DeFi DApps: What are Decentralized Applications (DApps)

Decentralized applications (DApps) are digital applications or programs that are powered by smart contracts and operate on blockchain networks. Learn about them and how to use them here.

4 min read
Key Takeaways
  • Decentralized applications (DApps) are similar to traditional applications except that they run on top of blockchain networks. 
  • DApp use cases include gaming, finance, social media, and more.
  • DApps utilize smart contract technology and distributed networks to create a more transparent, decentralized and attack-resistant platform for users. 

Blockchain technology has undergone a significant evolution over the past decade-plus since Bitcoin was first introduced to the world by Satoshi Nakamoto. One of the most significant advancements came with the introduction of smart contracts, which enabled the creation of decentralized applications (DApps) and set our global society on a path towards a more efficient, blockchain-infused internet. 

What Are Decentralized Applications (DApps)?

Decentralized applications (DApps) are digital applications or programs that are powered by smart contracts and operate on blockchain networks rather than centralized servers. Aside from being blockchain-based, DApps have a similar look and feel as regular smartphone mobile apps and service a wide array of sectors including gaming, finance and social media.

Thanks to a foundation that is based on a decentralized peer-to-peer network, dApps offer multiple features that aren’t seen with your average smartphone app including: 

  1. Open-source code - Allows anyone to verify, copy, use, and modify the source code of a DApp
  2. TokenizationDApps can utilize cryptocurrencies such as Ethereum or can generate their own native token for use within the application. 
  3. Cryptographically secure - All DApp information is cryptographically secured and stored on a public, decentralized blockchain network that is maintained by multiple users. 

Technically speaking, the Bitcoin blockchain can be considered a DApp based on this definition as it meets all the criteria described above. In the current state of the crypto ecosystem, however, the term “DApp” is typically used for applications that run on blockchain networks and offer smart contract functionalities. 

How Do DApps Work?

Smart contracts, which are a set of predefined rules that are enforced by computer code, power decentralized applications while their backend code runs on distributed peer-to-peer networks. Once a certain set of conditions laid out in a smart contract are met, all nodes on the network will execute the task which is coded into the smart contract. 

Once a smart contract is deployed on a blockchain, it is nearly impossible to change the code or destroy the contract, which highlights the immutable and censorship-resistant nature of DApps and blockchain technology. 

Benefits of DApps

The integration of blockchain technology allows Decentralized Apps to offer multiple benefits that aren’t seen with their centralized counterparts:

  • DApps are built on distributed networks with no central authority.
  • Less vulnerable to attacks from malicious actors due to their decentralized nature.
  • Less downtime thanks to operating on a peer-to-peer network.
  • Users have more control over the information they share.
  • No need for users to provide real-world identity in order to interact with the DApp since there is no company controlling users’ personal data
  • Connects directly with a cryptocurrency wallet to allow for anonymous interactions. 
  • DApps can integrate cryptocurrencies into their basic functionality to allow for payments without the need for a third-party payment provider. 

When compared to the current system of smartphone applications which rely on centralized servers that can be compromised and take down the entire network, DApps offer a more secure and resilient interface for users to enjoy. 

DApp Limitations

While DApps show great promise in the creation of a censorship-free web experience, it's important to note that the technology is still in the early stages of development and still has some notable issues that need to be addressed. 

The scalability of blockchain technology is one of the major pain points, as DApps require a significant amount of computing power to operate. During times of high use, this can cause networks like Ethereum to become overloaded, which results in delayed confirmation times and increased transaction costs. 

Modifying the code base of a DApp is also a challenging proposition as it requires a majority consensus from the nodes on the network to approve any changes or make improvements, which can often take a long time to implement. Such changes are regularly needed to fix bugs, update the user interface and add new functionalities to the DApp, so finding a more efficient way to allow for such changes is an important goal that developers are working on.  

An additional limitation that many Decentralized Apps grapple with is an overcrowded field that leads to a low user base. The cryptocurrency ecosystem remains relatively small on a global scale with a limited number of users capable of interacting with DApps. This can make it difficult for them to stand out and attract users. As a DApp increases its active user count, it becomes more efficient at providing services to its userbase and more secure in protecting against hackers and other malicious actors. 

Popular DApp Use Cases

  • GameFi - Made popular by play-to-earn games that allow users to earn a living while enjoying their gameplay. 
  • Decentralized Finance and Decentralized ExchangesFinancial applications that cut out the middleman and allow users to access financial services and control their assets without the need for a central authority. Borrowing and lending are the most popular types of financial services that decentralized applications provide.
  • Entertainment - DApps enable people to continue to enjoy their normal daily activities while also generating economic incentives in the process. 
  • Governance - Users are able to participate more in the governance of an online organization thanks to governance tokens that allow for a more community-based decision-making process. 
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