22_01_What-Are-Dapps--Everything-You-Need-to-Know-About-Decentralized-Applications
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What are dApps? Everything You Need to Know About Decentralized Applications

Decentralized finance (DeFi) looks set to disrupt the legacy financial system. If you’ve been in the DeFi space for a while, you’ll likely be familiar with some of the innovative decentralized applications (dApps) available across various blockchains. However, many crypto investors are still relatively unfamiliar with dApps and how they function. So, if you’re one of the many people wondering, “What are dApps?” and “How do dApps work?” then this article is for you!

In this “What are dApps?” article, we’re going to dive deep into the world of decentralized finance (DeFi) protocols and decentralized applications (dApps). Also, we’ll explore some of the differences between dApps and centralized applications. Plus, we’ll take a look at some of the most common types of dApps available and how they operate.

To interact with most DeFi applications, you’ll likely need to use some sort of Web3 browser wallet. Be sure to check out the DeFi 101 course at Moralis Academy to learn how to install and use MetaMask, the number-one Web3 wallet for DeFi. This course teaches students how to use MetaMask with some of the most prominent Ethereum DeFi protocols, including Uniswap, Compound, Curve, Aave, and MakerDAO. Join our community of over 30,000 students and start your DeFi journey today with Moralis Academy! Also, if you’re new to the space, be sure to save our Crypto Explained” and “What is Bitcoin?” articles for later reading!

Decentralized Finance (DeFi)

Decentralized Finance (DeFi), often known as “open finance”, refers to a network of permissionless, peer-to-peer financial applications and open-source technologies. These decentralized applications (dApps) and protocols rely on public blockchains and smart contracts to replicate various financial services trustlessly and automate trade agreements. 

This enables DeFi protocols to operate without a central authority. Furthermore, DeFi protocols operate outside of the traditional financial system without unnecessary intermediaries. Accordingly, DeFi is censorship-resistant and open to anyone with an internet connection. Plus, users get to keep the majority of the value they generate.

Moreover, DeFi protocols often work like “financial lego” when users interact with multiple dApps. For example, you can borrow assets from one protocol and use the liquidity in various other protocols. In turn, this could provide multiple revenue streams via transaction fees and token rewards. 

These next-generation financial tools are paving the way for exciting new frontiers in DeFi. Additionally, DeFi threatens to disrupt the legacy financial system by offering various novel methods for generating wealth with varying degrees of risk. Save our DeFi Explained article for later to learn more!

Decentralized Applications – What are dApps?

Decentralized applications (dApps) are smart contract-based protocols and applications that operate on public blockchains. One of the defining features of dApps is that they are not under the control of any single authority. Instead of relying on centralized servers with a single-point-of-failure, dApps use a distributed network of computers. Accordingly, many are community-governed. Furthermore, public dApps offer borderless and permissionless access presenting utility for a global market. Also, indiscriminate financial dApps provide business new opportunities to developing countries and economies.

From crypto gaming platforms to lending and borrowing platforms, dApps use cryptocurrencies for generating value and transacting. Various dApps offer a native token to provide holders with governance rights and other benefits to incentivize users. With such tokens, dApp users can vote to make changes to the parameters of the application. There are thousands of dApps available across multiple leading blockchains. Below, we take a closer look at some of the most prominent examples of dApps.

Apps vs dApps

One of the defining characteristics of a dApp is that it operates on a peer-to-peer (P2P) network like a blockchain. Centralized applications like Uber and Facebook rely on computer systems that are under the ownership and control of a single entity or organization. Plus, if the owner of a social media app decides to block somebody, they can do so without a second thought. 

However, dApps operate slightly differently. On the surface, many dApps look like simple apps. The difference is that dApps cannot be manipulated by a single authority. Furthermore, they operate on a public blockchain network. Accordingly, every event that occurs can be seen transparently.

Another defining characteristic of dApps is that they use smart contracts to automate events. There is no reliance on human performance, or trust. Instead, they use maths and science to minimize trust. Moreover, because dApps are distributed throughout a decentralized network, they often prove to be more difficult to attack than their centralized counterparts as there is no single-point-of-failure. 

Additionally, dApps are extremely difficult for governments to manipulate. Plus, they benefit from little downtime in comparison to applications on centralized servers. The development community responsible for creating these dApps benefits from open-source software and collaboration, accelerating innovation and creativity like never before.

What are dApps? – dApp Examples

Decentralized applications (dApps) come in all shapes and sizes. Popular examples of dApps include decentralized exchanges (DEXs), crypto gaming platforms, borrowing and lending facilities, social media platforms, prediction markets, and marketplaces. However, in the context of decentralized finance (DeFi), dApps often fall into a handful of categories. 

DEXs are among the most prominent types of dApp. Many DEXs use the automated market maker (AMM) model for automating trades in a trustless way, facilitating peer-to-peer (P2P) token swaps without intermediaries. Examples of popular DEXs include Uniswap, PancakeSwap, SushiSwap, and Trader Joe.

Also, many DEXs and DeFi protocols offer liquidity provision features. By providing liquidity to a DEX to facilitate P2P trading, token holders can make a passive income by earning a percentage of all trading fees for a particular token pair. For example, if you hold an equal value of ETH and USDC, you could become a liquidity provider and earn fees each time a trader exchanges ETH for USDC or vice versa. 

By providing liquidity in this way, investors can maximize their returns by staking liquidity provider (LP) tokens in a process known as “liquidity mining”. Several DeFi protocols and DEXs facilitate liquidity mining. Users can also jump between multiple platforms to find the best returns by participating in “yield farming”.

Some of the most popular dApps are crypto gaming platforms. Crypto gaming platforms provide users with a way of earning a passive income by showing off their skills. Many of these gaming platforms feature DeFi game mechanics and incentive models. Plus, many crypto gaming platforms benefit from decentralized file storage on the blockchain, making them provably fair. Moreover, non-fungible token (NFT) marketplaces are quickly becoming one of the most popular dApps available, thanks to the rise in demand for NFTs in art, music, and gaming.

Ethereum dApps

Although several blockchain networks host DeFi protocols, the first wave was largely built on the Ethereum blockchain. Ethereum is the largest smart contract blockchain and the second-largest blockchain by market cap. Also, the Ethereum development community is among the most active and well-supported in the industry. Many of the most prominent DeFi platforms available use the Ethereum blockchain for data storage and token minting. Plus, Ethereum smart contracts are responsible for executing the logic of many of these dApps.

Many of the pioneering DeFi protocols and dApps are Ethereum native. This includes the MakerDAO stablecoin protocol, the Compound Finance liquidity platform, and the Uniswap decentralized exchange (DEX). Ethereum is also home to many of the standard tools and functions that go into building smart contracts. 

For example, the Solidity programming language was purpose-built for creating smart contracts on Ethereum. Also, the Ethereum Virtual Machine (EVM) is essential for executing smart contract tasks and defining new rules for computations. A range of other blockchains use variations of the EVM. Furthermore, much of the standard tooling pioneered by the Ethereum community is now effective on other networks such as Polygon (Matic), Solana, Fantom, Avalanche, TRON, and Binance Smart Chain (BSC).

Moreover, Ethereum is home to many of the pioneering crypto investing platforms in the DeFi space. If you want to take your DeFi game to the next level, check out the DeFi 201 course at Moralis Academy. This course teaches students about yield farming, flash loans, liquidity pools, crypto arbitrage, and more! 

What are dApps? – dApp Browsers

There are so many different dApps available, so it can be challenging to keep up to date with the latest protocols. However, dApp browsers can be an effective way of staying up to date with the latest trends. Popular dApp browsers include DappRadar, State of the DApps, DeFi Pule, and the Trust Wallet DApp Browser. 

Furthermore, these tools make it straightforward to access a range of dApps from one convenient location. Additionally, some of these dApp browsers offer portfolio tools to track your investments across multiple platforms at the same time.

Pros & Cons of dApps

Decentralized finance (DeFi) provides equitable alternatives to many of the exclusive legacy financial tools and services. Anyone with an internet connection can access most of these dApps, regardless of wealth, status, or geography. Furthermore, as the industry is relatively new, some dApps and DeFi protocols offer handsome returns for investors.

However, the infancy of the DeFi space means that regulation is unclear. Also, the risk of losing funds due to hacks or exploits is much higher than in the traditional finance industry. When you deposit your savings into a bank, they are usually backed up to a certain amount. However, dApps are not backed. Accordingly, if you lose funds or the platform is hacked, there is no customer service department to help you out.

Additionally, many DeFi tokens are highly volatile. If you invest in these tokens, be prepared for substantial price fluctuations. Equally, suppose you decide to participate in yield farming, flash loans, or liquidity mining. In that case, it’s worth paying close attention to your position and being wary of impermanent loss and rug-pulls. As such, always do your own research and never invest more than you can afford to lose.

Moreover, the culture of DeFi encourages personal responsibility when making financial decisions outside of traditional infrastructures. This means that newcomers must operate without the safety net of centralized financial institutions. The “not your keys, not your coins” mantra of the crypto community assumes a level of technical understanding that can take time to develop. Accordingly, naivety and a lack of caution can prove to be disastrous for many new DeFi investors. Additional factors to consider when interacting with dApps include network congestion, poor user interfaces, and usability.

What are dApps? – Summary 

Decentralized applications (dApps) are open-source applications that operate on public blockchains and do not belong to a single entity. Most dApps provide financial tools and services using smart contract-based protocols. However, the use cases for dApps extend well beyond finance. In the future, we can expect to see a broad range of dApps serving a variety of novel use cases industrywide. 

A broad range of Web3 tools and services spurs these innovations by removing a great deal of the backend leg work from dApp development. Only a few years ago, creating rich dApps took a long time because everyone was starting from scratch. However, with modular building blocks like the ones Moralis provides, getting high-quality dApps to market fast is now extremely straightforward. Using just a few lines of code, you can bring your dApp ideas to life in no time with Moralis!

Now that we’ve answered the question of “What are dApps?”, you should have a firm understanding of the different types of dApps and DeFi protocols available. Also, if you want to build your own decentralized applications on Ethereum, check out the Ethereum dApp Programming course at Moralis Academy. Here, we teach students how to build a CryptoKitties non-fungible token (NFT) marketplace from scratch! Also, if you have your own ideas for developing cutting-edge dApps, save our dApp Ideas article for later! 

There has never been a better time to learn a new skill in an emerging tech field. Whatever your current level of knowledge or experience, Moralis Academy has the perfect courses for you! Begin your path to finding that perfect career in Web3 and blockchain with Moralis Academy! Also, don’t forget to follow us on Twitter @MoralisAcademy! We’d love to hear your thoughts about this “What are dApps?” article!

Ivan On Tech

Written by Ivan on Tech

January 9, 2022

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