What are dApps?
dApps are software applications that exist on smart contract blockchains like Ethereum. Instead of relying on centralized computer servers, dApps employ code that executes by itself once pre-programmed conditions are met called smart contracts and to fulfill users’ requests.
dApps are built on existing blockchains. The node operators on a dApp’s underlying blockchain help provide enhanced security by ensuring no bad actors manipulate the applications. Using consensus mechanisms like proof-of-work (PoW) or proof-of-stake (PoS), these blockchains incentivize network participants to validate transactions in exchange for token rewards. All transaction data on a dApp is publicly viewable on a blockchain’s ledger, and the code governing a dApp’s protocol should be open-source.
From a user’s perspective, a dApp should provide a similar online experience to centralized apps. For instance, dApps in the DeFi (decentralized finance) sector mimic the traits of centralized brokerage sites or banking apps. However, instead of logging in with a username and password, DeFi dApps only require that users have a compatible crypto wallet.
For example, the crypto lending dApp Aave allows people to deposit collateral and take out a loan. Unlike requesting a loan through a traditional bank, Aave users don’t need to supply financial or personal history. As long as a user has the required collateral and connects their crypto wallet, they can use Aave’s financial services.
Where do dApps come from?
The theory behind today’s smart contract dApps first emerged in 2013. During this year, programmers such as Vitalik Buterin (co-founder of Ethereum) first proposed using blockchain and coded smart contracts to create a decentralized internet. These ideas would eventually lead to the creation of Ethereum in 2015.
One year before Ethereum went live, a group of developers led by David Johnston published an article explaining what a dApp is. Entitled “The General Theory of Decentralized Applications, Dapps,” this seminal paper laid out four features every dApp should possess:
- dApps must have open-source code and community governance.
- The data on a dApp should be contained on a blockchain network and a transparent distributed ledger, not a centralized computer server.
- dApps should have a cryptocurrency associated with their platform to reward users.
- These crypto tokens must use a blockchain consensus mechanism like PoS to validate transactions.
What are dApps used for?
The potential use cases for dApps are as endless as those for centralized apps. Although many of today’s dApps are most famous in DeFi, there are many creative ways developers are pushing the boundaries of this technology.
DeFi (Decentralized Finance)
DeFi dApps offer all the products and services associated with traditional financial institutions. People can now find dApps that handle crypto lending, trading, and borrowing without needing a bank, centralized exchange (CEX), or broker.
Most DeFi dApps use liquidity pools to provide their services to users. Liquidity pools are smart contract-based “vaults” where anyone can deposit their crypto to earn rewards, similar to depositing funds in bank accounts. dApp users can freely trade or borrow from these liquidity pools.
Uniswap is one example of a DeFi dApp. Launched in 2018, Uniswap allows users to trade Ethereum-based tokens with their crypto wallets. Although there are many competing DEXs (decentralized exchanges) presently, Uniswap remains one of the largest in the DeFi ecosystem.
Video game dApps have become increasingly prevalent as gamers search for ways to monetize their passion. Unlike video games on centralized platforms, gaming dApps allow users to collect rewards in their crypto wallets. In-game currency is represented by cryptocurrencies, and in-game items are represented by NFTs. This play-to-earn (P2E) incentive structure rewards gamers for their time and effort.
Since all these digital assets are viewable on a decentralized blockchain, players enjoy full ownership over their fungible or non-fungible tokens (NFTs). There’s no centralized gaming studio that can bar someone from selling or transferring their crypto rewards.
Interestingly, Dapper Labs’ game CryptoKitties was one of the first dApps to gain mainstream attention. This NFT-based dApp allowed users to buy, breed, and sell animated cats on the Ethereum blockchain. The demand for CryptoKitties was so high in 2018 that it caused severe congestion on Ethereum. These issues forced Dapper Labs to create its NFT-focused Flow blockchain.
Many people involved in Web3 want to create a censorship-resistant social media platform that can rival the likes of Facebook and Twitter. Although social media dApps are still in their infancy, a few platforms use blockchain on their back end.
For example, Lens Protocol is building a Web3-focused “social graph” that helps people own, share, and monetize their social media content. Built on the Polygon blockchain, Lens allows users to mint their profile as an NFT that can be stored in their crypto wallet. This allows people to bring their social media identity anywhere they want in the Web3 ecosystem.
NFTs were around in the mid-2010s, but a few people paid attention to them until the 2021 crypto bull run. Today, there are countless NFT-focused dApps on smart contract blockchains, many of which allow users to create, sell, and trade these digital collectibles.
Anyone who visits non-curated NFT sites like Rarible can upload a digital file and mint it as an NFT. This grants artists, musicians, and game developers more opportunities to monetize their work and create a Web3 community. These markets also give big brands and celebrities new ways to connect with fans and offer NFT rewards.
What are the benefits of dApps?
Developers in favor of dApps will argue this technology provides internet users with the maximum degree of freedom. While critics may disagree with this point, there are a few undeniable benefits dApps offer:
- Newly Unlocked Functionality: Due to the decentralized nature, many dApps create functionality, which was previously unavailable. These include new financial instruments to earn yield on users’ money and more transparent and liquid markets for selling of goods.
- Zero downtime: Blockchains like Ethereum have thousands of validators, which means a dApp can still function even if a few nodes go out. In contrast, if a Web2 site’s central server goes down, it’ll affect the app’s performance.
- Greater censorship resistance: No single entity dictates the content that can go onto a dApp. Thanks to the transparency of public ledgers and the decentralization of blockchain, people can feel more confident about expressing their opinions without the threat of censorship.
- Enhanced user privacy: Most dApps only require users to connect their crypto wallets to start using them. Since people don’t have to give away as much personal information to use dApps, it helps preserve anonymity on the internet. dApp users also don’t have to trust a centralized company will leak their data either intentionally or accidentally.
- Decentralized governance: Many dApps allow users to use governance tokens to vote on upcoming changes to the site. This feature gives people who enjoy using a dApp greater influence in a dApp’s decision-making process.
What are the disadvantages of dApps?
Ironically, decentralization contributes to many of the disadvantages dApps face. While developers are working to address these issues, they’re pressing concerns in the Web3 sector. Here are some drawbacks:
- Some are decentralized by only name: Decentralization is not binary but a spectrum. When building a dApp, developers can decide how decentralized they want it to be, trading off user experience and ease of building. For example, some apps only use blockchains for databases, whereas others also use for storage of images and DNS services. Apps that are less decentralized have less of the positive attributes of dApps and resemble traditional apps more closely.
- Slow to scale: While decentralized governance gives more people a say, it also takes up much time. To preserve decentralization, dApp developers must constantly put improvement proposals up for a vote, which can slow the development process.
- Poor user interface/user experience (UI/UX): Most of today’s dApps aren’t as user-friendly as Web2 apps. People who don’t already know how to transfer crypto or use wallets may feel confused when first exploring a dApp.
- Susceptible to scams: Since Web3 is largely unregulated, plenty of scammers have begun creating scam dApps to exploit innocent investors. People need to be careful when getting involved in smaller dApp projects.
Ever since Ethereum began operations, developers have introduced dozens of dApps to Web3. Here are five notable dApps examples:
- Uniswap: Uniswap was the first automated market maker (AMM) DEX on Ethereum, and it continues to be a pillar of the DeFi ecosystem. In addition to Ethereum, Uniswap offers trading on Optimism, Arbitrum, and Polygon.
- Aave: In the DeFi lending and borrowing sector, Aave has become an increasingly prevalent protocol. Also built on Ethereum, Aave lets users deposit crypto to earn interest or withdraw a loan using crypto collateral.
- Audius: Built on the Flow blockchain, Audius is trying to decentralize the music streaming industry. Thanks to its AUDIO token, fans can vote for their favorite tracks and support artists who publish on the platform.
- Magic Eden: Founded in 2021, Magic Eden has swiftly become one of the major NFT dApps on Solana. People who use Magic Eden can mint, buy, and sell Solana NFTs.
The technology behind dApps is still under development. While dApps are still highly experimental, they can potentially become a more dominant aspect of our digital lives. Although it’ll take time for dApps to reach their full potential, there are already exciting signs in this new field.
While exploring today’s dApps can be fun, remember that there are many scams in Web3. At Worldcoin, we want to ensure everyone using dApps knows how to protect their crypto. We aim to put a share of our crypto in everyone’s hands for free while maintaining their privacy and anonymity. We’re also airdropping free DAI to anyone who downloads our app. Subscribe to our blog to know more.