Decentralized applications, which often (but not always) utilize blockchain technology, have seen an exponential increase in both interest and use cases over the last several years. Unlike their centralized counterparts, dApps are designed to be:
- More resilient to hacks, network attacks, and server outages
- More transparent for end-users and developers alike
- Resistant to censorship
Although the majority of dApps run on popular blockchains, any application which is hosted on a peer-to-peer (P2P) network is technically decentralized. The BitTorrent application, for example, is a popular file-sharing protocol that ran on a peer-to-peer network without a blockchain for many years.
What blockchains provide that normal P2P networks do not, however, is strong resistance to censorship attempts and transaction fraud. It’s important to note, however, that it is not impossible for a rogue group of bad actors to gain control of a blockchain and begin making fraudulent adjustments to the ledger. With that said, effective decentralization does make this task much more difficult.
In the world of decentralized applications, network participants who verify transactions occurring on the dApp’s native blockchain are known as “nodes.” The Ethereum Network, for example, has over 4,000 nodes at the time of this writing. Distributing these nodes in as many geographic locations as possible makes sure that no single point of failure will ever shut down the underlying blockchain or the dApps which utilize the distributed ledger.
Examples of popular dApps in use today include decentralized exchanges (DEXs), blockchain-based lending applications, games, and even token-based social media platforms. Additional use cases include supply chain management systems and online auction houses.
Understanding Smart Contracts
Smart contracts are the lifeblood of almost all blockchain-based dApps and this feature is not available in all blockchains, for example, Bitcoin does not support smart contracts. Simply put, a smart contract is a piece of computer code that acts as a self-executing agreement between two or more mutually consenting parties. The terms of the smart contract specify the various conditions under which a given component of the agreement will be executed, and many smart contracts cannot be changed once put on the blockchain.
Since computer code can be made arbitrarily complex, smart contracts can support use cases as simple as a friendly wager between two friends or as complicated as an advanced custody arrangement between large financial institutions. Recently, entities known as “decentralized autonomous organizations” (DAOs) have started implementing smart contracts to run entire companies.
MakerDAO, for example, is a DAO on the Ethereum blockchain that runs entirely on a smart contract which lets users form collateralized debt positions by issuing various liability tokens. These collateralized debt positions give cryptocurrency holders access to trustless liquidity, and MakerDAO’s participants are always assured of the transaction’s integrity because the smart contract code is open source.
Emerging Use Cases for dApps in 2021:
Decentralized applications have a natural home in finance, and more than one blockchain has begun hosting non-custodial exchanges that let users trade various tokens directly from their cryptocurrency wallets. With Uniswap, the most popular DEX on the Ethereum Network at present, ETH holders can buy and sell ERC-20 tokens while keeping all of their current holdings safely contained in their MetaMask wallet.
The Binance Smart Chain (BSC) has become an increasingly popular alternative to Ethereum-based decentralized exchanges in recent months. SushiSwap and PancakeSwap, two popular DEXs on the BSC, both offer lower transaction fees compared to the Ethereum Network. However, DEXs are just the beginning of where the financial use cases of dApps appear to be headed.
Injective Protocol, a project that recently raised funding from Mark Cuban and other notable investors, has plans to offer decentralized derivatives and other financial instruments. Protocols like Injective have already begun disintermediating many legacy financial institutions, and almost all decentralized financial (DeFi) applications also offer much faster settlement times than centralized clearing mechanisms.
In the world of DeFi, a user’s wallet acts as a Web 3 browser to connect with various financial ecosystems and smart contracts. Gone are the days of navigating to a trading exchange’s centralized website to place buy and sell orders. The growing DeFi ecosystem offers cutting-edge protocols instead of traditional web pages and a distributed settlement system instead of top-down clearing mechanisms.
With many social media users feeling the increasing pressure of censorship and the large-scale control of centralized platforms becoming more and more apparent, various blockchain projects have started hosting decentralized versions of the world’s most popular social media applications. DFINITY, an ambitious project that has some of Silicon Valley’s most successful venture capital firms on board, recently released a decentralized prototype to rival the LinkedIn network.
With investments from Samsung and Sony, Theta Network released a blockchain-based video delivery network in early 2021. Larry Sanger, Wikipedia’s famous co-founder, has chosen the EOS blockchain to host a decentralized encyclopedia of censorship-resistant, user-generated content.
Supply Chain Management
The tamperproof nature of the blockchain makes it a natural fit for decentralized supply chain management applications, and some of the world’s largest companies have taken notice. Louis Vuitton, BMW, and Walmart have all started using distributed ledger technology from Chinese blockchain company VeChain to help fight back against counterfeiting and streamline warehouse management.
As items travel through the supply chain, they are identified through a radio-frequency identification chip and have their status scanned to the VeChain blockchain. Winemakers in the country of Georgia have also started using custom dApps to streamline delivery to suppliers, and the state of Wyoming has started working with blockchain-based initiatives to help track cattle.
Voting and Identity
In April of 2021, the Ethiopian government announced a landmark deal with blockchain software company IOHK to put the academic records of five million students on the Cardano blockchain. Through Cardano’s decentralized identity application, Atala Prism, these students will have a portable, verifiable, and secure digital identity that they can carry with them at all times.
Ethiopia’s future plans with the Cardano blockchain include voting registration in national elections, and the deal is expected to empower more than 100 million citizens with a decentralized identity (DID) at full scale. The governments of Tanzania, Nigeria, and possibly even South Africa have suggested that they may soon follow suit.
Traditional Financial Services
The inherent security properties of dApps allow traditional lending institutions to offer a richer suite of products to corporate customers and retail depositors alike. However, decentralization also allows for unprecedented applications in areas like risk modeling and credit scoring.
Credmark, for example, offers a decentralized, privacy-focused, predictive analytics system that large financial institutions can use to offer anonymous loans. Instead of taking factors like employment history into account, Credmark uses the blockchain to track the transaction record of cryptocurrency wallets. This allows banks to aggregate on-chain data and use advanced risk models in their decision making without gathering personal information from customers.
Unique Advantages of dApps
The Unique Advantages of dApps
Due to the distributed nature of the networks they are hosted on, dApps are inherently resistant to DDoS attempts and other types of traditional network attacks. The robust fault tolerance of the underlying blockchain, especially as compared to centralized hosting services, can also fend off the majority of attacks from internal network participants.
The open-source of most dApps also makes them easier to debug and upgrade. When bugs inside the code of an open-source, decentralized software project appear, groups of dApp developers can “swarm” the problem together with no management approval required. Thus, dApps development often proceeds much faster than traditional software release cycles. Open-source development tools like GitHub are essential to the success of many dApps, and such tools also lets users anticipate when new upgrades are coming.
In terms of pure user experience, the biggest advantage that dApps offer over centralized applications is censorship resistance. Users of properly constructed social media dApps will never have to worry about having their account banned or getting temporarily suspended for violating selectively enforced community standards.
In the case of DeFi dApps, users are secured that no central entity will be able to “censor” their participation in the blockchain by confiscating assets. Thus, it’s no surprise that dApps of all shapes and sizes have begun thriving in regions with authoritarian regimes.
The Drawbacks of dApps
Needless to say, the strength of a dApp’s user experience is only as strong as the security, scalability, and decentralization of the underlying blockchain. As more and more users have flocked to the Ethereum blockchain, transaction fees have increased far beyond what anybody had previously imagined. It’s not uncommon for a transaction fee on Uniswap to exceed the amount of underlying value being transferred.
In addition, programming languages for smart contracts vary widely by the level of security they offer. Several dApps using Solidity, the native smart contract language of the Ethereum ecosystem, have been the successful target of high-profile hacking attempts. In some cases, hackers have given back the stolen funds and only used these network attacks to prove a point about the importance of increasing Ethereum’s focus on security. In other cases, hacking victims weren’t so lucky.
The current ecosystem of blockchain-based dApps is certainly a work in progress, but there are several reasons that many users prefer these applications over the incumbents in various industries. Getting ahead of current trends and offering users a censorship-resistant platform secured by blockchain technology can certainly help increase brand loyalty and acquire market share from competitors who are too slow to change.
The team of blockchain experts in Chetu, are dedicated to be on top of the latest trends of this fast-growing space. If you are looking to create a decentralized using the power of blockchain, or you want to make upgrades to your existing dApp, get in contact with Chetu’s team of experts in blockchain.