What Are DApps in Cryptocurrency – A Comprehensive Guide

Since the birth of Bitcoin, blockchains have evolved constantly to adopt new features and functionalities. dApps surpass currencies by involving use cases in many traditional sectors and services.

In this article, we will explain in detail what dApps are and what is their purpose.

What Are dApps?

Decentralized apps (dApps) are software programs that have their backend code powered by a decentralized peer-to-peer network. They are run by cryptocurrencies, so users make their payments with crypto coins to have various software-enabled services, like digital wallets or games.

Just like any app, dApps can make calls to their backend using code and user interfaces written in any language. It can also have its frontend stored on decentralized storage like IPFS. In other words, dApss functions as a video arcade where people can deposit money to use its services. 

Key Features

• • Decentralized –  they are decentralized applications that operate on Ethereum – an open public decentralized platform. Hence, dApps are safe from censorship and manipulation because they do not rely on a centralized server or authority.
  • Incentivised – meaning users receive rewards for using them. Their rewards have different forms, such as tokens. The main reason behind rewards is to bring users back and engage them with the dApp. Protocol-Compliant – dApps have their
  • own set of rules and specific regulations. Hence, users must follow them, to ensure security and reliability. 
  • Isolated – they operate in a virtual environment known as Ethereum. Hence, if the smart contract has a bug, it will not disturb the blockchain network. 
  • Deterministic – they are coded to perform the same function anywhere, no matter the  environment in which they are executed.

How Do dApps Work?

Applications that are powered by smart contracts are known as dApps. Their backend code operates on peer-to-peer networks that are distributed across the internet. A smart contract is a binding agreement that is implemented as a set of rules that are enforced by computer code. Every node in the network will carry out the obligations outlined in the contract if and when the criteria outlined in the contract are satisfied.

It is difficult to update the code of a smart contract after it has been distributed on a blockchain, and it is nearly impossible to delete it. Users will still be able to access the decentralized application even if the team that developed it has been disbanded. 

Right now, decentralized applications are the biggest attraction in crypto and blockchain. They offer some similar services, like traditional apps. However, they differ a lot because dApps use blockchain technology, a digital ledger that records every transaction on a decentralized network. To use a dApp, users pay an amount of crypto that enables smart contracts.

dApps use Web3 technologies to handle logic processing and other back-end tasks. With immutability and tamper-proof security, there has been a big rise in interest in dApp programming tutorials and guides. 

Eric Chen, CEO and co-founder of the company Injective Labs, which builds and develops autonomous financial markets, says, 

“Whether a user is creating an account, purchasing a digital item, placing a trade, or transferring assets, they only need to trust the open-sourced smart contract code and the underlying decentralized network.”

Moreover, he says, “All activity is also logged and secured on-chain, so that everything is fully visible and uneditable, creating full transparency and accountability for the end-user.”

Aaron Rafferty, CEO of BattlePacs, a platform for engaging voters in political discussions that uses blockchain and non-fungible tokens, says,

This transparency “allows users to verify that the dApp is running as intended and that there is no fraud or cheating taking place.”

What are Dapps. Source: Bitnovo

dApp Development

Technology has evolved beyond financial transactions. When Vitalik Buterin introduced Bitcoin, he set his sights much broader. And when he proposed Ethereum, he introduced a new decentralized way of life. He envisioned an internet based on blockchain where users had all of the control. To do so, he powered Ethereum with smart contracts.

In 2014, David Johnston, Shawn Wilkinson, and other authors released a report that defined dApps, named “The General Theory of Decentralized Applications, Dapps.” This report included these characteristics:

• A DApp must use open-source code. Users must suggest and vote on automated modifications.
• Data must be stored on a public blockchain. Since there cannot be a central point of attack, decentralization is essential.
• DApps must have a cryptographic token for access and reward miners and stakers with it.
• Proof-of-work (PoW) or proof-of-stake (PoS) consensus must create tokens for a DApp.

Simply put, the paper defines DApps as different apps that run on a core blockchain. Built on top of layers, they are all DApps as long as they meet the above criteria.

Web 2.0 and Web 3.0

Most of the apps we see on the internet today operate on a centralized network. Moreover, they are operated by a controlling authority, such as social media networks, banks, and streaming services. Whenever you access these apps, they request your personal information, assuming your credentials, such as your username and password, are valid.

On the one hand, this centralization is efficient. On the other, it generates a lot of user data, which exposes them to hacks, creepy advertising, and big tech companies. Usually, big tech companies such as Google and Amazon profit from users’ data. Generally, this is how most of the internet we know works, and it is referred to as Web 2.0. 

However, now we are moving towards a new type of internet called Web 3.0. The Web 2.0 drawbacks have raised security issues. Hence, people started looking for a peer-to-peer decentralized solution. Now dApps are part of something better called Web 3.0. You can simply log into your crypto wallet and select the amount of crypto you want to send. Then, you confirm the transaction, and your work is done. The smart contract completes the transaction, which is recorded permanently on the blockchain. 

“Once something is put on the blockchain, it cannot be taken off or changed without the network consensus. This allows developers to create more secure and reliable applications, which in turn provides users with a better experience,” says Rafferety, regarding the immutable nature of dApps. 

“For example, decentralized exchanges can form an ecosystem with strongly linked incentives to add features and product offerings for users at an exponential rate, which is something a centralized exchange cannot do,” says Chen.

Benefits of dApps

• Privacy – dApps do not require any personal information. It makes it safer from hackers, scams, and fraud.
• Data Integrity – Data on dApps are immutable and indisputable. They are secure, free of hacking and malicious actors.
• No Single Point of Failure – dApps are more reliable than traditional apps, because blockchain spans multiple nodes. Hence, dApps cannot crash or go offline. 
• Open Source Transparency – dApps rely on open-source code. Hence, they are open and transparent to every member of the network.
• No Central Authority – transactions occur without a central authority, and are utilized by a consensus mechanism. No third party has control over dApps.

Drawbacks of dApps

• Maintenance – dApps are hard to maintain because the code on the blockchain is difficult to modify. Even developers find it hard to update their dApp, even if there are bugs and security risks.
• Performance Overhead – There is a significant reduction in performance, and scaling is quite challenging. In addition to this, reaching consensus via proof-of-stake requires some additional time.
• Network Congestion – When a dApp uses too much computing power, the whole network slows down. At the moment, the network can only handle about 10 to 15 transactions per second. If transactions are sent faster than this, the number of transactions that haven’t been completed can quickly grow.
• User Experience – dApps are not quite user-friendly, because it might be too hard for the average end user to set up the tools needed to connect with the blockchain in a truly secure way.
• Bad Coding – The code, especially around smart contracts, is really important. The smart contract or decentralized application is only as good as the code that makes it work. If you pay for a certain service, you might not get the service you paid for. Experts say that once a smart contract is in place, it cannot be changed.

Types of dApps

Today’s DApps are a bridge between Web 2.0 and Web 3. Most of the time, this means that DApps can be used with regular Web tools like Google Chrome or Firefox. But if you want to use a DApp and talk to the blockchain networks underneath it, you’ll need a crypto wallet.

Since blockchain technology has only been around for a short time, there are fewer DApps than standard apps. But new ideas have started to make the environment more diverse, and many of the most popular DApps are crypto exchanges, NFT marketplaces, blockchain-based games, social media, etc.

• Financial Applications – These apps allow users to store and handle digital currencies like Bitcoin and Ethereum. Examples include wallets, crypto exchanges, payment platforms, insurance goods, etc.
• Marketplace Applications – This app has a peer-to-peer nature that lets people buy and sell goods and services directly with each other using cryptocurrency.
• Gaming Applications – People are using these kinds of dApps to play games more and more. They do this by using blockchain technology to create unique experiences on the blockchain network.

dApps VS. Regular Apps

Why Ethereum for dApps?

Blockchain technology, specifically Ethereum, is typically used to power decentralized apps. In other words, we can conclude that Ethereum is now the dominant platform for the development of decentralized applications, and there are various reasons why this is the case. 

The very first and most important reason is that Ethereum includes a development interface, which cuts down on the amount of time needed for programming and immediately launches applications. In addition, the Ethereum blockchain offers a user-friendly experience for developers with the incorporation of development kits, application templates, and MetaMask. This user-friendliness has been shown to be effective in recruiting new projects and big communities.

Use Cases

DApps give businesses in a wide range of industries a new way to reach more people. 

GameFi

The rise of Axie Infinity, a play-to-earn game on the Ethereum blockchain, shows how GameFi DApps are becoming more popular. In the first quarter of 2022, there were 2,000% more blockchain games than in the first quarter of 2021. It also had 1.22 million unique active wallets (UAW) in March 2022, with gaming DApps making up more than half of the action. 

In most gaming DApps, players have full control over their in-game assets, which is different from most traditional video games. They also let players sell these things outside of the game to make money. In Axie Infinity, for example, NFTs come in the form of game characters, virtual land, and game things. 

Players can keep them in crypto wallets, send them to other Ethereum addresses, or trade them with other players on NFT marketplaces. Within the ecosystem, players can fight to get ERC-20 tokens, which can be sold on exchanges. Most of the time, the longer they play, the more prizes they can earn in the game. 

DeFi and DEXs

Traditional finance uses banks as intermediaries. DApps let everyone utilize financial services without a central authority and maintain their assets. DeFi offers low-income people a wide range of financial services at lower costs. 

Decentralized applications offer borrowing and lending. DeFi DApps enable quick transaction settlement, minimum credit checks, and digital asset collateral. DApp lending marketplaces offer more flexibility. Lenders can choose which cryptocurrency and platform to lend. Since there are no middleman fees, users can earn 100% of the loan interest. 

Decentralized exchanges (DEXs) are another important financial DApp. By removing crypto exchanges, such platforms enable peer-to-peer trade. Users can keep their funds. Smart contracts let them deal directly with other users instead of exchanging assets. On-chain, wallet-to-wallet orders are completed. DEXs charge less than centralized exchanges because they require less maintenance. Uniswap, SushiSwap, and PancakeSwap are popular DEXs. 

Entertainment

Our lives aren’t complete without entertainment. With DApps, people’s favorite daily tasks are being turned into digital experiences that can also make them money. For example, Audius, a blockchain-based decentralized music streaming app, cuts out the intermediaries in the traditional music business to connect artists and fans directly. It lets music producers make more money from their work and make immutable records of it on the blockchain.

DApps are also being used to solve problems that social media users have. People often say that centralized social media, such as Twitter and Facebook censor posts and mishandle users’ data. With decentralized social DApps like Steemit, the community can talk to each other and share their views freely, with less censorship and restrictions, and have more control over their own information. 

Finance

DApps help lenders and borrowers. Banks pay lenders interest on savings. Savings allow banks to lend more and earn more interest. However, the bank gets a larger percentage than lenders might prefer for simply storing funds. No intermediary means lenders get 100% of their interest on a DApp. They also control loans and earn tokens from the platform they lend on.

Borrowers control interest and payment timing. Some platforms let borrowers pay interest over months or years if they reach a certain payment requirement. The borrower and lender can negotiate rates to provide a fair deal. Smart contract technology allows instant proceeds.

Governance

DApps can give users a bigger say in how online groups are run by making decision-making more about the community as a whole. Users who own governance tokens for a certain blockchain project can make proposals for the community to vote on with the help of smart contracts. They can also vote secretly on other’s proposals. 

Decentralized Autonomous Organizations are one type of autonomous government. DAOs can be thought of as DApps that make choices on their own with the help of smart contracts instead of a central authority. There is no order among them. Instead, economic processes make sure that the organization’s goals are in line with those of each DAO member.

Social Media

Social networking DApps benefit users. First, posts cannot be edited, so anyone can say anything. The community can remove problematic posts. They can earn more. Traditional apps, like Twitter, earn the most from popular tweets. Ads from site visitors make money, but the creator doesn’t. Social media DApps might include a coin-based tipping system and let users run adverts without the corporation receiving a part.

Fundraising and Advertising

Many internet users block ads. This is a problem for websites seeking to make money, but adverts have grown annoying. Browser DApps fix this. Users earn crypto while browsing with a browser-integrated ad and tracker blocker. They can now allow contributions to creators and websites they enjoy, and spend more on a site as they surf longer. Users can enable advertisements for those sites to benefit more.

Takeaways

• dApps are software programs that run on a decentralized peer-to-peer network and are powered by smart contracts. 
• They are safe from censorship and manipulation, incentivised, protocol-compliant, isolated, deterministic, and are coded to perform the same function anywhere. 
• Decentralized applications use blockchain technology, Web3 technologies, and immutability and tamper-proof security to offer similar services to traditional apps.
• They use open-source code, users suggest and vote on automated modifications, data is stored on a public blockchain, and have a cryptographic token for access.
• DApps offer privacy, data integrity, no single point of failure, open source transparency, and no central authority. 
• Some drawbacks are: maintenance, performance overhead, network congestion, user experience, and bad coding. 
• Ethereum is the dominant platform for the development of decentralized applications, as it is used to power decentralized apps, allowing users to store and handle digital currencies, buy and sell goods and services, and play games. 
• Ethereum offers a development interface, user-friendly experience, and use cases for DApps, such as GameFi, DeFi, and DEX, which offer low-income people access to financial services at lower costs.
• DApps reach different industries such as GameFi, DeFi and DEXs, entertainment, finance, governance, social media, and fundraising.