A standard version of applications operated by the Ethereum network mainly, powered by smart contracts and essentially based on the blockchain network, is known as decentralized applications or DApps.
The users of the applications cannot figure out much difference between traditional and decentralized apps; however, they provide many more features to the users than the normal ones.
DApps have provided users with a new medium of interaction with the financial mechanism. Usually, considering the financial mechanism reminds one of several phenomena such as saving, lending, borrowing of funds, etc. However, if all processes are carried out through some central authorities, such as financial institutions or banks, these may be empowered more.
Therefore, the blockchain network and cryptocurrencies can be considered representatives while thinking about the future financial system.
Here is a thorough guide article to help the readers understand the concept of decentralized applications and the features and services offered to the users. Moreover, it will help in understanding the pros and cons of them and what they hold for the upcoming generations.
What are Decentralized Applications (DApps)?
The digital programs or applications located on a blockchain network and operating through a peer-to-peer (P2P) network of computers are known as decentralized applications. These applications are similar to other software applications running on a device or website.
Moreover, it allows the developers to build various other applications on its top. No single authority controls these applications, and they can be used to create multiple other apps such as gaming, social media, decentralized finance, web browsing, etc.
Historical Explanation of Decentralized Applications (DApps)
Blockchain technology evolved long ago when a typical financial transaction occurred, although Bitcoin was founded much later. The concept behind the foundation of the Ethereum network by Vitalik Buterin and his fellows in 2013 was creating a decentralized way of life, providing people control over their belongings.
Buterin wanted to hand over the control to the users instead of organizations by creating an internet system based on the blockchain network. To provide this opportunity to the users, the Ethereum network uses smart contracts to automate their if and then statements.
The rules and limitations integrated with these codes cannot be manipulated; therefore, smart contracts are rigid. This also eliminates the need for an intermediate body allowing the users to carry out transactions without the involvement of any central authority.
In 2014, a report named “The General Theory of Decentralized applications, DApps” was released; that was written by multiple authors having expertise in the field, such as Shawn Wilkinson and David Johnston. The report adequately explained the concept of DApps. It elucidated these characteristics of decentralized applications and treated them as entities.
- The decentralized application operates without the interference of any third party and has an open-source code. It is usually controlled by the users whenever they want to change the system and vote for it. The proposed change is then implemented in the system automatically.
- The blockchain network holds all the information that can be accessed by anyone easily. As there is no significant point to attack the system, it remains safe due to decentralization.
- In order to access the decentralized applications, there must be some sort of tokens used. Moreover, the contributors, such as miners and stakers, should be rewarded with the same tokens.
- A particular consensus mechanism, such as Proof of Work or Proof of Stake protocol, must be adopted by the decentralized application.
The report explains these decentralized applications as applications empowered by a root blockchain technology. If the applications that are built on top of the initial layer meet the above characteristics, they will be considered DApps too.
Depending on these features and the ways of interaction with the users, the authors classify decentralized applications into three types. These three types are mentioned below.
- Layer One DApps: These decentralized applications are present automatically on their specific blockchain network. Bitcoin is one of the most popular projects of this kind of DApps. However, a proper consensus mechanism and built-in regulations are required to operate these applications.
- Layer Two DApps: These decentralized applications are typically created on top of layer one DApps that empower the specific blockchain network. These protocols usually require a protocol to interact.
An excellent example of layer two decentralized applications is the scaling solution created at the top of the Ethereum blockchain network. It also helps decrease the load from the main chain as the transactions are processed first at the second layer and then transferred to the first one.
- Layer Three DApps: These decentralized applications are created above layer two of the chain that helps interact with the other two by holding the required information. For the proper functioning of layer one and layer two, the required scripts and application programming interfaces (APIs) are usually stored on this layer.
For example, a number of layer two decentralized applications are located on layer three, which helps in improving the overall experience of the user.
Why Should Decentralized Applications Be Used?
Compared to the applications running on the centralized network, decentralized applications offer various additional benefits. Smart contracts have made it possible for users to carry out transactions without the involvement of any third party.
They can send money to anyone free of cost by using several applications available such as Venmo etc., that would otherwise charge a fee if carried out through banks.
In addition, it takes a few days to transfer fiat from one account to other. However, if one moves money using decentralized applications, he has to pay minimal fees or no charges. This helps save money that may be cost as transaction charges and time as transactions through decentralized applications are instant.
As no centralized servers are used to operate the decentralized applications, it makes them safe from cyberattacks. As there is no central point that could be vulnerable to attack, decentralized applications are much safer than centralized ones. This helps the users to access the DApps at any time as they do not have to face any downtime in addition to being more secure.
DApps have implementations in all kinds of industries; they may include file storage, governance, gaming, and even the medical field. Therefore, one can consider decentralized applications similar to normal ones.
However, all the manipulations at the back end provide advantages to the users. Moreover, how the users interact with the decentralized applications also leads to the decentralization of information and is referred to as Web 3.0.
The web was initially loaded with information that could be accessed by anyone. With the passage of time, it was controlled and exploited by the larger organizations in the industry. This made the data a central entity where the customers’ data was sold at a profit by these organizations. They would take the data for free and then earn profit from it.
After getting hold of the data, they manipulate their customers using it by knowing their preferences, their budget, and the time they require. However, to provide the opportunity for the customers to earn a profit, some companies may also pay to provide them access.
In addition, despite providing complete security to the customers, some of the organizations might still leak the users’ personal credentials; therefore, it becomes difficult for people to trust anyone.
Applications of Decentralized Applications (DApps)
The decentralized applications can prove an excellent innovation in every field of industry. Here are some of the benefits that these applications provide to users through their advanced features and services.
- In Financial Sector
To carry out their business correctly, money lenders and borrowers can use decentralized applications. Depending on the money saved in the banks, lenders can earn a specific interest rate too. Both parties can profit through it, as the more the customer keeps in the bank, the more the bank can give in the form of loans.
But it should be kept in mind that being a central authority, the bank gets a higher percentage share in the interest earned as it provides the customers a place to store their assets. The borrowers can also get the convenience as they have more time to repay the loan. Some organizations even allow borrowers to return the interest for up to a year or more.
Moreover, to ensure a fair share for both parties, the borrower can also discuss the interest rate with the lender before finalizing. After that, smart contracts can be used easily to complete the further steps of the deal. This also saves time and money as no involvement of any mediator or lawyer is required to confirm the agreement between the two parties.
- In Social Media
Social media decentralized applications are providing a lot of benefits to customers. Firstly, it gives freedom of speech to the people as there is no central authority involved in censoring the data.
In case there are specific posts that may offend others. The public can vote collectively to remove them. In addition, it also provides an excellent opportunity for the influencers to earn.
Through commonly used platforms such as Twitter, the famous and liked tweets by the users help the platform earn profit. The platform also makes advertisement revenue using all these site visits; however, the tweet’s author does not achieve anything.
On the other hand, decentralized social media applications allow users to earn revenue by running advertisements. These applications use their tokens and, through the innate tipping system, help the users to gain. It also prevents the central organizations from taking all the profit share.
- In Gaming
The most interesting usage of decentralized applications is in the gaming industry. At present, traditional games require investing several hours in excelling in a game. In addition, if one invests money in the game when the player goes to the next step, they are useless.
Therefore, in terms of value and time, gaming with decentralized applications is a better option. In these games, the player has to buy a tokenized asset as specified by the game.
In case that asset is raised correctly according to the requirements of the game, the value of the asset increases. Moreover, when there is a considerable buyer, the player can sell that particular asset reasonably.
Moreover, the players can also produce different and rarer assets through further experimentation and earn more profit. Players can do anything with their assets to collect or trade with them. The time they invest in playing the game increases the worth of their asset ultimately.
Although there are not many games based on decentralized applications recently, however, in the future, it might provide full-time gaming opportunities.
- In Governance and Voting
Voting in traditional applications is a messy procedure. It is usually not accessible to everyone in the community who does not have a proper habitat or may be facing other issues; moreover, it requires a lot of validation before reaching the final step. In addition, illicit activities such as rigging and tampering cannot be denied.
These issues can be solved by using a decentralized application for voting through smart contracts. It allows the community to cast its vote for a list of options available.
After that, a specific time frame is provided to the users in which they can stake their votes by using the tokens. This helps the participants cast their votes and allows those who do not want to reveal their identities to participate.
The votes cannot be manipulated or tampered with as they are stored on a decentralized network. Moreover, the participants who actively participate in the whole procedure are also awarded tokens by the smart contracts. This encourages more people to participate and cast their votes.
- In Advertising and Fundraising
Usually, a website is blocked by an advertisement while browsing. This acts as a hurdle for the websites that are trying to earn revenue through them. However, this behavior is understandable as the advertisements have become nasty in many ways. All this mess can be fixed by using decentralized applications.
Users can earn crypto while browsing the web as there is a tracker blocker and an advertisement integrated within the browser. The users can choose contributions as they finally get access to the websites and creators they want to explore.
Thus, a site will be paid more as the user spends more time browsing. In addition, the advertisements can be enabled by the users too to spend a relatively long time on the site.
The significant feature provided by these applications is privacy. The users can select the ones who can access their credentials and track them. It creates a win-win situation for all, as they can protect their personal information while equally contributing to the platform.
Advantages of Decentralized Applications (DApps)
No single entity is allowed to own the decentralized applications. There are several benefits attached to them, providing convenience to the users. Some of them are mentioned below.
- More Secure
As there is no central authority controlling the DApps, they are usually considered safer than traditional applications. However, users should still take precautionary measures to keep their data secure.
- Encryption of Data
To track all the activities on the blockchain, the blocks are synchronized with each other, which also helps in the verification procedure. It becomes difficult for scammers and cybercriminals to intrude into the network and manipulate the data at any point.
- Data is not Lost
The users do not need to worry about data loss as it is stored on a decentralized network. In case one node gets disturbed, others eventually compensate for the loss immediately.
- Cost Efficient
There are usually higher charges integrated with centralized networks. However, transactions through decentralized networks occur using crypto, making it financially affordable for the users.
- No Content Regulations
The centralized applications must follow some specific rules and regulations per geographical region. However, there are no restrictions for DApps allowing users to say and upload all kinds of data they want.
Disadvantages of Decentralized Applications (DApps)
Though decentralized applications are successfully providing their services in every industrial sector, certain risks are also attached to them. A few of them are mentioned below.
As there is no central authority to control the network, at times, it becomes difficult to manage it. A little issue in the system takes too much time to achieve consensus among the participants of the network. Therefore, sometimes weeks or months are consumed to set up an update properly.
- Network Effects
A network should have a higher user base and a significant network effect for it to operate efficiently. In the initial stages, the number of users over the network is relatively less.
- KYC Procedure
As there is no need for the users to reveal their real identities, it sometimes becomes difficult for the network to verify the actual user.
DApps is one of the innovations of blockchain technology that is changing the world in multiple sectors by providing users with new and exciting services and features. However, it is mandatory for users to properly understand and adapt to the concept of this technology before ultimately shifting towards it.