To stay afloat, new Crypto initiatives must surf the waves of a cruel sea, which means that the turnover of new projects is significant. Because of the popularity of this growing business, the market is flooded with several different projects, all fighting for your attention, each promising high profits and no buyer’s regret.
It’s tough to tell which companies will succeed and are bound to fail. This blog will delve into the new trend: blockchain applications, or so-called decentralized applications (dApps).
We’ve seen decentralized applications reach their highest peak ever in 2022. Games, NFTs, and DeFi (the industry’s three primary categories) all showed an upward trend in 2021 and appear to be in a solid position to continue gaining traction in 2022.
With the hype and popularity surrounding decentralized applications, it’s essential to understand what they are and whether they are here to stay.
What are DApps?
dApps are built on blockchain technology and use a decentralized network of computers rather than a centralized server. They’re decentralized since they’re governed by a network of P2P (peer-to-peer) computers rather than a single entity.
dApps are decentralized apps, just like cryptocurrency is decentralized money. The blockchain simultaneously maintains copies of its growing data stack on many collaborating computers, referred to as “nodes.” These computers belong to the users, not the dApp’s creators.
Dapps can provide social networks, gaming, entertainment, productivity tools, and more, just like traditional apps. Many are intended to assist customers in gaining access to decentralized financial services or DeFi. Because of this, the Ethereum network white paper divided dapps into three categories: “financial,” “semi-financial,” and “other.”
So far, Ethereum has been the most prominent platform for dapps. One of the network’s key goals at the outset was to make it easier to develop dapps.
Dapp users may feel more secure knowing that the application’s authors have no control over its use – at least not in the traditional sense. How?
It’s all because of smart contracts, which are computer programs installed on a blockchain and designed to carry out the terms of an agreement without the need for human intervention.
This makes them more secure and difficult to hack. The developers of dApps use blockchain’s distributed ledger technology (DLTT) to create applications that don’t rely on a central authority. Because of this, dapps offer users a higher degree of control and security than traditional apps.
The Main Features of Dapps
The key features of DApps include;
- Open source– DApps are open source, meaning that anyone can view and modify the code. This allows for more transparency and trust between users and developers.
- Decentralized– DApps are decentralized, meaning that a single entity does not control them. Instead, they are governed by a network of PTP (peer-to-peer) computers.
- Autonomous– DApps are autonomous, meaning that they are self-sustaining and do not rely on a central authority.
- Blockchains– What holds the app together if there isn’t a central entity? Instead of one central entity, Dapps use an underlying blockchain (like Ethereum) to coordinate.
- Smart contracts– Ethereum smart contracts are used in decentralized applications to automate the execution of particular rules.
- Algorithms– The decentralized application community agrees on a cryptographic algorithm to demonstrate proof of value.
- Flexible– the platform enables developers to create an app for a specific function or use it as a base layer and build on top.
The Main Categories of DApps
Dapps are divided into three categories in the Ethereum white paper published in 2013 by the Ethereum founder Vitalik Buterin. They are as follows:
- Financial apps
- Semi-financial apps
- Other apps
DeFi applications, short for “decentralized finance,” are a popular term for financial applications.
The goal is to utilize blockchains (particularly Ethereum) to enhance more complex financial applications like lending, insurance, wills, and stablecoins (alternative coins that try to keep cryptocurrency prices stable.)
Some well-known examples of DeFi applications include:
- MakerDAO– MakerDAO is a decentralized loans platform that employs smart contracts to bind digital assets to the Ethereum blockchain, leading to the creation of the DAI stablecoin. Because it is included in every new Ethereum-based protocol, the DAI stablecoin is the most popular DEFI application. Unlike other stablecoins, DAI does not have administrator backdoors that prevent addresses from changing their tokens.
- Augur– A decentralized prediction market. It allows users to build and participate in prediction markets for nearly any event, from sporting events to election outcomes. Augur not only allows users to wager on the result of world events, but it also allows them to crowdsource statistics about the chance of such developments occurring.
- Uniswap– Uniswap is a decentralized exchange (DEX) that allows anyone to participate in ERC-20 token transactions without a centralized authority or intermediary. It provides permissionless access to financial services, adhering to the Ethereum blockchain’s decentralized values.
- Bancor– A decentralized liquidity network for tokens. Bancor is a protocol that enables users to create and deploy automated liquidity pools and offer liquidity and swap tokens. Liquidity provision to Bancor is permissionless (no central entity can prevent or control the process) and simple for daily users (a few clicks to add/withdraw liquidity).
The second type of app is similar to the first, but it combines money with “a heavy non-monetary aspect,” as described by Buterin in the Ethereum white paper.
Buterin used the example of Ethereum developers creating “bounties,” which are rewards that can only be unlocked if a task is completed. Bounties are given out to bandits who can apprehend a person or criminal in western countries. However, the bounties in dApps get rewarded in this case for remarkably less dangerous undertakings, such as completing a challenging computer problem.
The smart contract, in this case, can tell if the bounty hunter delivered a working solution and will only disburse payments if this requirement is met.
Another example is a crop insurance program that relies on weather data from the outside. Let’s say a farmer buys a derivative that pays out automatically if a drought destroys their crops.
These smart contracts rely on so-called “oracles,” which give real-time data about the universe, such as how much rain fell last season. Although, many developers are doubtful that oracles can get utilized in a decentralized fashion. Users must trust that the data feed provides accurate information and is not manipulating the data for their financial gain.
Because Ethereum is such a flexible platform, developers are coming up with new proposals that don’t fit into the traditional financial section.
This approach could be used, for instance, to develop a decentralized social network that is resistant to censorship. Most prominent social media platforms, such as Twitter, filter some postings, and some critics believe that the rules for what content is blocked or “downranked” are uneven.
So, once you publish a message to the blockchain through a decentralized software like Peepeth, no one can delete it, not even the firm that created the platform. It will exist eternally on Ethereum.
Some people look forward to expanding the concept of decentralization even further. Is it conceivable to do the same thing with organizations that Bitcoin did with banking authorities?
Decentralized Autonomous Organizations (DAOs) are decentralized applications that try to respond “yes” to that question. The idea is to create a corporation without a leader by setting rules from the start regarding how members can join, vote, and release company funds, among other things. The DAO would function under these rules indefinitely once it’s up and running.
While DAOs are theoretically possible, the first such experiment, fittingly dubbed “The DAO,” failed. Launched in 2016, “The DAO” was a $50 million disaster due to a technical vulnerability. Organizations such as Aragon, Colony, MakerDAO, and others, on the other hand, are picking up where The DAO left off.
The Benefits of dApps
There are a few key benefits that dApps offer over traditional applications.
First, they are more trustworthy because no central authority controls them. This is because dApps are based on blockchain technology, a tamper-proof distributed ledger.
Second, they are more democratic because a single entity does not control them. This is especially essential in cases where the traditional app is subject to censorship.
Third, they are more secure because they are cryptographically secured– means that the data is encrypted and cannot be tampered with.
The Challenges of dApps
Decentralized applications are still in their early stages of development, and developers have yet to face several critical issues with the underlying network holding them back. For one thing, as Ethereum’s user base sprouts, dapps can become extremely costly to maintain. Although traditional apps have scaling challenges, those issues are amplified in a decentralized environment, which cannot work without cooperation and coordination among various stakeholders by its very nature.
So, while dApps are still in their early stages, they have the potential to change the way we interact with the world. dApps are more trustworthy, democratic, and secure than traditional applications and have the potential to revolutionize a variety of industries. However, they are still facing some critical challenges that developers need to address before reaching their full potential.