Decentralized applications create a new digital economy of peer-to-peer services that counterbalance industry monopolies. While centralized applications like Facebook, Netflix, and similar ones have taken over our lives, DApps are here to help and offer much more. In this article, you will learn everything you need about “DApps”: what they are, how they work, their use cases, and their advantages.
What is a DApp?
A decentralized application (DApp) is similar to a digital app found on any smartphone or laptop, with the added feature of using blockchain technology to keep user data out of the hands of organizations behind the scenes. Just as cryptocurrencies are decentralized money, DApps are decentralized applications. They represent a new way of interacting with personal finances. When we think of traditional finance, we often think of borrowing, lending, saving, and similar entities. A central body governs each of these activities like banks or other financial institutions. This is where decentralized finance comes in, through cryptocurrencies such as Bitcoin and Ethereum.
Key features of DApps:
- They are open-source and operate independently without being controlled by anyone.
- Their data and records are public.
- They use a cryptographic token to help maintain the security of the network.
How Do Decentralized Applications Work?
A standard web application (like Instagram or Uber) operates on a computer system owned and controlled by an organization that has complete control over the application and its operations. The website may have multiple users, but a single organization controls the backend.
DApps, on the other hand, can operate on a P2P network or a blockchain network. For example, BitTorrent and Tor are applications that run on computers that are part of a P2P network, where multiple participants consume content, store or upload content, or perform both functions simultaneously.
In the context of cryptocurrencies, DApps function on a blockchain network in a public, open, and decentralized environment, free from the control and interference of any authority. For instance, a developer could create a DApp similar to Twitter and host it on a blockchain where every user can post messages. Once these messages are posted, no one (including the app creators) can delete them. This sounds both amazing and, at the same time, somewhat intimidating.
History
Bitcoin (BTC) is the first blockchain network, but the technology has evolved beyond simple financial transactions. When Vitalik Buterin and his colleagues proposed Ethereum (ETH) in 2013, they set a much broader goal – a decentralized way of life. Buterin envisioned a blockchain-based internet where users, not corporations, would have control. To achieve this, Ethereum would utilize automated if-and-then statements known as smart contracts. These contracts are immutable, as the rules and restrictions are embedded in their code. In 2014, a report defining DApps titled “The General Theory of Decentralized Applications, Dapps” was published by various authors with expertise in the field, such as David Johnston and Shawn Wilkinson wrote it. This marked the beginning of the life of DApp applications.
Using Decentralized Applications
Decentralization has various advantages over centralized applications. The main one is the absence of a third party, which is made possible by the innovative smart contract. An application like Revolut allows you to send money to anyone but charges a fee for transferring the funds to a bank account. Additionally, the transfer of fiat funds often takes several days.
However, sending money via a decentralized application means there are no or very low transaction fees. This saves users money on costs, and since decentralized transactions are almost instantaneous, it also saves them time. Of course, DApps do not run on centralized servers.
DApps can be used in almost any industry, such as gaming, healthcare, management, and file storage. Undoubtedly, top online betting sites will also start using this technology. Therefore, their usage is almost identical to traditional applications. Although users benefit from all the backend changes, the experience should remain the same. This way of interacting with applications is related to Web 3.0, which also refers to the decentralization of information.
When the internet was first used, it was a place full of information anyone could access. Over time, large companies took advantage of or centralized this information. These organizations, however, provide it “for free,” but at the cost of giving up our data, which they then sell for profit. Companies then control this data, knowing what their users like to buy, how much money they have, and who they know. This control also means that it can be taken away. Enter Web 3.0, where using DApps is not tied to privacy.
Dapp: Advantages
- Censorship Resistance: Since there is no single point of failure, it is complicated for governments or influential individuals to control the network.
- No Downtime: Relying on a peer-to-peer system ensures the application continues running even if individual computers or network parts fail.
- Built on Blockchain: As they are built using smart contracts, they can easily integrate cryptocurrencies into the core functions of DApps.
- Open Source: Open-source DApps encourage the broad development of the DApp ecosystem and allow developers to build better DApps with more useful or interesting features.
Dapp: Disadvantages
- Vulnerable to Hacking: According to DappRadar, in the first quarter of 2022 alone, hacking and exploitation led to the theft of $1.2 billion. These are huge figures. In August 2021, Poly Network was exploited for $611 million. In March 2022, the Ronin bridge of the popular game Axie Infinity was compromised for $552 million, and the Harmony Horizon bridge was compromised for $100 million in June 2022.
- Early Development Stage: The use of DApps is still in its infancy, making it experimental and prone to specific issues and unknowns. There are questions about whether apps can scale effectively, especially if the application is computationally intensive and overloads the network, causing congestion.
- Usability: Many DApps have poor user interfaces, which have already deterred many users. However, this is improving over time.
- Users: Similar to many Web 2.0 applications, the more users a DApp has, the more efficiently the network delivers its services. This is often referred to as the network effect. DApps need a more significant user base, which can make them less interactive. As a result, they may also be less secure, as the security of DApps often depends on the number of users.
Decentralized Applications in Various Industries
As we already mentioned, dApps can be used in many fields. Here are the most popular industries where dApps are already leading the race.
Finance
Lenders and borrowers can use DApps to operate their businesses. In banks, lenders earn interest on their saved money. The more people save, the more the bank can lend, and both parties gain more interest. However, a bank acting as a centralized entity takes a larger share than lenders might want simply because it provides a place to store funds.
Lenders earn 100% of their interest in a decentralized application since no intermediaries can pay. Additionally, they have more control over their loans, earning platform tokens for lending. As for borrowers, they have more influence on the interest payment terms. Indeed, some platforms allow borrowers to pay interest over several months or even years. Borrowers can negotiate interest rates with lenders, ensuring a fair decision for both parties. Ultimately, the income from smart contract technology can be immediate. There is no need to involve lawyers or other third parties. So, the approval process is faster and cheaper for both sides.
Social Media
Social networking applications will offer users many benefits. First, no one can censor posts, ensuring freedom of speech. If specific posts become problematic, the community can vote to have them removed. In this form of social network, influencers can also earn. On traditional platforms like Twitter, the company earns the most from popular tweets. All visits to the page generate ad revenue, but the author receives nothing financially. Social media applications could have a built-in “tip system” using their token, allowing users to display ads and earn full payments instead of the company taking a share.
Video Games
Games have always been an interesting use case for decentralized applications. Currently, games require tens of hours of investment in character development. Also, players are likely to invest real money, only for it to “decay” once the player leaves the game. Dapps offers a more valuable solution.
Let’s take a game like CryptoKitties as an example. Players acquire tokenized assets, in this case, a cat. If raised properly, this cat grows and increases in value over time. The user can then sell that cat for whatever they want if a buyer is willing to pay. This is also suitable ground for the NFT community. Additionally, some cats can mate with other cats, creating even rarer and potentially more valuable cats. Players can trade or collect cats and do whatever they want with these pets.
Their invested time becomes truly valuable. While there aren’t many such games, imagine this concept in a more polished title with hours of gameplay. Continuous gaming might be part of our future. You can read more about the intersection of cryptocurrencies and games here.
Voting and Governance
In most cases, voting takes a lot of work. It often involves several verification steps—some of which are inaccessible to citizens without proper accommodations or to people with disabilities, not to mention fraud and other illegal activities. A voting Dapp could make this process accessible to everyone using smart contracts. The community can vote on a list of proposals and then set a time frame, such as 24 hours, during which users can “stake” their votes with tokens. This opens up the possibility for everyone to participate, and everyone can vote anonymously. Dapp technology has also led to entirely new ways of building businesses: decentralized autonomous organizations, or DAOs.
Fundraising and Advertising
Many users utilize ad-blocking programs while browsing the web. This is inconvenient for websites trying to generate revenue, but it’s somewhat understandable since ads have become intrusive in many ways. For example, a Dapp browser could fix this issue.
Users can integrate an ad and tracker blocker into the browser while browsing the web and earning cryptocurrencies. When users find creators and websites they want to support, they can allow them to contribute. This means that the longer users browse the web, the more they pay for that website over time. Users can even enable ads for specific websites to help them further in the long run. Privacy is key here. They can also choose who can track them, protecting their data while contributing to platforms needing funding, which benefits both parties.
Which Dapps Are in Use?
We recommend the DappRadar portal, which hosts thousands of DApps built on networks like Ethereum, BNB Chain, Solana, and Polygon. Among the most popular DApps are decentralized finance (DeFi) applications, such as decentralized exchanges (DEX). These allow people to exchange one cryptocurrency for another without needing a centralized gateway, like the ones you find on cryptocurrency exchanges such as Binance and Bitstamp.
DApps on The Ethereum Network
Ethereum represents the most extensive network for building decentralized applications:
- Decentraland – A metaverse platform where users can interact as avatars and purchase NFTs representing virtual items or land.
- Uniswap – A decentralized exchange that allows users to exchange cryptocurrencies peer-to-peer instead of through a centralized intermediary.
- Compound – A DeFi lending protocol.
- Audius – A decentralized music streaming platform.
- Gods Unchained – A blockchain-based card game.
- MakerDAO – A smart contract that allows users to interact with the Dai stablecoin system.
Conclusion
Like the entire world of cryptocurrency, decentralized applications are still in their infancy. However, thousands of dApps offer countless services, whether games, DeFi investments, or NFT trading. In the first quarter of 2022, there were almost 2.4 million active dApp users daily, and still, we have a long way to go. Before dApps reach the mainstream, developers and networks must overcome many challenges, including scalability, security, and user experience. Once they do, we will likely witness a boom in decentralized applications.
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FAQ
What is the Purpose of Decentralized Applications?
The purpose of decentralized applications (dApps) is to enable users to transact directly with each other without relying on a central authority. This significantly reduces costs while increasing the efficiency of all transactions happening in the crypto world.
Where can I buy cryptocurrencies?
Today, buying cryptocurrencies has been simplified. There are so-called crypto exchanges through which users can buy their preferred virtual currencies at prices that suit them. On our portal, you can find honest reviews of all the best crypto exchanges for buying Bitcoin, Ethereum, or other alternative coins.
What are examples of centralized applications?
Twitter, Facebook, Instagram, Netflix… As you can see, many applications and social networks you use daily are centralized applications. We are sure you didn’t know this information before reading this article.
Which blockchain network has the most dApps?
Most decentralized applications are built on the Ethereum network. This is expected, as the Ethereum network offers a lot of freedom to developers who create smart contracts. One disadvantage of the Ethereum network is certainly the slightly higher transaction fees.
What are the most popular decentralized applications?
Uniswap, PancakeSwap, Decentraland, MakerDAO… They are similar to digital applications found on any smartphone or laptop – with the added feature of using blockchain technology to keep user data out of the hands of organizations behind the scenes.
