Introduction
Since the emergence of Bitcoin (BTC) over a decade ago, blockchain technology has continuously evolved, unlocking a multitude of new features and applications beyond currency. One of these is the development of decentralized applications (DApps), which leverage blockchain technology to drive innovation in traditional industries and services.
What is a Decentralized Application (DApp)?
A decentralized application (DApp) is a digital application that operates on a blockchain, based on smart contracts, rather than relying on centralized servers. DApps resemble ordinary mobile applications on smartphones, offering a variety of functions such as gaming, financial services, and social media.
As the name suggests, DApps run on a decentralized peer-to-peer network. Early studies have identified several key characteristics of DApps:
Open Source: The source code of a DApp is publicly accessible, allowing anyone to verify, use, copy, and modify it. No single entity can control the majority of the tokens, and users can suggest updates and participate in voting on DApp changes.
Decentralization and Secure Encryption: To ensure data security, all information within a DApp is protected using encryption technology and stored on a public decentralized blockchain maintained by multiple users (or nodes).
Tokenized System: Users can access DApps through cryptocurrencies, such as Ether. These DApps may utilize cryptocurrencies or generate native tokens through consensus algorithms like Proof of Work (PoW) and Proof of Stake (PoS). These tokens can also be used to reward contributors, such as miners and stakers.
Broadly speaking, the Bitcoin blockchain can be viewed as a DApp, arguably the first of its kind. The Bitcoin blockchain exemplifies open source characteristics, with all data stored on a decentralized blockchain and operating through a cryptographic token using PoW consensus. Other blockchains with similar characteristics can also be classified as DApps.
However, today the term "DApp" typically refers to applications that run on blockchain networks and possess smart contract functionality. Since the Bitcoin blockchain does not support smart contracts, most people do not consider it a DApp.
As of June 2022, the majority of DApps are built on the Ethereum network. Ethereum provides a robust infrastructure for DApp developers, allowing them to expand existing use cases. As DApps continue to mature, developers are also beginning to build DApps on other blockchains such as Binance Smart Chain (BSC), Solana (SOL), Polygon (MATIC), Avalanche (AVAX), and EOS.
How Do DApps Work?
DApps are driven by smart contracts, with their backend code running on a distributed peer-to-peer network. A smart contract is a set of predefined rules enforced by computer code. When specific conditions are met, all nodes in the network execute the tasks specified in the contract.
Once deployed on the blockchain, smart contracts are challenging to alter or destroy. Therefore, even if the team responsible for building the DApp has disbanded, users can still access and utilize the DApp.
Advantages of DApps
Although DApps share a similar interface with traditional applications, they offer several significant advantages over centralized applications. Traditional web applications typically rely on centralized servers to store data, and a failure of a single server can disrupt the entire application, leading to temporary or permanent service interruptions. Furthermore, centralized systems are more vulnerable to data breaches and theft, posing risks for both businesses and individual users.
In contrast, DApps are built on distributed networks, free from control by a central authority. The absence of a single point of failure makes DApps more resilient against attacks, making it difficult for malicious actors to take control of the entire network. Even if certain computers or parts of the network encounter issues, the peer-to-peer network ensures that DApps can quickly resume operation.
The decentralized nature of DApps also means that users have greater control over their personal information. Without a company managing user data, individuals can interact with DApps without needing to provide their real identities. They can connect to DApps through cryptocurrency wallets, fully controlling the information they choose to share.
Another advantage is that developers can easily integrate cryptocurrencies into the core functionalities of DApps. For instance, DApps on Ethereum can directly use ETH as a payment method without relying on third-party payment providers.
Limitations of DApps
Despite their potential to become a vital component of a censorship-free future, DApps are still in the early stages of development, and the industry has yet to address several challenges, including scalability, complexity of code modifications, and a limited user base.
DApps require substantial computational power, which can lead to network congestion. For example, to achieve the security, integrity, transparency, and reliability that Ethereum aims for, DApps require each validator to process and store every transaction on the network. This can reduce the system's transactions per second (TPS), leading to congestion and rising transaction costs.
Modifying DApps is also a challenge. To enhance user experience and security, developers may need to continually update the code, fix bugs, and add new features. However, once a DApp is deployed on a blockchain, its backend code is difficult to change; any modifications require consensus from the majority of network nodes, a process that can be time-consuming.
With numerous DApps available in the market, it is no easy task to stand out and attract a large user base. For a DApp to operate efficiently, it needs to establish network effects— the larger the user base, the more efficient the service. An increasing number of users also enhances the security of the DApp, reducing the risk of hackers tampering with the open-source code.
Common DApp Use Cases
DApps provide new ways for various industries to expand their user bases. Some common DApp use cases include GameFi, decentralized finance (DeFi), entertainment, and governance.
The popularity of GameFi DApps is on the rise, with games like Axie Infinity on the Ethereum blockchain serving as a prime example. According to DappRadar, blockchain gaming activity grew by 2,000% in the first quarter of 2022 compared to 2021. In March 2022, gaming activity attracted 1.22 million unique active wallets (UAW), with over 50% of users coming from gaming DApps.
Unlike traditional video games, most gaming DApps allow players full control over their in-game assets and the opportunity to monetize these items. For example, the characters, virtual land, and other in-game items in Axie Infinity are all NFTs. Players can store these assets in cryptocurrency wallets, transfer them to other Ethereum addresses, or trade them on NFT marketplaces. Within this ecosystem, players can compete against one another and collect ERC-20 tokens that can be traded on various platforms. Generally, the longer players engage, the more in-game rewards they can earn.
Traditional finance relies on financial institutions as intermediaries, but through DApps, individuals can enjoy financial services without a central authority, maintaining complete control over their assets. Decentralized finance (DeFi) particularly benefits low-income populations, enabling them to access a variety of financial services at minimal costs.
Lending is the most common type of financial service offered by decentralized applications. DeFi DApps provide instant transaction settlements, perform minimal credit checks, and allow users to use digital assets as collateral. In the lending markets of DApps, users enjoy greater flexibility. Lenders can freely choose which tokens to lend on which platform, enhancing their control. Moreover, users can earn 100% of the loan interest since there are no intermediary fees to pay.
Decentralized exchanges (DEXs) represent another significant application of financial DApps. These platforms eliminate the intermediary role of centralized cryptocurrency exchanges, facilitating peer-to-peer transactions. Users do not need to transfer their assets to an exchange for custody; instead, they can trade directly with other users through smart contracts, with orders executed directly between user wallets on-chain. Due to the lower maintenance requirements of decentralized exchanges, their transaction fees are significantly lower than those of centralized platforms. Currently, popular DEXs include Uniswap, SushiSwap, and PancakeSwap.
Entertainment is an indispensable part of life. The emergence of DApps has transformed everyday activities into digital experiences that can generate economic returns. For example, the decentralized music streaming platform Audius connects artists directly with fans by eliminating intermediaries in the traditional music industry. Musicians can better monetize their work and leave an immutable record on the blockchain.
DApps also address some of the issues faced by users of social media platforms. Centralized social media platforms like Twitter and Facebook are often criticized for censoring posts and mishandling user data. In contrast, decentralized social DApps like Steemit impose fewer restrictions on community members, allowing them to express their opinions freely and maintain better control over their personal information.
DApps empower users to play a more significant role in the governance of online organizations by introducing community-centered decision-making mechanisms. Through smart contracts, users holding governance tokens for specific blockchain projects can propose initiatives for community voting and anonymously vote on others' proposals.
One model of decentralized governance is the decentralized autonomous organization (DAO). DAOs use smart contracts to make decisions without a central authority and can be seen as fully autonomous DApps. DAOs lack hierarchy; instead, they align the interests of the organization with those of each member through economic mechanisms.
How to Interact with DApps
To interact with DApps, you first need a compatible browser extension wallet, such as MetaMask, Trust Wallet, or Binance Chain Wallet. These wallets can typically be set up in a matter of minutes, and some even offer mobile versions for added convenience.
For example, to connect Trust Wallet to PancakeSwap on the Binance Smart Chain (BSC), you can follow the instructions provided in relevant guides for mobile setup.
Conclusion
DApps are upgrading traditional applications through blockchain technology, thereby expanding the capabilities of the web. In the future, decentralized applications are likely to bring even more innovative use cases to the market. According to DappRadar, the daily active users of DApps approached 2.4 million in the first quarter of 2022, with expectations of attracting even more users. However, for widespread adoption, DApps and their underlying blockchain networks still need to address several existing limitations.