The Decentralized Finance (DeFi) space exploded with the launch of numerous Decentralized Applications (dApps), many of which were made possible because multiple blockchains were released, which enabled developers to access programmable smart contracts.
Decentralized applications (dApps) are essentially these blockchain-based smart contract-powered versions of applications that run on top of a specific blockchain.
They act similarly to traditional applications; however, they leverage the power of decentralization and the public ledger to achieve their specific goals.
They are a representation of a new, modern and free way through which users can interact with personal finance.
The Need for Decentralized Applications (dApps)
Whenever someone thinks about interacting with personal finance, they think about processes such as:
- Lending
- Borrowing
- Saving
- Earning
Traditionally, these processes were powered by a central authority, such as a bank, brokerage, or financial institution.
This means anyone could access these services, assuming they had a proper bank account, ID, or access to a predefined amount of minimum capital.
Needless to say, a lot of people were locked out of financial services, especially the unbanked. Decentralized Applications (dApps) were developed to enable users to access financial services without needing a central authority.
History of Decentralized Applications (dApps)
Bitcoin (BTC) was one of the first blockchain networks to truly take the world by storm, and while it is, to this very day, the largest cryptocurrency and blockchain in terms of market capitalization, it does not have all of the functionalities found in newer, more modern blockchain networks.
Ethereum (ETH) was one of the first blockchains that implemented smart contracts, which paved the way for dApps as we know them today.
Ethereum’s mainnet went live on July 30, 2015, and will soon experience a transaction to Proof-of-Stake (PoS) with The Merge.
How Decentralized Applications (dApps) Work
A paper defined decentralized applications (dApps) as entities that feature specific functionalities as well as characteristics, including:
- To have open-source code and work without any third-party intervention. This means that it has to be user-controlled, as they can propose and vote on changes that get automatically implemented.
- All of the information needs to be held in a blockchain network that is publicly accessible, and decentralization plays a key role, as there cannot be a central point of attack.
- dApps need to have some sort of cryptographic token to be accessed, and they have to reward the contributors with the token in question, which can be miners or stakers.
- dApps have to function through a consensus method that generates tokens, which can be Proof-of-Work (PoW), Proof-of-Stake (PoS), or any other supported option.
There are three types of dApps, including:
- Layer-1: these are by themselves their own blockchain and require a consensus algorithm as well as built-in rules.
- Layer-2: these are built on top of one layer and utilize the power of the underlying blockchain, and are typically considered protocols due to the fact that they utilize tokens for interactions.
- Layer-3: These are built on top of layer-two and often hold the information which is required for the other two to interact.
How Decentralized Applications (dApps) Are Utilized
Many leading decentralized applications (dApps) are built on top of the Ethereum blockchain. However, any blockchain that supports smart contracts can be utilized to create them, such as Cardano, Solana, Algorand, and Tron, for example
Some of the most popular dApps include:
- Uniswap - a decentralized exchange (DEX) that enables users to swap tokens through a peer-to-peer (P2P) network rather than through a centralized intermediary.
- Compound - a Decentralized Finance (DeFi) lending protocol.
- Audius - a decentralized music-streaming platform
- Decentraland - A metaverse platform that enables users to interact as avatars and buy NFTs that represent virtual objects or land.
Note that there are thousands of dApp available, all of which aim to assist users when it comes to fulfilling a specific goal or finance-related activity.
Pros and Cons of Decentralized Applications (dApps)
There are numerous pros surrounding dApps, including:
- There is zero downtime, as once a smart contract gets deployed, the network will always be able to serve those that want to interact with it.
- There is a high level of privacy as nobody needs to provide real-world identity in order to interact with a dApp.
- They are censorship-resistant, as no single entity on the network can block users from submitting transactions, deploying dApps, or reading data from the blockchain.
- There’s also full data integrity, as the data stored on the blockchain is immutable and indisputable due to cryptographic primitives.
However, there are also some cons associated with dApps, including:
dApps can be a lot harder to maintain due to the fact that the code and data published to the blockchain can be harder to modify.
Network congestion is also an issue, as when a dApp utilizes too many computational resources, the network gets backed up. If the network has low throughput, such as Ethereum's 15 to 30 transactions per second (TPS), if transactions get sent faster than this, the pool of unconfirmed transactions can quickly grow.
It can be harder to engineer user-friendly experiences as well, as the average end-user might find it a bit difficult to set up a tool stack required to interact with the blockchain securely.
Moving Forward with dApps
It is clear that dApps play a major role within the crypto space and are an essential part of DeFi.
Many of the lending, borrowing, and other types of financial products on offer by the crypto space would be impossible to pull off without the utilization of dApps, at least for the average person.
dApps represent an entry point for anyone looking to access financial services without relying on centralized solutions that have no privacy and can experience downtime or maintenance.