What are dApps?
dApp (Decentralized Application) is an application that interacts with a blockchain in one form or another. The term “dApp” denotes any existing decentralized digital applications powered by the blockchain or P2P networks.
P2P networks
n a peer-to-peer network, computers on the network are equal, with each workstation providing access to resources and data. This is a simple type of network where computers are able to communicate with one another and share what is on or attached to their computer with other users.
The absence of a single point of management is the essential characteristic of all dApps. Smart contracts, or self-executing code, are a backend mechanism that lets users interact directly with the dApp.
Decentralized finance (DeFi) and decentralized applications (dApps) allow anyone with an internet connection to participate in a new generation of financial services. DeFi dApps represent a formidable alternative to traditional financial services, and they are growing in popularity thanks to the trustless, immutable, and transparent characteristics of blockchain.
Decentralized applications (dApps) are web services built on a blockchain. Using a blockchain like Ethereum allows applications to be trustless (i.e., they do not require participation or verification from centralized, third-party intermediaries), transparent (i.e., all transactions and activity are freely and easily accessible and viewable to the public), and immutable (i.e., all transactions and activity are validated and secured to the blockchain and cannot be tampered with).
And, while dApps can be designed to provide any web service (e.g., games, file-sharing networks, and social media platforms), the most widely discussed use for dApps is in financial services, as evidenced by the notable growth of decentralized finance (DeFi).
Starting with MakerDAO, the first noteworthy wave of dApps was launched in 2017, the same year Initial Coin Offerings (ICO) on Ethereum achieved widespread popularity. Although the Bitcoin network supports dApps to some extent, most dApps are built on Ethereum.
DeFi dApps allow lending, borrowing, and other financial services that centralized service providers typically offer. DeFi projects have already captured billions of dollars in value and look to continue this trend as more and more people become aware and familiar with their unique value proposition.
Benefits of Decentralized Apps
Unlike traditional software on centralized servers, dApps run on a decentralized network of censorship-resistant nodes that are difficult to shut down. Given the transparent nature of the blockchain, most dApps feature open-source software, which users can examine and audit themselves.
Most blockchain protocols on which dApps are built are secured and incentivized through either a Proof-of-Work (PoW) consensus mechanism, a Proof-of-Stake (PoS) consensus mechanism, or a combination of both.
While there are many other types of consensus mechanisms, these two are by far the most prevalent. These consensus mechanisms work to maintain network security while avoiding centralization issues in their respective ways. Additionally, dApps are typically designed to incentivize users — typically through token rewards — to maintain the security, transparency, and operational effectiveness of the dApp itself. Perhaps most importantly, dApps are global and available to most people online.
dApps Are the Building Blocks of the Future
DeFi dApps are for more than just simple applications. Developers can design decentralized autonomous organizations (DAOs) that operate as apparatuses governed through code democratically voted upon by users. The emerging marketplace of DeFi Ethereum dApps is being built with composability in mind, which means that different services can be used interoperably to fulfill a near-limitless range of intended use cases. Sometimes referred to as “money legos,” dApps can be stacked on each other and are highly modular yet intuitive and simple from an end-user perspective.
The decentralized lending platform Maker and stablecoin DAI can be building blocks to access dApp services on Compound, Yearn. Finance, Uniswap, and many others. Decentralized applications like Compound are algorithmically automated to maximize returns.
Further, some dApps strictly focus on data and analytics and offer users an easy way to optimize their financial returns. In short, dApps are already furnishing the core functionality that may actualize the paradigm shift away from centralized financial services to a decentralized model.
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