What Are DApps and How Do They Work?

Basics

Blockchain technology has expanded significantly since the creation of Bitcoin over ten years ago. This growth has opened up opportunities for utilizing decentralized applications, known as DApps, in various industries and services, as blockchain can add value beyond currency.

Diverse DApps exist and serve varying purposes, from gaming and finance to social media, among others. These applications run on blockchain networks and differ from regular mobile apps, as they depend on smart contracts in a distributed network for operation. While this feature enhances their decentralization, transparency, and immunity to attacks, it also creates novel difficulties.

What Are DApps?

DApps are digital programs that operate on blockchains rather than centralized servers. They are comparable to conventional mobile apps and provide a wide range of services such as gaming, finance, social media, and more.

DApps operate on decentralized peer-to-peer networks, meaning that they are accessible to the public, open-source, and modifiable. The majority of its coins or tokens are not controlled by a single entity. Users can also vote on proposed changes to the DApp. To ensure data safety, DApp information is cryptographically protected and stored on a public, decentralized blockchain maintained by multiple users or nodes.

DApps require cryptographic tokens to function, which can be cryptocurrencies such as ETH or native tokens generated through consensus algorithms like Proof of Work (PoW) or Proof of Stake (PoS). These tokens can also be used to reward miners and stakers.

According to this definition, the Bitcoin blockchain can be defined as a DApp. However, since it doesn't support smart contracts, it is no longer classified as one. Nowadays, DApps generally refer to all applications that have smart contract capabilities and operate on blockchain networks. The Ethereum network currently has the most DApps, but developers are creating them on other blockchains like Solana (SOL), Polygon (MATIC), Avalanche (AVAX), and EOS.

How Do DApps Work?

Smart contract-powered applications, known as DApps, rely on a distributed network where their backend code runs. Smart contracts serve as a set of predefined rules enforced by computer code. Once certain conditions are met, all nodes in the network will execute the specific tasks laid out in the contract.

Benefits of DApps

Compared to centralized applications, DApps offer several advantages despite having similar interfaces. Traditional web apps store their data on centralized servers, leaving them vulnerable to attacks that may compromise the entire network. In contrast, DApps rely on distributed networks without a central authority, making it difficult for malicious actors to target the entire network. Even if parts of the network malfunction, the P2P network ensures that DApps continue to function with minimal downtime.

Furthermore, the decentralized nature of DApps means that users have greater control over their personal information since no company controls it. Instead of providing their real-world identity to interact with a DApp, users can use a crypto wallet to connect with DApps and fully control the information they share.

Additionally, developers can easily integrate cryptocurrencies into their basic functionalities using smart contracts. For instance, Ethereum-based DApps can adopt ETH as payment without relying on third-party payment providers.

Drawbacks of DApps

Although DApps hold promise as a crucial component of a future free of censorship, there are downsides. As a nascent technology, DApps face issues like scalability, code modifications, and limited user adoption that the industry has yet to resolve.

To operate, DApps require significant computing power that can overwhelm the networks they run on. For instance, Ethereum needs every validator to run and store each transaction executed on the network, hindering its TPS rate, causing network congestion, and inflating gas fees.

Modifying a DApp is also difficult. Once deployed on the blockchain, its backend code is challenging to change, necessitating consensus from a majority of network nodes. Consequently, bug fixes, UI updates, and new features are hard to add, leading to delays in implementation.

Furthermore, numerous DApps compete for users, making it challenging to stand out. A DApp must achieve a network effect to provide services effectively. A larger number of users can also improve security and protect the DApp from hackers attempting to exploit open-source code.

Popular DApp Use Cases

DApps have a broad range of use cases that cater to various industries and can help businesses expand their user base. Popular examples of DApps include decentralized finance (DeFi), GameFi, entertainment, and governance.

GameFi

The popularity of GameFi DApps has surged with the advent of Axie Infinity, an Ethereum blockchain-based game that offers players the opportunity to earn money while playing. The blockchain gaming industry has experienced a massive 2,000% rise in activity in recent years, with gaming DApps accounting for over half of the total activity. Millions of unique active wallets participated in blockchain gaming.

Unlike traditional video games, gaming DApps offer players complete ownership and control over their in-game assets. These items can be monetized outside the game, allowing users to earn from playing. Axie Infinity, for instance, offers virtual game characters, land, and items in the form of NFTs. Players can store their assets in crypto wallets, trade them with other players on NFT marketplaces, or transfer them to other Ethereum addresses. Players can also compete to collect ERC-20 tokens, which can be exchanged on cryptocurrency exchanges. The longer the players engage with the game, the higher the in-game rewards they can earn.

DeFi and DEXs

Decentralized applications, or DApps, provide an alternative approach to traditional finance. Rather than relying on financial institutions to act as middlemen, DApps allow everyone to use financial services without a central authority and maintain full control of their assets. The benefits of decentralized finance, or DeFi, can also extend to low-income individuals, offering them access to a broad range of financial services at significantly lower costs.

Decentralized lending and borrowing are the most popular types of financial services that DApps provide. They offer instant transaction settlement, minimal credit checks, and the ability to use digital assets as collateral. Lenders and borrowers have more flexibility on DApp lending marketplaces. For instance, lenders can choose which token to lend and on what platform. Users can also potentially earn the full interest generated from the loan since they don’t have to pay intermediary fees.

In addition to borrowing and lending, decentralized exchanges (DEXs) are another crucial example of financial DApps. DEX platforms facilitate peer-to-peer trading by eliminating intermediaries such as centralized crypto exchanges. Users do not need to transfer their assets into an exchange; instead, they trade directly with another user using smart contracts. Orders are executed on-chain and directly between the users’ wallets. DEXs typically have lower trading fees than centralized exchanges because they require less maintenance. Popular DEXs include Uniswap and SushiSwap.

Entertainment

Blockchain technology is changing the way people consume entertainment, and DApps are at the forefront of this transformation. They provide economic incentives for everyday activities, such as listening to music. For instance, Audius, a blockchain-based music streaming platform, connects artists and fans directly without intermediaries. It offers better monetization options for music curators and immutably records their work on the blockchain.

Decentralized social DApps, such as Steemit, offer a solution to the issues surrounding censorship and data privacy in centralized social media platforms like Twitter and Facebook. By using decentralized social DApps, users can freely interact without any restrictions and maintain greater control over their personal information. This is in contrast to centralized platforms, which have been criticized for their handling of user data and censorship of posts.

Governance

Smart contracts enable users to participate in online organizations' decision-making process, promoting a more community-centric approach. Users holding governance tokens of a specific blockchain project can create and vote on proposals anonymously. Decentralized Autonomous Organizations (DAOs) are another decentralized governance model that operates as fully autonomous DApps. Instead of a central authority, DAOs use smart contracts to make decisions. They are organized with no hierarchy and employ economic mechanisms to align the organization's interests with those of individual members.

How to Connect to DApps?

To connect to DApps via a crypto wallet, you will first need to make sure that your wallet is compatible with the blockchain network that the DApp is built on. Once you have confirmed this, you can follow these general steps:

1. Install a compatible wallet: You will need to have a compatible crypto wallet installed on your device. The most popular wallets are MetaMask or Ledger Live.
2. Fund your wallet: You will need to have some cryptocurrency in your wallet to use the DApp. You can buy cryptocurrency from an exchange or transfer it from another wallet.
3. Open the DApp: Go to the website of the DApp you want to use and click on the "connect wallet" or similar button. This will prompt you to connect your wallet.
4. Select your wallet: Select the wallet you want to use from the list of available options.
5. Connect your wallet: Follow the prompts to connect your wallet to the DApp. You may need to approve the connection from your wallet app.
6. Start using the DApp: Once your wallet is connected, you can start using the DApp as intended. Depending on the DApp, you may need to perform certain actions such as approving transactions or staking tokens to use its features.

Conclusion

The integration of blockchain technology into conventional applications through DApps is extending the functionality of the internet. As a result, DApps are expected to introduce even more innovative use cases in the future. User interest in DApps is projected to rise continuously. Nonetheless, DApp developers and the blockchain networks they operate on have yet to overcome current limitations to attain mass adoption.