The invention of cryptocurrency, blockchain, and smart contracts has opened up a new world of technological possibilities.
Bitcoin, the first cryptocurrency, provided a way for people to transfer value independently of any third-party payment processor thanks to blockchain technology. This same concept has also been applied to more complex transactions, like those involving software applications.
Software applications that run independently of a central authority are known as dApps, or decentralized apps.
What is a dApp?
An application that has no central authority governing it, isn’t hosted on one centralized server, and runs on a distributed, decentralized peer-to-peer network is known as a decentralized application (dApp).
A dApp is, for the most part, similar to any other software application — for instance, it could function on a desktop or mobile device, and will have a graphical user interface (GUI) just like any other app.
What makes dApps different is how they function behind the scenes, with the app being powered by transactions taking place on a decentralized network. Most or all of the backend programming happens on a decentralized network like Ethereum.
How dApps Work with Ethereum
Most dApps run atop Ethereum. Other protocols exist that perform similar functions, such as Cardano and the Ouroboros consensus protocol, Tron, or EOS, but Ethereum is the dominant market player in this space.
The Ethereum protocol gives users the ability to deploy and run smart contracts. A smart contract is a virtual agreement contained in code that can run specific operations and interact with other smart contracts.
The use of smart contracts eliminates the need for a third party to handle transactions and contract execution between two parties. Replacing the middle man with a program can speed up processes, reduce the potential for fraudulent transactions, and reduce costs.
Where do smart contracts exist? On thousands of servers called “nodes” distributed around the world. The nodes continually work to make sure they all agree on the current state of the network and which transactions are valid.
What Makes dApps Different?
There are a few key characteristics that differentiate dApps from other programs:
• dApps run on a blockchain
• Their code is open-source and operates independently of any person or group
• Many dApps generate tokens in an effort to bring value to their nodes
• Users often must contribute tokens to gain access
• Miners receive new tokens as a reward for contributing to the ecosystem
Not all dApps have a native token. The Crypto Kitties game, for example, was one of the first and most popular dApps of its time, beginning in 2018. Playing the game required ETH gas fees and the value exchanged between players were pictures of digital cats.
Any dApp running atop Ethereum will require gas fees, paid in ETH (the native token of the Ethereum network), to facilitate smart contract transactions. The same holds true of other smart contract protocols. Some dApp protocols may have their own native tokens as well.
Recommended: What is a Crypto Token? Tokens vs Coins
What Can dApps Be Used For?
DApps can be used for just about anything that requires two or more parties to agree on something. When the appropriate conditions are met, the contract will execute automatically.
4 Different Types of dApps
1. Money management applications
These allow users to make peer-to-peer transactions on a blockchain network. Dapps of this kind often have their own independent blockchains, and are commonly called cryptocurrencies.
One of the most popular use cases for decentralized applications in recent years has been decentralized finance (DeFi). Decentralized exchanges (DEXs), for example, allow for peer-to-peer trading of digital assets without the need for a single entity maintaining order books, user accounts, and security. Financial services like borrowing and lending can also take place thanks to dApps. This can provide access to loans for people with poor credit (as no credit check is required) and give investors a chance to earn yield on their idle investments.
Recommended: A Guide to Decentralized Finance (DeFi)
2. Applications that align real-world events with digital assets.
An example could be oracles that feed real-time price data to decentralized exchanges or other interested parties. Or a logistics company could use a location-tracking chip to verify that a cargo shipment has reached its destination, at which time payment for the shipment could be released. Such a transaction could be accomplished with crypto, with no action taken on part of the humans involved aside from both the buyer and seller entering into a smart contract agreement beforehand.
Such agreements wouldn’t require notarization by a formal authority, as there would be no way for participants to avoid their contractual obligations (assuming the smart contract code was written correctly).
3. Decentralized Autonomous Organizations (DAOs).
These are decentralized blockchain-based organizations with no leader. Such organizations run according to rules defined by code from day one. These programmatic rules can define who can be a member, how voting works, what activities members can engage in, and how funds or value can be exchanged. After deployment, a DAO operates autonomously.
Recommended: What Is a DAO and How Do They Work?
These are an interesting kind of dApp that can be used to compliment other dApps. Oracles like Chainlink are protocols that provide real-time data about something happening in the real world. Synthetic assets, for example, allow people in the DeFi world to trade crypto tokens that are designed to have the same price as a real, physical asset like gold or oil. Oracles provide the price data that allows this kind of trading to happen.
A decentralized application, or dApp, is a software app that can run atop a blockchain protocol independently and autonomously, without the need for constant human intervention.
DApps have many potential use cases, some of which are still being developed. Decentralized finance (DeFi) and non-fungible tokens (NFTs) are a few of the latest examples, but they likely won’t be the last.
Interested in getting involved in crypto trading? With SoFi Invest®, you can trade crypto including Ethereum, Bitcoin, Litecoin, Cardano, Dogecoin, Solana, and Enjin Coin.
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