Innovation Award and the 2013 IEEE computer society technical achievement award. Jan is the author of the scientific paper “Internet Computer Consensus.”

Lomesh Dutta, VP of Growth, brings in over 17 years of experience building and growing startups. He held similar roles at Abra and Paytm previously. He co-founded two startups, which he successfully exited.

Team image. Source.

Since its creation in 2016, the Foundation has grown phenomenally, recruiting researchers, scientists, cryptographers and professionals of all areas to build its human power. The team counts over 200 members worldwide and operates three research centres in Palo Alto, San Francisco, and Zurich.

Some notable researchers and scientists that contributed to the project include Andreas Rossberg (co-creator of WebAssembly), Ben Lynn (BLS Signatures), Paul Liu (architected Intel’s Haskell Compiler), and Timo Hanke (created Asic-Boost).

LEGAL AND COMPLIANCE SPECIFICS

Jurisdiction

The DFINITY Foundation was registered on the 9th of November 2016 in Zurich, Switzerland, under file CHE-189.770.146. ICP acts solely as a Utility token, thus clearing many regulatory hurdles associated with Security tokens.

Switzerland is home to what’s known as ‘Crypto Valley’, which hosted the founding of Ethereum. It is considered a crypto-friendly jurisdiction.

Legal Advisor

The Foundation’s General Counsel, Jennifer Sum, boasts over 15 years of experience in financial services and regulated industries. She spent most of her professional life at the Federal Reserve Bank of San Francisco. Most recently, she was the General Counsel and VP of Legal & Regulatory at Metal, a FinTech and crypto startup.

Partnerships

The DFINITY Foundation partnered up with Hacker Fund and Major League Hacking to foster the access to education and technology by preparing the next generation of developers to build apps and services that run directly on the open Internet. These partnerships provide supportive course materials, workshops, dev challenges, and more. DFINITY also launched the Beacon Fund to support the sourcing, evaluating, and supporting ‘world-class applications’ and services built on the Internet Computer. The Fund is managed by Polychain Capital with additional backing from Andreessen Horowitz and the DFINITY Foundation.

VC Backing

DFINITY Foundation managed to raise funds by some notable high-profile individuals and VC funds such as Ryan Zurrer, the former Director at Wb3 Foundation, Fred Ehrsam, co-Founder and Board Member at Coinbase, Polychain Capital, a16z Crypto, Electric Capital, Andreessen Horowitz and many more.

Token Classification

The ICP token is the native token of the ICP network. It plays three key roles in the ecosystem:

  • Facilitating Network Governance: ICP tokens can be locked to create neurons that participate in network governance by voting, through which they can earn economic rewards.
  • Production of Cycles for Computing: ICP can be converted into cycles, which power computation in the role of fuel to be burned when used.
  • Participant Rewards: The network mints new ICP to reward and incentivise those contributing to the network and enabling it to function. These contributions include (1)
    the provision of “voting rewards” to those participating in governance, (2) the provision of “compute rewards” to those operating the node machines hosting the
    network, and (3) other miscellaneous activities.

The Foundation deliberately decided not to follow a traditional ICO path. Instead, they decided to airdrop tokens to participants who complete KYC/AML processes. They restricted this airdrop to non-US persons to avoid regulatory grey areas.

All these features and measures could classify ICP as a pure Utility token, thus clearing many regulatory hurdles associated with security tokens.

Tokenomics

The DFINITY Foundation raised ~$166 million by selling ICP tokens. The leading investors were Andreessen Horowitz and Polychain Capital.

DFINITY past fund raises and approximate token issue prices. Source: D-CORE calculations based on publicly available data.

It is common practice for most token offerings to have a significant allocation for the community. This approach helps projects in several different ways, one of them being the excitement it generates. However, in ICP’s case, we can observe a significantly low token allocation for this reason. This low community allocation may be one of the causes for the lack of meaningful community backing and supporting the token and the project. However, it is noteworthy that users do not need ICP to pay for gas/fees when they interact with hosted services on IC. This is a significant difference with Ethereum, in which the token serves as a commodity.

The distribution of the initial ICP supply is as follows:

  • Early contributors: 9.50%
  • Seed donations: 24.72%
  • Strategic: 7.00%
  • Presale: 4.96%
  • Strategic partnerships: 3.79%
  • Community airdrop: 0.80%
  • Initial community and developer grants: 0.48%
  • Node operators: 0.22%
  • Internet Computer Association: 4.26%
  • Team members: 18.00%
  • Advisors and other third-party token holders: 2.40%
  • DFINITY Foundation: 23.86%

At genesis, the DFINITY Foundation had about 38.4% of the total voting power. The Internet Computer Association had about 1.6% voting power. They have also repeatedly mentioned that they would never hold more than 50% of the voting power. However, depending on the amount locked in neurons and the Dissolve-Delay-based rewards mechanism (which gives more rewards to those staking for longer), there is a likelihood of voting power centralisation. It would be interesting to see the steps taken by the Foundation to maintain its voting power below 50% in such a scenario. These decisions might play a significant part in future price action.

Voting power at Genesis.

 

Overall, we note that ICP has an undefined supply schedule. This could be meaningful for the following reasons:

No supply cap:There are both inflationary as well as deflationary pressures in the way ICP is structured. This inflationary-deflationary pressure means that the liquidity of ICP token depends on several different factors, namely newly minted ICP tokens, burned tokens (depending on the rate of adoption of the project), and distributions out of the Foundation’s token endowment to raise funds in the future.

Participants Rewards. The network mints new ICP to reward and incentivize those contributing to the network and enabling it to function. These contributions include:

  1. The provision of “voting rewards” to those participating in governance;
  2. The provision of “compute rewards” to those operating node machines hosting the
    network; and
  3. other miscellaneous activities.

Participant rewards are also inflationary. Neuron voting rewards start at 10% of the total supply at Genesis, decreasing to 5% over eight years. Interestingly, there is a user-selected notice period in the form of “Dissolve Delay” to unlock stakes ICP (minimum and maximum dissolve delay are six months and eight years, respectively). This mechanism incentivizes holders with longer Dissolve Delays, or unstaking periods. Refer to the table below for statistics from June 2021

Annualized Voting Reward Percentage. Source: DFINITY (note: data as of 8th, June 2021)

Production of Cycles for Computing: The Network Nervous System (NNS) governance mechanism converts ICP worth 1 SDR34 into 1 trillion cycles. This rate is chosen to ensure the network users can always create new Cycles at an approximately constant cost in real terms, creating a predictable rate of creation and usage. Converting ICP to Cycles is a deflationary function.

Current statistics (as of 7 July 2021). Source: DFINITY Explorer.

ICP token price performance: At launch, the ICP market price peaked at around $700. Since then, it has lost close to about 94% of its value, as of writing.

Market Reactions: Upon the above-mentioned crash, the market reacted with criticisms and even alleged that insiders shed their holdings on the public. Several public sources report findings based on an analysis of the project’s market behavior. In summary, the results are:

  • Addresses suspected to belong to DFINITY treasury, and project insiders have deposited 18.9 million ICP (worth ~$3.6 billion) to exchanges.
  • DFINITY was not transparent about token allocation and unlocking.

SOCIAL MEDIA AND VIRALITY

DFINITY’s Twitter account has 238.2k followers, an impressive amount for a blockchain project.

Dominic Williams has a substantial following on Twitter (over 162k followers). He is frequently tweeting about the project.

The projects’ Youtube channel has almost 16.6k subscribers with over 3.8 million total views. Most notably the “Internet Computer: Blockchain Singularity” video gathered 3.1 million views.

Many different YouTube channels have also discussed DFINITY and ICP tokens. Some of these are listed below.

Coin Bureau did a review of ICP and provided some criticism on its tokenomics and centralisation. The video gained more than 550k views.

The channel Internet Computer Report tries to simplify concepts of DFINITY and encourage ongoing development and decentralization of the IC.

BitBoy Crypto Channel’s ICP video has over 144k views.

Finally, the project Telegram group has over 43k members. Since June this year, the channel has been read-only.

Recent Media Criticisms

An airdrop to the early community helped to propel attention to the project. The project enjoyed hype in interest in and around the news of ICP tokens’ public listing (on Coinbase initially, followed by Binance and others) and the release of ICP’s source code to the public. Helped by timing of the general market, this trend amplified taking the token to rank amongst the top 10 by market capitalization.

Worldwide search trends spiked for the search term “Dfinity” in Google Trends.

However, in the aftermath of the sharp fall of ICP’s token price, the project received negative press, especially centered around insiders selling ICP. A recent proposal by ICP, the Internet Computer “Badlands” concept, has also garnered unexpected reactions in the Twitter community, gaining criticism as an unnecessary fork. Apart from this, there have also been questions on the Foundation’s power over the network.

As you can see, a common viewpoint shared by the project’s critics is that it does not propose truly decentralised mechanisms.

RATINGS

Everything you see in this report is the aggregate result of an extensive research process carried out by a distributed team of researchers and crypto enthusiasts around the world. The process consists of 60 questions divided into three phases. Researchers are called to answer these questions about a project, while providing links or screenshots as evidence to support their answers. For every answer, they also provide a rating from zero to five. The average of their ratings is detailed below.

Our researchers gave DFINITY’s Internet Computer a final rating of 69.2%.

DISCLAIMER

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