What Are DApps? A Guide to Decentralized Apps
With new acronyms added daily—DEX, DAO, DeFi, NFT—the Web3 world feels like it needs its very own glossary. Get a crash course in dApps (what’s that?) from the Ventive team.
It can be difficult for anyone to understand all of the new vocabulary used in the decentralized finance world. Companies and apps add to the confusion by using different words that mean the same thing or something that is just slightly different.
Like any new idea, it’ll take a while before everyone is speaking the same language.
Guides, glossaries, and dictionaries can help us build a common understanding. We’ve already dived into the blockchain technology that underpins the Web3 world. If you need a refresher, check out this Ventive blog article "What Is Blockchain Development?".
Now let’s talk about a related topic: decentralized apps, including decentralized financial apps and decentralized games.
What Is a DApp?
Decentralized Apps, also known as dApps, are applications built on decentralized networks like blockchains. Rather than being stored on a single server, a dApp is spread across a network, reducing the chances that it will have a single point of failure and increasing its security.
Statista places the number of apps for sale at around five million. Comparatively, there are roughly 3,000 dApps for sale. While that number will continue to grow, it will probably never catch up with apps.
But widespread adoption isn’t the goal.
Just like any new technology, decentralized technology isn’t needed in all circumstances. After all, you don’t want to use a hammer to do a drill’s job. Developers should choose decentralized apps to meet specific project requirements.
We built Swear on BlockchainDB because the app was created to combat deepfakes. To verify real videos, Swear had to have an additional layer of security and transparency that the blockchain could provide. It’s referred to as ‘immutability’, or the process of making something unchangeable or undeletable.
Although Swear isn’t a true dApp since it’s not open source, the SaaS product does use dApp functions. Compared to frameworks like Laravel and Django, building a mobile app on the blockchain can be more expensive. For this project, blockchains like Ethereum provided the user with the indisputable data they need to prove their videos are real. In this instance, the additional cost of blockchain development not only made sense but added value to the project.
The broad phrase “decentralized apps” includes several different kinds of apps within it. According to How-to Geek, true dApps have the following characteristics:
- The dApp must be secured with a cryptographic token.
- Its data and records must be public.
- It must be open source and not under the control of any single person or group.
Even if a group or company builds a decentralized app, once they launch it, it’s like they’re taking their hands off the wheel and letting the blockchain run it because dApps are difficult to tweak. Within the broad definition of dApps are decentralized financial apps and decentralized game apps. Let’s take a look at decentralized financial apps next.
Unpacking Centralized and Decentralized Finance
Before we define Decentralized Finance (DeFi), let’s talk about Centralized Finance (CeFi), which is more familiar to the average consumer.
If you want to take out a mortgage to buy a house or borrow capital to start a business, you’d probably turn to a traditional institution, like your neighborhood bank or credit union, to borrow the money. You may keep up with your retirement funds by keeping an eye on the stock market or interest rates. The institutions that you borrow money from will dictate the interest rate, and a central authority determines the minimum interest rate.
Other easily recognizable CeFi symbols are institutions like the Federal Reserve, Wall Street, large banking institutions like Wells Fargo, and other financial corporations that are controlled by authorities like governments or boards of directors.
However, in DeFi, algorithms and smart contracts are the intermediaries in a transaction. No central authority sets the terms and conditions of a contract—instead, it’s worked out between the parties. Smart contracts are the logical backbone of the blockchain, where consensus between the nodes ensures each transaction is valid and immutable. Meaning your transaction can’t be modified by any other party, and can only be transferred to another.
I recently visited a technical summit where the topic of real estate on the blockchain sparked a discussion about the feasibility of implementation. The consensus was that the most challenging aspect of using blockchain technology to manage real estate transactions is the action of migrating to the blockchain. It was less about the security, transparency, and reliability of blockchain technology, and more about whether or not we can get people to switch. This indicates that the general population will not doubt blockchain cryptography and security. Instead, they’ll be reluctant to actually switch from the traditional systems.
The security protocols built into the DeFi network increase trust and transparency even in the absence of a central authority. Transactions or exchanges of information can be hardcoded into smart contracts, removing the need for an intermediary.
Removing Pain Points in Decentralized Finance (DeFi)
Most consumers are familiar with peer-to-peer (P2P) financial networks like PayPal or Venmo. In these apps, money appears to be transferred immediately to friends. This is achieved simply by claiming funds in a large pool. Venmo keeps the funds in their bank account with a promise to payout on withdrawal.
When account holders send funds on the platform, Venmo simply updates a database record centrally, stating that account holder ‘A’ requested funds to be transferred to account holder ‘B’. It’s enough for Venmo to increase the balance of account holder B without actually transferring funds. Once an account holder requests a withdrawal, the claimed funds verified are officially transferred out of a shared pool of funds.
How long does it really take to get your money out of an app like Venmo? Once you’ve been reimbursed by friends for their half of the dinner check, it takes an additional 1-3 days to move that money from your Venmo account (a standard transfer) to your bank account. Unless you want an instant transfer, which means you’ll pay a fee.
P2P financial networks give consumers more power over their transactions, but there exists a middleman between the two parties. The financial entity that sits between transactions adds more friction to what could be a seamless interaction. Taking aim at this friction between parties is what DeFi is all about.
DeFi is aiming at the middleman that exists in every financial transaction by creating true P2P networks, making digital money transfers instant. The blockchain, and its immutable ledger tracking every transaction, creates the trust that needs to exist between two parties. DeFi and the Web3 world is all about the ownership economy.
What Do Decentralized Games Look Like?
Web3 is a world where the user becomes the creator, and owns what they create. Traditional online games exist in their own world, with little input from players. That means the economies, currency, and alliances they’ve built only exist inside the game. Decentralized games like Xaya and CryptoKitties are some of the first games built on the blockchain with an emphasis on fairness designed into their programs.
Decentralized games are trying to disrupt the current pipeline of video game creation with more collaboration between players and the company. Creators envision a future where their digital assets can even move between games. Non-fungible tokens (NFTs), or unique digital assets, can be sold to other players, creating a play-to-earn situation. Theoretically, the idea is that an enchanted level 21 broadsword from World of Warcraft can be sold and used in Age of Empires.
One of the features of Web3 is ‘voting’. This was birthed through the cryptocurrency altcoin era, where coins popped up with various value propositions. Exchange market users voted on whether or not those altcoins would make it, or have utility of some sort by trading those coins. It can be applied to gaming by using coins to pay for the levels or downloadable content (DLCs) you have an interest in.
Instead of current triple A titles that simply provide an experience based on internal analytics, concept games on Kickstarter have parallels to this model. On this crowdfunding site, mass donations help fund the game developers to create a game that gamers actually find interesting. The Kickstarter model is essentially a Web3 voting model, except instead of setting up an account and loading it with fiat, users would simply trade their bitcoin for the utility coin.
For now though, decentralized games are an experiment with bad user experience that require expensive processing tools. And the vision of moving weapons, gear, or characters between games is still just theoretical.
The Downside of DApps
We have to say it. The absolute biggest downside to dApps is their poor user experience.
Almost as if all of the budget in a project was spent on development, some dApps will remind users of websites from 2005. They’re ugly. They’re clunky. All of the working parts are on the screen, but the visual aesthetic is not there, nor is the intuitive interface that users have come to expect from modern design.
DApps also might not have any UX/UI at all. In some cases DApps simply function as integrations, or bridge modules between various Web2 platforms. In cases where DApps have UX and UI, poor user experience is typically related to the complexity and nature of the technology. New technologies have the burden of educating their users on the technology and the tools of the technology while also performing complex transactions.
Imagine introducing our current banking system, credit cards, online login, and mobile apps to developing countries. The user experience would burden the user with account setup and verification during the application process. It would take days to receive a credit card, and when the lucky user finally got their card, they find out that none of the stores in their city accept Visa. You would then say, the user experience was also poor.
UX design in dApp development continues to lag behind the technology, but with every new Web3 product launch, app developers get closer to finding the right mix of design and development.
Privacy on the blockchain requires a hybrid approach. If you use a public ledger or expose the ledger publicly, you could be leaving your data unprotected. But not all implementations are public. Putting together a public reference to gated information is one way to build in an additional layer of protection to dramatically reduce privacy risks for data owners.
In the case of currencies, unlike savings accounts, checking accounts, or other institutional financial products, DeFi apps are not FDIC-insured yet. Like all unregulated forms of currency, they are susceptible to fraud. The federal government or your local credit bureau will not return consumers’ money nor can they file a stop payment if they’re a victim of fraud.
While cryptocurrency isn’t totally anonymous, it’s considered pseudo-anonymous because it’s harder to tie an identity to a crypto wallet. Law enforcement remains concerned about how to find and identify attempts to launder money using cryptocurrency. Elaborate schemes that move money electronically across borders have made it harder, but not impossible, to conceal the source of money.
A final point about the downside of dApps relates to their accessibility. Like a lot of new technology, early adopters are passionate about the potential benefits of blockchain technology. For the broader population and especially for tech-adverse older people, widespread adoption of dApps may occur much more slowly. DApps require smartphones and good computer processors; they also may be more expensive with gas fees. All of these elements slow down their adoption.
The Bottom Line
Early crypto adopters are experiencing all of the twists and turns of a new and promising technology that could change how users invest, play games, or interact with strangers on the internet. Right now, the experience is a little rough. Yet when creators and innovators strategically build dApps, they’ll be able to solve Web2 problems and put users in the driver’s seat. Do you have an idea for a dApp that could change the world? Contact Ventive today.
Here are some terms you should know in the DeFi space.
Anti-Money Laundering (AML) - The set of rules, regulations, and technologies that governments and financial companies use to detect, prevent, and track money laundering.
Centralized Finance (CeFi) - This refers to the type of finance that consumers are accustomed to that’s regulated by government authorities—from credit unions to banks and the stock market.
Cryptocurrency - Digital currency that is decentralized and highly volatile. People can purchase dApps and their content with crypto assets.
Crypto Wallets - There are two kinds of crypto wallets: soft wallets and hard wallets. Unlike regular wallets, crypto coins don’t exist inside a crypto wallet. Instead, crypto wallets hold the keys or passwords to access the crypto coins on the blockchain. A soft wallet, also known as a hot wallet, is stored on a PC or in the cloud. A hard wallet, also called a cold wallet, is located on an external device, usually a thumb drive.
dApps - Decentralized apps run on the blockchain or a peer-to-peer (P2P) network.
Decentralized Autonomous Organization (DAO) - Like other financial ideas in blockchain, the DAO was created so that there was no single point of failure. Open-source code was the backbone of this decentralized type of venture capital fund. DAOs elects company leaders that serve for a limited period of time.
Decentralized Exchanges (DEX) - Similar to peer-to-peer networks like Venmo or PayPal, Decentralized Exchanges let crypto traders loan or borrow directly from each other.
Initial Coin Offering (ICO) - Similar to an Initial Public Offering (IPO), this is a cryptocurrency company’s first public offering of a new coin they’re trying to launch.
Decentralized Finance Protocol (DeFi) - Most common kind of decentralized apps.
Ethereum (ETH) - Created by Vitalik Buterin, Ethereum is an open-source blockchain with smart contract functionality.
Fiat - Government-issued currency that isn’t backed by gold or silver.
Fungible Token - The opposite of an NFT, a fungible token is something that is not unique and is interchangeable with like items. For example, dollar bills all have value, but one dollar bill can be exchanged for another without losing any value.
Gas - The cost of verifying or completing a blockchain transaction that is passed onto users as a fee. It pays for the computational power of executing a transaction.
Hash - A unique string of letters and numbers, a hash is the backbone of crypto security because it verifies authenticity.
Know Your Customer (KYC) - Refers to the due diligence that financial companies are required to perform to verify their customers’ identities and prevent fraud.
Node - In the crypto context, a node is a computer that validates a transaction on the blockchain ledger. The blockchain exists in the node, and each node has identical copies of the blockchain ledger. Nodes are spread across the world so that a single point of failure will not affect the network.
Non-Custodial - Cryptocurrency moves from one party to another, with the owner possessing the asset until it’s transferred. Not all cryptocurrency is non-custodial, so the best way to identify one is if it has a key that only the owner can access.
Non-Fungible Token (NFT) - Unique digital asset that gives ownership to whoever possesses it. Although commonly thought of as art (like the famous Bored Ape series), NFTs can also be tweets, videos, music, memes, and any other unique item.
Smart Contract - An essential part of trust-building in Web3, smart contracts are written in code that self-executes when the conditions of the contract are met. Both parties can see the terms and conditions on the public blockchain.
Stablecoin - A cryptocurrency pegged to a currency or commodity, it enjoys stable growth and avoids the wild dips and spikes of other crypto coins. Algorithmic stablecoins are connected to an algorithm, and their protocol is publicly available on the blockchain.
Whales - Investors or large investment firms that hold so much cryptocurrency that when they buy or sell, it has a substantial impact on cryptocurrency prices.
Yield farming - Much like earning interest on a savings account, yield farming is lending out cryptocurrency and receiving crypto rewards in return. Unlike a savings account, it occurs between people and not institutions. It can be extremely profitable but is also very risky. It’s also known as Liquidity mining.