How do DApps work? Decentralized applications: everything you need to know
DApps, which stands for decentralized applications, are basically apps that are powered by smart contracts and are based on the blockchain. These apps gained popularity on the Ethereum network.
They perform the same functions as traditional apps, and a user should not even notice any difference between the two, but they offer a significantly expanded feature set.
DApps present a novel approach to the management of one’s own financial affairs. When people think of traditional finance, they often think of things like lending money, borrowing money, saving money, and other similar activities.
If you will allow me to use this metaphor, each of these is driven, so to speak, by a central authority such as banks or other financial institutions.
However, many people believe that cryptocurrencies and blockchain technology are examples of what the future of finance will look like. If this is the case, then how do basic monetary operations such as loaning money work in a state that is decentralized?
A Brief Overview of DApps
Even though Bitcoin (BTC) was the first blockchain network ever created, the technology has since advanced to the point where it can now be used for much more than just financial transactions. In 2013, when Vitalik Buterin and his colleagues first proposed Ethereum (ETH), they had their sights set on something much more ambitious: a decentralized way of life.
Buterin had a vision for an internet that was based on blockchain technology and in which users controlled the network rather than corporations. In order to accomplish this goal, Ethereum would be used to power smart contracts, which are essentially automated if-then statements.
Because the rules and restrictions were pre-programmed into these contracts, they cannot be altered in any way. Because of this, any two parties can conduct business directly with one another, doing away with the requirement for centralized platforms.
It’s interesting to note that the term “Dapp” wasn’t officially defined until 2014, when a report entitled “The General Theory of Decentralized Applications, Dapps” was published. It was written by a number of authors, including David Johnston and Shawn Wilkinson, both of whom have previous experience in the field.
In the paper, decentralized applications (DApps) were defined as entities possessing the following characteristics:
1. A decentralized application is required to have open-source code and function independently of any outside influence. It is imperative that users have control over it, meaning that they should be able to suggest and vote on changes that will be automatically implemented.
2. It is required that all of the information be stored in a blockchain network that is open to the public. Decentralization is essential, as there cannot be a single point of attack that controls everything else.
3. In order to gain access, users will need to possess some kind of cryptographic token, and the DApps themselves are obligated to compensate contributors in the same token, including miners and stakers.
4. A decentralized application (DApp) needs to have a consensus method that can generate tokens. Examples of such methods include proof-of-work (PoW) and proof-of-stake (PoW).
Following this, the paper proceeds to divide decentralized applications, or DApps, into three distinct “types” or “layers” based on the type of interaction that users have with them.
Layer-one decentralized applications each have their own independent blockchain and exist independently. This category of decentralized application (DApp) includes some of the most well-known projects, such as Bitcoin. For instance, they call for a consensus algorithm and rules that are already baked in.
Layer-two decentralized applications, or DApps, are typically constructed on top of layer one, utilizing the power of the aforementioned blockchain. Tokens, which are used for interactions, are frequently considered to be protocols.
A layer-two decentralized application (DApp) would be something like a scaling solution that was built on top of Ethereum. Transactions can be processed on this second layer before being committed to the first, thereby relieving some of the load that is being placed on the main chain.
Layer-three DApps are built on top of layer two, and they frequently store the information that is necessary for the first two layers to interact with one another.
It is possible that it will store the application programming interfaces (APIs) and scripts that are required for layers one and two to function correctly. For instance, a layer-three protocol could house multiple layer-two decentralized applications (DApps), thereby improving the user experience across all of them.
DApps, or decentralized applications, are various software programs that are driven by a central blockchain, according to the definition provided in the paper. If they satisfy the requirements outlined above, then the applications in question are considered to be decentralized applications (DApps), even if some of them build on top of the initial layer.
Why use DApp?
Apps that run on a decentralized network have many advantages over those that run on centralized networks. Because of the revolutionary smart contract, there is no need for a third party to be involved in this transaction.
If you use an app like Venmo, you can send money to anyone; however, there is a fee associated with transferring those funds to a bank account. In addition, the arrival of moving fiat can sometimes take days.
When you send money through a decentralized app, on the other hand, you won’t have to pay any fees at all or very little fees at all. Users will not only save money on transaction fees as a result of this, but they will also save time because decentralized transactions are nearly instant.
Naturally, decentralized applications do not operate on centralized servers either. Because there is no physical device to aim an attack at, decentralized platforms are immune to any and all forms of assault. This is one of the advantages they offer.
This not only makes the network more secure, but it also ensures that there will be no downtime in the future. Always a possibility is gaining access to these applications.
DApps have the potential to be used in almost any sector, including the gaming industry, the medical field, governance, and even file storage. As a direct consequence of this, the use of decentralized applications is almost identical to that of conventional software.
Even though users will benefit from all of the changes made on the backend, users should not notice any difference in their experience. The way in which users interact with applications in this manner is referred to as Web 3.0, which also refers to the decentralization of information.
When it first began, the web was a space that anyone could use to access a wealth of information. Large corporations have, over the course of time, centralized or otherwise made use of it. Although these organizations provide it “for free,” doing so requires us to hand over our personal information, which the organizations then sell in order to make a profit.
When this occurs, businesses have control over the information at their disposal and are aware of their customers’ shopping preferences, as well as their financial situation and the people they are connected to. Because they control it, they also have the ability to take it away. Here we are in Web 3.0, where the use of DApps does not come at the expense of users’ privacy.
Instead, a user has the option to share only the information that is required for a particular purpose, such as a medical checkup or a loan. They can also choose who sees the information and for how long. It’s possible that businesses will pay for this access as well, which will ensure that users will benefit from it as well.
Trust is another issue that needs to be addressed. In a world in which large companies that have a reputation for having strong security are leaking usernames, emails, and passwords, it is difficult to trust anyone completely.
The Downsides of DApps
Despite the possibility that decentralized applications will usher in a world liberated from corporations, the industry is currently grappling with a number of significant challenges that need to be addressed.
To begin, the absence of a centralized authority may result in a more gradual pace of update and platform change. After all, one of the parties is free to modify their app in any way they see fit.
A decentralized application (DApp), on the other hand, calls for the participation of the majority of the governance even for the smallest of bug fixes. As users weigh the benefits and drawbacks of any proposed change, this could take several weeks or even a few months.
Additionally, in order for decentralized applications (DApps) to function correctly, there must be a sizeable user base. In order to merely interact with it, they require nodes, governance, and users. Accessing decentralized applications (DApps), on the other hand, can be quite challenging in this early stage, and many users aren’t seeing the support they require.
It’s possible that in the future, accessing a DApp will simply require a download. However, for the time being, users are required to download a browser that is compatible with DApps, then send the necessary cryptocurrency to that wallet and interact from there.
Users who are accustomed to working with technology shouldn’t have any trouble with this, but the vast majority of people won’t even know where to begin.
DApps around the world
The use of decentralized applications (DApps) in the financial sector may appear to be an obvious choice, but these applications have the potential to revolutionize virtually every market. Let’s take a high-level look at some of these benefits in a variety of industries, including gaming, social media, and the financial sector.
Finance
DApps are able to be used for conducting business by both those who lend and those who borrow money. When dealing with banks, depositors are eligible to receive a certain interest rate on their funds saved.
The more money a person puts away in savings, the more money a bank has to lend out, and the more money both the person and the bank make through interest.
However, the bank, which performs the function of a centralized entity, receives a larger share of the profit than the lenders might prefer simply for the service of providing a location to store the money.
Because there is no need to pay an intermediary when using a DApp, lenders keep the full amount of interest they earn. In addition to this, they have a greater degree of control over loans, and at the same time, they are earning tokens from the platform that they have chosen to lend on.
Borrowers, on the other hand, have more leeway in determining both the amount of interest they must pay and the amount of time they must do so.
In point of fact, some platforms enable borrowers to pay off their interest over a period of months or even years, provided that they meet a certain minimum payment threshold.
The borrower and the lender can negotiate the terms of the loan, including the interest rate, to reach a decision that is equitable for all parties involved.
After everything is said and done, the distribution of the proceeds can take place instantly thanks to the technology of smart contracts. There is no requirement to involve attorneys or any other types of third parties, which would make the process of confirming the agreement take more time and result in increased expenses for both parties.
Social media
Users stand to gain a great deal from decentralized applications (DApps) for social media. To begin, there is no one to censor the posts, which means that everyone has complete freedom of speech. On the other hand, if certain posts become a nuisance for the community, members can vote to have them removed.
Earning potential also increases for influencers. On traditional platforms such as Twitter, the company makes the most money off of tweets that are particularly popular. It does so by earning money through advertisements from the many people who visit the site, while the author receives, well, nothing financially speaking.
Users of social media decentralized applications (DApps) can run advertisements and receive full payment for doing so, as opposed to the company taking a cut of the revenue generated by those advertisements.
Gaming
Gaming has always been an interesting use case for decentralized applications. At this time, video games require players to spend dozens of hours cultivating a character — a character in which they have probably already invested real money — only for that character to wither away when the player moves on to another game.
In terms of value, decentralized applications (DApps) offer a solution that is more interesting. Take, for instance, the game CryptoKitties as an illustration. The “tokenized asset” that the players obtain is a cat in this example. The value of that cat will increase as it matures over time if it is cared for appropriately.
After that, a user is free to set any price they want for the sale of that cat, provided there is a buyer willing to pay that price.
In addition, some cats have the ability to mate with other cats, which can result in the creation of an even rarer and possibly more valuable cat. Players are free to do anything they want with these tokenized pets, including trading, collecting, and trading again.
Their time investment ends up being something that is truly valuable. Imagine that concept implemented in a game that was more developed and had several hours’ worth of playtime, even though there aren’t very many right now. It’s possible that we’ll spend all of our time gaming in the future.
Voting and administrative control
Voting is typically a difficult and uncomfortable process. In many cases, it requires the completion of a number of different validation steps, some of which are inaccessible to citizens who are unable to afford adequate housing or who are dealing with other issues. That’s not even mentioning things like tampering and other illegal activities of a similar nature.
With the help of smart contracts, a voting DApp can make the process accessible to everyone. A vote can basically be cast by the community on a list of different proposals.
The next step is for them to decide how long users have, say, twenty-four hours, to “stake” their vote by exchanging tokens for it. Because of this, participation is open to everyone, and even anonymous voting is possible for anyone.
Votes are saved in a distributed network, making them unchangeable and impossible to manipulate in any way. In addition, smart contracts can be programmed to provide voters with a relevant token as a reward for their participation, thereby encouraging an unprecedented number of people to exercise their voting rights.
Fundraising and advertising
While doing their online browsing, a large number of users make use of ad blocking software. This is obviously a problem for websites that are trying to generate revenue, but in some ways it is understandable given how annoying advertisements have become in a variety of contexts. This can be remedied with a browser DApp.
When users surf the web, they do so with an ad and tracker blocker that is integrated into their browser, and in the process, they earn cryptocurrency. Now, when users come across creators and websites that they would like to support, they have the option to choose whether or not to accept contributions.
This indicates that the longer a user stays on a particular website, the more money they will ultimately pay to access that website. Users even have the option to enable advertisements on those particular websites, which ultimately benefits them more.
Maintaining your anonymity is of the utmost importance here. Users have control over who can track them, which allows them to protect their personal information while still providing financial support to platforms that are operating at a loss. The outcome is beneficial for both parties.
