Exploring Decentralized Applications (dapps)

The launch of Ethereum in 2015 marked a significant turning point in the evolution of blockchain technology. Ethereum allowed developers to code smart contracts on the blockchain – programs designed to execute automatically based on the fulfilment of a set of conditions. Ethereum also introduced the functionality to mint digital tokens such as ERC-20 tokens or NFTs, paving the way for a wide array of decentralized applications serving different use cases.

Since its launch, Ethereum has become the base layer for over 1,000 dapps, and there are active ecosystems of decentralized apps on other blockchains and Layer 2s, including Solana, Polygon, and Avalanche.

From a user perspective, the look and feel of a dapp is often very similar to an app running on centralized infrastructure. Like centralized applications, dapps may be available via the web, on desktop, or on mobile. A key difference is that most dapps require a wallet to enable interaction with the blockchain for processing transactions and asset transfers.

It is worth noting that the term “dapp” applies to any application using blockchain smart contracts, digital assets, or both. However, a dapp may use centralized infrastructure to manage other back- or front-end requirements, such as data storage, processing power, or web hosting.

Types of dapps and Their Use Cases

Dapps fall into several broad categories of use cases, which include decentralized finance (DeFi), gaming, marketplaces, and others.

Decentralized Finance (DeFi)

There are several different types of DeFi dapps.

Wallets act as the user interface to blockchain-based accounts, allowing users to send and receive funds and view their balances. Some, such as MetaMask, offer more sophisticated features like portfolio tracking.

Decentralized exchanges (DEXs), such as Uniswap, are dapps offering non-custodial exchange functionality so that users can swap tokens. DEX dapps rely on complex smart contracts called Automated Market Makers to maintain token prices according to the supply and demand of liquidity in pools of tokens.

Lending dapps like Compound and Aave use smart contracts to maintain lending pools that offer variable interest rates according to supply and demand. Collateralized Debt Positions (CDPs) are a specific type of lending protocol used to issue crypto-backed stablecoins such as Maker’s DAI.

There are many other types of DeFi dapps, including insurance applications such as Nexus Mutual and trading platforms for derivatives, such as dYdX.

Gaming

Gaming has emerged as another popular use case for dapps. Games based on blockchain allow users to own their assets and trade them outside of the game environment, offering ways to solve legacy gaming challenges, such as trust, along with entirely new gaming models, such as play-to-earn.

Gaming dapps have also diverged into different types.

Play-to-earn, also known as GameFi, has become one of the most popular segments of blockchain gaming. Play-to-earn games allow users to earn token-based rewards for participation and success in a game.

Blockchain-based metaverse games such as The Sandbox put in-game assets such as real estate onto the blockchain so that users can own a share of the metaverse. These shares can typically be monetized – for example, by renting them out, using them for advertising, or creating a business in the metaverse.

On-chain gambling is also a popular category of gaming. Dapps can leverage oracle services for random number generation, which are provably fair and more transparent than centralized services, which often introduce an opaque house edge.

Other use cases for dapps

Marketplaces are another category of dapps that have proven popular with users. On-chain marketplaces such as OpenSea or Magic Eden allow users to trade NFTs without paying high commissions to third-party listing services, and all transactions take place between peers on-chain, with transparent pricing and rapid settlement in crypto.

Another, perhaps less well-used use case for dapps is for decentralized social networks, such as CyberConnect or Lens Protocol, which aim to improve the user experience around areas such as privacy and support developers with gaining users for their dapps.

How dapps Are Revolutionizing Industries

Most dapps have not yet gained widespread adoption at the enterprise or industry level. For example, DeFi users can earn generous yields above those available on the TradFi markets. However, there are high risks involved, including volatility, protocol vulnerabilities, and regulatory uncertainty, to name a few. However, dapps are playing a significant role in showcasing the possibilities of blockchain technology to financial institutions and large corporations in industries such as gaming.

As such, while it’s difficult to demonstrate signs of adoption by industries, there are significant indicators that the functionality available in dapps will ultimately be available in mainstream applications.  

For instance, Wall Street giant Fidelity has previously announced it is exploring staking and on-chain lending services, and French bank Societé Generale has issued a particular type of structured financial product as security tokens on the blockchain.  

In the gaming sector, Ubisoft, publisher of Assassin’s Creed, has been the biggest name to push into the blockchain and Web3 space. In 2021, it became one of the first major gaming companies to incorporate NFTs with the launch of Ghost Recon Breakpoint, and has since published NFT avatars on the Polygon blockchain for use in The Sandbox metaverse.

Risks and Challenges of dapps

As decentralized, open-source technology, anyone can build and publish a dapp, so the main risks of using dapps are due to human misbehavior. Blockchain code can be vulnerable to exploits and attacks if not written securely and with all eventualities in mind, meaning dapps are often targeted by malicious parties intent on draining assets. Dapps and tokens are often used as cover for scams and rug pulls, where founders wait until there is enough value in the project and then drain all the funds.  

Using a dapp still requires the user to have a self-custody wallet, which can make them a target for cyberattacks such as phishing, where fraudsters try to obtain their private keys. Following good cybersecurity practices can help users to protect their assets against such attacks.  

The high prevalence of hacks and scams means there is still a relatively low level of trust in dapps compared to applications issued by centralized entities.

Another general challenge of dapps is that they are still relatively immature compared to centralized apps, and often the user interface and experience are inferior. For instance, many DeFi dapps are only available via the web and not as a mobile version.

The Future of dapps and Their Impact on Cryptocurrencies  

Despite the high number of dapps launched since the Ethereum genesis, only a relatively small number of dapps across all blockchains have gained significant traction among users so far. However, the technology is still relatively new. While the earlier generations of dapps may not gain widespread adoption by enterprises, they are an important proof of concept for demonstrating the possibilities of blockchain technology.

Furthermore, dapps play an important role in the cryptocurrency ecosystem since each dapp transaction requires a fee to be paid in the native cryptocurrency. Therefore, dapps create a fundamental use case for cryptocurrencies and in turn, drive their demand.

Exploring dapps essentials

• dapps are applications that use blockchain-based smart contracts and tokens to enable features and functionality not available in centralized applications.

• Popular dapp use cases include DeFi – which encompasses wallets, exchanges, and lending – and gaming, covering play-to-earn, metaverse games, and gambling applications.

• dapps are playing an important role in showcasing the potential of blockchain technology, supporting broader adoption by enterprises and institutions.