What Are Decentralized Applications (dApps)?
Decentralized applications (dApps) operate across blockchain or peer-to-peer (P2P) networks, allowing them to function without a single controlling authority. Built often on Ethereum, these applications serve various purposes like finance, gaming, and social media while safeguarding privacy and resisting censorship.
KEY TAKEAWAYS
Decentralized applications (dApps) run on a blockchain network, enabling them to operate without a central authority.
DApps provide benefits such as improved user privacy, resistance to censorship, and enhanced security due to blockchain technology.
Despite their advantages, dApps face challenges like scalability issues, difficulty in updating code, and potential security risks.
DApps have diverse applications, including financial services, supply chain management, social media, and education.
Users should be cautious of scams and security vulnerabilities when interacting with dApps due to their decentralized nature.
How Do Decentralized Applications (dApps) Work?
A web app such as Uber or X (formerly Twitter) runs on a computer system that is owned and operated by a company with authority over the app and its workings. No matter how many users there are, the backend is controlled by the company.
DApps operate a bit differently. They run on a P2P or a blockchain network. For example, BitTorrent, Tor, and Popcorn Time are applications that run on computers that are part of a P2P network, which allows multiple participants to consume, feed, or seed content.
DApps are similar but run on a blockchain network in a public, open-source, decentralized environment. They are free from control and interference by any single authority. For example, a developer can create an X-like dApp and put it on a blockchain where any user can publish messages. Once posted, no one except the message originator can delete the messages.
Centralized vs. Decentralized Apps: Key Differences
A centralized app has a single owner. The application software for a centralized app resides on one or more servers controlled by the owner. Users interact with the app by downloading a copy of it and then sending and receiving data back and forth from the company's server.
A decentralized app operates on a blockchain or peer-to-peer network of computers. Users engage in transactions directly with one another rather than relying on a central authority to facilitate them. The dApp might be free, or the user might need to pay the developer in cryptocurrency to download and use the program's source code. The source code nearly always uses smart contracts, which complete transactions between people. Smart contracts remove the need to trust that the other party will execute their part of a transaction. The apps also rely on blockchain protocols that hide personal information.
Why Are Decentralized Applications Important?
Several features of dApps can significantly change how information and resources are shared.
Cost and Efficiency
Because dApps operate on decentralized networks, there is no need for an intermediary. This approach can reduce costs, enhance efficiency, and improve accessibility. For example, instead of having to rely on a bank, imagine having nearly 100% control of every aspect of your finances. This can have major implications for many industries, especially the financial sector.
Security
By using blockchain technology, dApps can enhance security in various business and personal processes. Blockchains make data immutable by leveraging cryptographic techniques and distributed automated consensus. Because the ledger is shared and compared across all users, data cannot be altered.
Accessibility
DApps are accessible to anyone with an internet connection. It doesn't matter where you live—all you need is internet access. This global accessibility democratizes access to many different types of services, digital assets, and information.
Transparency
Blockchain-based dApps maintain transparent records of transactions, meaning users can verify the integrity of data without relying on centralized authorities. This transparency is critical for distributed and anonymous networks because users need to know the system is trustworthy.
Practical Applications of dApps
DApps are designed to decentralize various functions and applications, removing the need for intermediaries. Examples include self-executing financial contracts, multi-user games, and social media platforms.
DApps have also been developed to enable secure, blockchain-based voting and governance. They can even be integrated into web browsers to function as plugins that help serve ads, track user behavior, or solicit crypto donations.
Some examples of practical uses for dApps include:
Financial services: Facilitating peer-to-peer financial transactions, such as currency exchanges or asset transfers.
Supply chain management: Tracking the movement of goods through a supply chain, ensuring transparency and accountability.
Identity verification: Securely storing and verifying identity information, such as for voter rolls or passport applications.
Real estate: Facilitating real estate transactions directly between buyer and seller, tracking property ownership and related documentation, such as deeds.
Healthcare: Storing and tracking healthcare records and facilitating communications between healthcare professionals.
Education: Creating decentralized learning platforms that allow students and teachers to interact and collaborate directly without the need for intermediaries.
Social media: Creating decentralized social media platforms that allow users to interact and share content without being censored by a centralized authority.
Predictive markets: Creating decentralized platforms for predictive markets, allowing users to make bets on any event.
Common Scams and Risks with dApps
Scams have been perpetrated through dApps. Ponzi schemes, which use new investors' money to pay earlier ones, have occurred on dApps.
Fake initial coin offerings (ICOs) have been used to raise funds for developing a new cryptocurrency or dApp that the fundraisers have no intention of creating.
Phishing attacks, which use fake websites or emails to trick people into revealing sensitive information, have been seen on dApps. In addition, some dApps have been used to distribute malware or viruses, which can compromise users' devices and steal sensitive information.
Users should be cautious and do their due diligence when interacting with dApps, as the decentralized nature of these applications can make it difficult to track or hold perpetrators accountable.
FAST FACT
Industry analytics group DappRadar found that 312 hacks and vulnerabilities affected dApps in 2022, leading to losses of around $48 billion.1 Financial losses decreased by 96% to $1.9 billion in 2023, but the frequency with which hacks and exploits were used increased by 17.3%.2 In the first quarter of 2024, losses increased by 9% to $407 million compared to Q1 2023's $373 million.3
Pros and Cons of Decentralized Apps
Advantages
Many of the advantages of dApps center around their ability to safeguard user privacy. DApps use smart contracts to complete transactions between two anonymous parties.
Supporters of free speech argue that dApps can become alternative social media platforms. A decentralized social media platform is resistant to censorship because no single participant on the blockchain can delete or block messages.
Ethereum provides a flexible platform that lets developers focus on finding innovative uses for digital applications. This could enable the rapid deployment of dApps in several industries, including banking and finance, gaming, social media, and online shopping.
FAST FACT
American cryptographer and computer scientist Nick Szabo introduced the term "smart contract" in 1996 as a graduate student at the University of Washington.4
Disadvantages
DApps are still in the early stages, so they are experimental and prone to certain problems and unknowns. There are questions about whether these apps can scale effectively. Also, there are concerns that too many applications requiring computational resources will overload a network, causing congestion.
The ability to develop a user-friendly interface is another concern. Most apps developed by traditional centralized institutions have an ease-of-use expectation that encourages users to use and interact with the app. Getting people to transition to dApps will require developers to create an end-user experience and level of performance that rivals popular and established programs.
Because they are decentralized, dApps are not subject to the oversight and auditing most centralized applications are exposed to. If the application's programming is rushed, unaudited, or sloppy, hackers will find it easy to break into it.
After deployment, a dApp often requires updates to enhance features or fix bugs and security issues. According to Ethereum, it can be challenging for developers to update dApps because the data and code published to the blockchain are hard to modify.5
Pros
Promotes user privacy
Resists censorship
Flexible platform enables dApp development
Cons
Experimental, may not be able to scale
Challenges in developing a user-friendly interface
Difficult to make needed code modifications
Security issues if programming is sloppy
Navigating Regulatory Challenges With dApps
One of the primary challenges regulators face with dApps is their decentralized nature. Traditional regulatory considerations are usually based on a specific location; since dApps are not centralized, it's tougher to regulate activity based on where transactions occur.
The Emerging Centralization of dApps
Consider the General Data Protection Regulation (GDPR) and its implementation within the European Union. DApp providers that serve the EU audience must comply with GDPR requirements, regardless of their home jurisdiction.
In December 2023, a European subnet of the Internet Computer Protocol (ICP, a blockchain DAO) was launched that provides an infrastructure and set of tools developers can use to create compliant dApps.6 If using the ICP becomes the standard way of ensuring compliance, the apps lose their decentralized standing because the ICP is centralized—nodes must be voted in by the DAO and can only be located in the EU.7
Some dApps issue tokens or conduct token sales to raise money. This may raise regulatory concerns as authorities work to protect investors—it is viewed by regulators as an unregistered securities issuance. Similarly, financial dApps like decentralized exchanges or lending platforms must follow know-your-client regulations.
Consumer Protection
There is also a consumer protection element even if the user is not exchanging money or goods. This includes personal data, privacy, and security protection. Agreeing to the transactions via signature puts users at risk; platforms such as MetaMask warn users to be aware that they could lose funds if they're unaware of what they agree to when using dApps.8
Examples of dApps
One popular example of a dApp is CryptoKitties.9 CryptoKitties is a blockchain-based virtual game that allows players to adopt, raise, and trade virtual cats. The game is one of the world’s first forms of interactive blockchain dApps.9
Each CryptoKitty is unique, owned by the user, and validated through the blockchain. Like other types of tradeable assets, its value can appreciate or depreciate based on the market. CryptoKitties are considered “crypto collectibles” because each digital pet is one-of-a-kind and verified on a blockchain.
Another example is Uniswap, a decentralized exchange protocol built on Ethereum.10 Uniswap enables users to trade directly with each other without needing an intermediary, like a bank or broker. This dApp uses automated smart contracts to create liquidity pools that facilitate trades. Users can trade their tokens directly from their wallets, providing a seamless and secure trading experience. Again, the existence of Uniswap is made possible by the decentralized nature of the application.
What Is Meant By Decentralized Application?
Decentralized applications are applications that are generally open source and use or facilitate blockchain and cryptocurrency transactions.
What Is the Most Popular Decentralized Application?
Cryptocurrency wallets like MetaMask are the most popular dApps, followed by exchanges like Uniswap and openSea. Gambling dApps like MetaWin are also very popular.
Is Bitcoin a Decentralized Application?
Bitcoin is decentralized, but it is not an application. It is a blockchain network with a cryptocurrency used as a payment system and speculative investment.
The Bottom Line
Decentralized applications (dApps) are revolutionizing digital interactions by running on blockchain networks instead of centralized servers. These open-source programs enhance user privacy, resist censorship, and enable direct peer-to-peer exchanges without intermediaries. While promising significant disruption in sectors like finance, gaming, and social media, dApps also face challenges in scalability, user interface design, and security. Users must exercise caution, as the decentralized nature of dApps complicates regulatory oversight, potentially exposing them to higher risks.
