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What are dApps?

Your primer for everything relating to the exciting new world of decentralized applications.

29 Jul 2022by Mohammad Musharraf

Decentralized applications, or “dApps”, are smart-contract enabled software that function just like conventional apps but without a central point of control. Instead, dApps run on blockchain technology or a peer-to-peer network.

A traditional Web2 application like Twitter is run by a single entity with user data stored in centralized servers. Web2 apps are therefore open to censorship and unilateral control of personal data, making them prone to security breaches.

On the other hand, Web3 dApps are permissionless and open-source protocols, with user data stored in a distributed manner across the network. Dapps are thus censorship resistant and less prone to security threats as there is no single point of failure.

This article takes a closer look at dApps, explaining their use cases, advantages, and disadvantages. 

What is a dApp?

A 2014 paper titled “The General Theory of Decentralized Applications, Dapps” laid out the main criteria for dApps. According to the paper, a decentralized application must meet four main criteria:

  1. It must have open-source code and be operable without relying on a centralized network. Users must reach a consensus to implement changes to the app code 

  2. Data storage must occur cryptographically on public, distributed networks instead of a centralized server 

  3. A cryptographic token powers the decentralized application as app users, stakers, yield farmers, and miners earn the tokens as rewards

  4. The dApps rely on a consensus mechanism like Proof-of-Work or Proof-of-Stake for generating tokens

The report also classifies decentralized apps into three categories depending on whether they have their own blockchain:

  1. dApps that have their own blockchain (Type I)

  2. dApps that rely on a layer-1 blockchain (Type II)

  3. dApps that rely on a type II dApp (Type III) 

The origins of dApps

In 2013, Daniel Larimer, founder of Bitshares, used the term Decentralized Autonomous Corporations (DAC) to refer to companies running on decentralized networks. Bitshares was one of the earliest decentralized communities where token holders controlled the platform instead of a single authority. The term “corporation” was later dropped, however, and “decentralized applications” became the standard.

A screenshot of CryptoKitties.
CryptoKitties was the first dApp to draw widespread attention (Image source)

Blockchain-based decentralized apps became famous with the emergence of the Ethereum blockchain. In 2013, Vitalik Buterin and a team of developers conceptualized a blockchain system that went beyond simple Bitcoin transactions. The developers designed a smart contracts-powered Ethereum network empowering users to use decentralized apps without interference from a central authority. 

Although it is difficult to trace the first dApp on the Ethereum blockchain, CryptoKitties was the first decentralized app to draw widespread attention. Dapper Labs launched CryptoKitties in November 2017 and by January 2018, the game had over 250,000 users. The blockchain-based app became so famous that the tokenized cats were trading for $200,000.

dApp use cases

Finance

In traditional financial institutions, users have to depend on a centralized single authority like a bank to mediate all financial transactions. However, in decentralized finance (DeFi), users do not have to pay any centralized agency for managing their digital assets. Since decentralized transactions happen on a peer-to-peer blockchain network, DeFi users only have to interact with each other through smart contract-enabled decentralized app.

A screenshot of the Aave homepage.
Aave is a platform that offers lending-borrowing services for its users (Image source)

By the end of Q1 2022, Ethereum dApps have controlled more than 54% of the total value locked (TVL) in DeFi. The decentralized credit service MakerDAO has the highest TVL in the DeFi market with over $7.6 billion locked.

Aave is another popular protocol in the dApp ecosystem that offers lending-borrowing services for its users. Uniswap also recently became the first smart contract-enabled decentralized exchange on Ethereum to cross $1 trillion in total trading volume.

Gaming

According to a study by Zion Market Research, the gaming industry generated $200 billion in revenue in 2021. Gamers, however, traditionally do not own their in-game assets. Blockchain-based games are transforming the gaming landscape by tokenizing assets and giving control back to gamers.

The emergence of NFT technology and Play-to-Earn (P2E) games like Axie Infinity have empowered gamers to immutably store their assets on a blockchain network. Players can now own and monetize in-game assets like racing cars, weapons, and avatar wearables. They can then trade these assets on secondary marketplaces, using them as collateral to take loans, or leverage them as derivatives. 

Despite being in its infancy, blockchain-based NFT games achieved sales of over $5.17 billion in 2021, accounting for 52% of activities across all blockchain networks. Gaming dApps have become immensely successful with over 1.22 million unique active wallets connecting to blockchain games in March 2022. 

Social media

Web2 social media platforms like Facebook, Instagram, and Twitter have certain disadvantages. Firstly, the corporations own all user data and sometimes sell the data to third parties without consent from the user. Secondly, content creators get a tiny share of the revenue as the Big Tech companies take up the majority of profits. Finally, company management can deny access to user content, thereby making users susceptible to censorship.

Web3 social media dApps like CanCan, Canistore, and DSCVR offer unique solutions to these problems. On these apps, the user alone own and can monetize their personal data. Since dApps run on a token economy, content creators can set up a direct payment network with their followers rather than sharing profits with a company.

Moreover, unlike regular apps that rely on centralized computers to store information, dApps immutably store data on the blockchain network. So once users create something like a public post, it is impossible to alter or delete it. This makes social media dApps censorship-resistant. 

Advertising

Digital advertising reached a new high in 2021 as companies spent over $521 billion to market their products. However, traditional digital advertising methods have some disadvantages.

Companies often sell user data to advertisers without the user’s permission, and advertisers often target the wrong demographic. Many users therefore use ad blockers when they browse the web, leading to revenue loss for advertisers.

Many users are now using web browser dApps that give them greater autonomy over their data. Some of these browser dApps use an advertising model in which the user gets paid for watching ads. 

A screenshot of the Brave browser.
Web browsers such as Brave give users greater autonomy over their data (Image source)

Such a flexible platform creates a symbiotic relationship between the user and the advertising company. The company can target the right audience with its ads, thereby increasing revenue share. Users also have more autonomy to choose what they want to see and even get paid for viewing ads.

Governance

The existing governance model for a vast majority of companies depends on an outdated voting system. Company managers and CEOs depend on this voting to introduce changes or act on a new proposal. However, traditional voting methods are susceptible to tampering and forgery. 

Companies can now use a special kind of dApp called Decentralized Autonomous Organizations (DAOs) to govern their company operations. The smart contract-enabled DAOs run on a decentralized network and automate the entire voting mechanism through a staking system. 

DAO participants stake their money in the protocol to vote for upgrades and decide the organization’s future trajectory. Staking ensures that malicious actors do not approve any faulty proposals during voting. The protocol leverages distributed ledger technology to immutably store voting data on the blockchain, effectively making it impervious to tampering.

Advantages of dApps

Enhanced user privacy

When users create a dApp account, they do not need to provide their personal information. Since a centralized company does not store sensitive data on servers, hackers have no means to access it. 

This makes a dApp more secure than conventional apps. Users can interact with dApps through smart contracts without the need to reveal their identity. Automating transactions between anonymous dApp users makes the protocols more secure from identity thefts and hacks.

Censorship resistant

Since dApps store all information on-chain, no single entity can alter or delete it. A dApp network is even beyond the control of state regulatory authorities. This quality makes social media dApps a good alternative to existing Web2 platforms.

A picture of a server room.
Since dApps don’t depend on servers, there’s no single point of failure (Image source)

No downtime

Since dApps do not depend on centralized servers for their everyday operations, there is no single point of failure. A dApp will therefore never stop functioning due to an unexpected fire in the server room, technical glitches, or routine maintenance. Since dApps rely on a decentralized network of computers, the protocols continue to work even if a few computers malfunction.

Disadvantages of dApps 

Lack of scalability

Although dApps are still in their infancy, many find their inability to scale and the resultant network congestion concerning. Whenever a dApp requires more computation due to an influx of new users, it takes a long time to process data and execute transactions. 

In 2017, for example, the CryptoKitties craze created massive congestion on Ethereum with backlog transactions rising to almost 15,000. Ethereum is now trying to tackle this scalability issue by upgrading to Ethereum 2.0.

Difficult user interface

Some dApps lack a user-friendly interface. Quality only improves significantly when a dApp onboards more users onto the platform. Thus, dApps require a sizeable amount of network participants along with nodes and validators to run smoothly. In the initial stages when a dApp has few users, the end-user experience is less than ideal. 

Slower upgrades

Unlike Web2 apps, decentralized apps do not depend on a central entity for code modifications and updates. Rather, the community votes on upgrades and protocol changes and executes the decision only after achieving a majority consensus. 

It therefore can take a while to update dApps, even for minor bugs or other security issues. And while the decentralized mechanism promotes community governance, it can sometimes delay crucial updates, therefore harming the dApp’s users. 

Scams

Coding errors and other vulnerabilities in the dApp algorithm can make dApps susceptible to fraud. Malicious actors can exploit faulty code to steal money from users’ wallets. In December 2021, for example, hackers exploited the vault addresses of Bitcoin DeFi protocol BadgerDao and stole over $120 million

Read our articles Crypto security basics: Staying safe in Web3 and How to spot and avoid crypto scams to learn about how to stay safe while investing.

The Future of dApps

The use of decentralized applications has been rising steadily over the years. In 2021, more than 2.7 million daily unique active wallets were interacting with dApps, a rise of 592% from 2020. Despite a bear market and turbulent global economy, 2.38 million unique user wallets interacted with decentralized apps in Q1 2022. Industry experts believe that dApp usage will steadily rise over the years as the sector diversifies its offerings. 

However, dApps need to address scalability challenges and work on developing better user interfaces for greater accessibility. Once new users find that using a dApp is not very different from a Web2 app, more users will start using dApps. The key to mass adoption, therefore, lies in lowering entry barriers and enabling a smooth experience for users. 

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