What is a Decentralized Application

Last Update: October 1st, 2024

In today’s digital age, nearly everyone uses applications (or “apps”) on their smartphones and computers. These apps include everything from social media and messaging to banking and gaming. Typically, these traditional applications run on centralized operating systems like iOS, Android, Windows, or macOS. However, in the world of blockchain technology, there’s a new kind of app gaining popularity—decentralized applications, or dApps.

Decentralized applications (dApps) are built using blockchain networks instead of traditional operating systems. Unlike centralized applications, which rely on centralized servers and are controlled by a single entity, dApps operate on a decentralized network of computers, known as nodes. This decentralized nature makes dApps permissionless, trustless, and transparent, offering greater security and privacy for users.

dApps are powered by smart contracts—self-executing contracts where the terms are directly written into code. These smart contracts automate processes without human intervention, and they are stored on the blockchain.

While most traditional apps can be easily altered or taken offline by a central authority, dApps run on blockchain technology like the Ethereum network, which ensures they operate autonomously across a peer-to-peer network. Unlike Bitcoin, which is primarily used for cryptocurrency transactions, Ethereum’s flexible platform supports complex smart contracts, making it ideal for building dApps.

Key Takeaways

• Decentralized applications (dApps) operate on decentralized networks rather than traditional centralized servers.
• They leverage smart contracts to automate processes and are built on blockchain technology.
• dApps offer enhanced security, data integrity, and user privacy compared to centralized applications.
• While they present numerous advantages, they also come with unique challenges, making it essential to weigh both the pros and cons of using dApps.

Key Components of a Decentralized Application

1. Smart Contracts

Think of smart contracts like digital vending machines. When you insert money, the machine automatically gives you the product without any human involvement. In the same way, smart contracts automate tasks within a decentralized application. For example, they can release payments once conditions are met, like confirming a delivery in a supply chain dApp. This automation reduces the need for a middleman, making processes faster and more efficient.

2. Blockchain Network

A blockchain network is like a digital ledger that keeps track of all transactions within a dApp. Imagine a notebook where every person writes down their transactions for everyone to see—once written, it can’t be erased or changed. This transparency ensures trust and accuracy, as no single person can alter the records.

3. Peer-to-Peer Networks

Peer-to-peer networks work like a group chat where each participant stores a copy of the conversation. If one person leaves or loses data, the conversation is still preserved because others have the same copy. This decentralized structure means that even if some nodes go offline, the application continues to run smoothly.

How Do dApps Work?

Decentralized applications (dApps) operate differently from traditional apps. Instead of using centralized servers, they run on a network of multiple nodes, which are individual computers that collectively verify and record transactions. This process relies on distributed ledger technology, similar to how a shared Google Sheet is updated in real time by multiple users, ensuring that every entry is accurate and visible to all.

To process transactions and automate tasks, dApps use cryptographic tokens—digital assets that hold value or represent rights within the application. For example, some dApps might use tokens as rewards for completing tasks or for voting on app updates. This voting capability is powered by governance tokens, which give holders the right to participate in decision-making processes within the dApp ecosystem.

Take Ethereum-based dApps as an example: the network verifies each transaction using consensus from thousands of nodes. This structure makes the network 99.99% reliable and highly resistant to manipulation or downtime. As a result, dApps offer higher security and transparency, making them a solid choice for various applications beyond finance.

Examples of Popular dApps and Their Use Cases

1. Financial Applications

dApps in decentralized finance (DeFi) allow users to borrow, lend, and earn interest on digital assets without relying on traditional banks. For instance, Uniswap, a popular DeFi dApp, facilitates over $1 billion in daily financial transactions, enabling users to trade cryptocurrencies directly with each other.

2. Social Media Platforms

Decentralized social media platforms like Steemit reward users with tokens for creating and curating content. Unlike traditional platforms that store data on centralized servers, these dApps distribute user content across multiple nodes. This reduces censorship and ensures that users control their own data.

3. Supply Chain Management

In supply chain dApps like VeChain, every step of a product’s journey—from production to delivery—is recorded on the blockchain. This tracking mechanism reduces reliance on a central authority and improves transparency. For example, a food company can prove the origin of its products with 100% accuracy, reducing fraud and ensuring product quality.

Advantages and Disadvantages of Decentralized Applications

Advantages of Decentralized Applications

1.  Transparency 

Since dApps are built on the blockchain, their code is essentially transparent. Practically, anyone can look under the hood and read the code of the dApps they are using. Unlike applications like Facebook or Google, which are hidden and controlled, you can look at the dApps code and see how the nuts and bolts work.

2. No Downtime 

You may have experienced not being able to log into your banking app because they are doing routine monthly or quarterly maintenance. You may have seen Facebook or Instagram suddenly not loading new posts from time to time. Applications and programs are susceptible to going offline due to maintenance, and in extreme cases, they might even close down permanently.

You will never experience this with dApps, because they are built on the blockchain. Thousands of computers all around the world, that make up the blockchain network, would first need to go offline before this happens. Realistically, it would be virtually impossible to take down all of these computers.

3. Autonomy and Censorship Resistance

dApps are also resistant to controls by outside factors. Since they are decentralized, no government or powerful institution can close them down. Just recently, we have seen China take down gaming companies and other innovative tech companies, along with their billionaire owners. We also have seen the overprinting of money by the US Federal Reserve, with the help of the US Department of Treasury, resulting in an inflationary environment in the country. The US dollar has been losing value continuously because of this. We also see the major social media networks, like Facebook and Twitter, banning controversial people outright, without due process.

None of these forms of control and censorship have any place in dApps. You are in control of what you want to do in the blockchain space. You are in control of your money, and the government cannot take it away or print more of the cryptocurrency that you are holding, because they have no power over it. There will be no banning of people from dApps, in the way that big social media platforms do today. Since dApps are built on the blockchain, they do not answer to any government, corporation or social media mogul. The environment is free from censorship and control.

Disadvantages of Decentralized Applications

1. Network Congestion

High usage can overwhelm a blockchain network, causing slow transaction times and increased fees. For example, during peak usage periods on the Ethereum network, transaction costs can soar by up to 200%, making simple actions like token transfers expensive and time-consuming.

2. Risk of dApp Scams

The lack of regulation makes some dApps vulnerable to scams and Ponzi schemes. For instance, in 2021 alone, over $2 billion was lost due to fraudulent DeFi projects. Users should be cautious and conduct thorough research before using unfamiliar dApps.

3. Complexity and Usability

Unlike conventional apps, dApps require users to have a basic understanding of blockchain technology. Setting up a crypto wallet and managing private keys can be challenging for beginners, resulting in a higher barrier to entry. This complexity can limit widespread adoption among mainstream users who are used to simpler app interfaces.

Which blockchains can you build dApps on? 

Choosing the best blockchain platform depends on your project’s requirements. Ethereum is the go-to choice if you need a trusted and extensive ecosystem. For scalable solutions, consider Polygon or Arbitrum.

If you need high transaction throughput and security, newer networks like Aptos or Sui might be more suitable.

6 Best Blockchain Platforms for dApp Development

1. Ethereum Network

Overview: Ethereum is the most established and widely used blockchain for building dApps. It supports a vast number of decentralized applications, including Uniswap, OpenSea, and MetaMask.

Pros:

• Largest developer community and existing dApp ecosystem.
• Robust toolsets and documentation for developers.
• Trusted network with high liquidity for DeFi projects.

Cons:

• Low transaction speed (15-30 transactions per second).
• High gas fees (up to $100 during network congestion).
• Limited scalability without second-layer solutions.

2. Polygon Network

Overview: Polygon is a Layer-2 solution built on Ethereum, designed to improve scalability and reduce transaction costs. It hosts dApps like Decentraland and Aavegotchi.

Pros:

• Fast transactions (up to 7,200 per second) with low fees.
• Compatible with Ethereum, making integration seamless.
• Ideal for NFT and gaming dApps due to low cost.

Cons:

• Depends on Ethereum for security.
• Gas price fluctuations can affect stability.

3. Arbitrum Network

Overview: Arbitrum is another Layer-2 solution that enhances Ethereum’s speed and reduces fees while maintaining strong security.

Pros:

• Full EVM compatibility.
• Low transaction costs compared to Ethereum.
• Growing ecosystem and developer adoption.

Cons:

• Fewer existing dApps compared to other platforms.
• Requires further development for complex integrations.

4. Aptos Network

Overview: Aptos is a next-gen blockchain focused on security, scalability, and performance. It’s built to handle high transaction throughput using parallel processing.

Pros:

• High transaction speed due to the Block-STM engine.
• Supports complex protocols that other networks struggle with.

Cons:

• Limited existing ecosystem due to its young age.
• Steep learning curve for developers unfamiliar with its framework.

5. Sui Chain Network

Overview: Sui is a Layer-1 blockchain developed by former Meta engineers, designed for high performance and security.

Pros:

• Supports parallel transaction execution, increasing throughput.
• High security and fault tolerance.

Cons:

• Limited developer tools and resources available.
• Smaller ecosystem compared to established platforms.

6. StarkNet Network

Overview: StarkNet is a Layer-2 ZK-Rollup for Ethereum that provides high scalability and privacy.

Pros:

• Strong security using zero-knowledge proofs.
• Low transaction costs with improved scalability.

Cons:

• Small ecosystem and limited dApp support.
• High complexity in developing smart contracts.

Popular Industries for dApps

With the emergence of dApps in the blockchain, several industries have sprouted up as well. Here are the top three most popular industries that are thriving in the blockchain:

• NFT Marketplace dApps 

You may have heard of NFTs or “non-fungible tokens” in the news, as they have surged in popularity this year. NFTs have entered the pop culture, with art leading the way. These NFTs are bought and sold in what we call NFT Marketplace dApps. These are simply marketplaces where you can buy, sell, create and mint NFTs. The most popular NFT marketplaces are Opensea and Rarible.

• dApps 

Decentralized Finance dApps have also emerged as a popular industry today. These dApps have created an entirely new digital and decentralized banking ecosystem in the blockchain. You can borrow, lend and stake your crypto using these platforms. You can become a provider of liquidity to liquidity pools, which is a way to earn interest, or you can simply invest and trade in various cryptocurrencies in decentralized exchanges (DEXs).

• Gaming dApps

You may have heard of the sudden popularity of the game, Axie Infinity. It is an NFT-based play-to-earn game, where you can earn cryptocurrency by just playing the game. This is also a smart contracts dApp, which is NFT-based, but with a gaming utility.

Similar games such as Cryptokitties, Splinterlands, Alienworlds and Mobox have risen to popularity, especially during the pandemic, when people were mostly in front of their laptops and PCs. Gaming dApps are a fun way to experience both blockchain technology and cryptocurrency.

FAQs

What is a Decentralized Application?

A decentralized application (dApp) is a software program that operates on a decentralized network of computers rather than a single server. It utilizes smart contracts and blockchain technology to enable peer-to-peer interactions without a central authority controlling the data.

What are the Advantages of dApps Over Centralized Applications?

dApps provide increased security and data integrity by eliminating the risks associated with a single point of failure. Since they run on distributed networks, they are resistant to censorship, making them ideal for applications where transparency and user control are crucial.

What is the Role of Smart Contracts in dApps?

Smart contracts are automated agreements coded directly onto the blockchain. They self-execute when conditions are met, enabling dApps to perform tasks like financial transactions and data verification without human intervention. This reduces the need for intermediaries and lowers transaction costs.