In layman’s terms, dApps refer to decentralised applications. These are applications that run without a server or individual computer.
This guide focuses on decentralised applications running on blockchain networks. However, this concept predates today’s leading blockchains. Both BitTorrent and The Onion Router (TOR) are early examples of decentralised applications.
In the mid-1980s, John Gage of Sun Microsystems coined the slogan ‘the network is the computer’. This slogan aptly describes the world of decentralised applications.
Decades later, Ethereum was launched in 2015. The project received the nickname ‘World Computer’, describing Ethereum’s ability to host applications on its worldwide decentralised network.
Ethereum introduced the world to smart contracts at scale. These smart contracts act as conditional keys.
Smart contracts can act on information from within the network. Or they can act on data from outside the network through the use of oracles. Smart contracts can also create powerful decentralised applications. They interact with other smart contracts. They interact with different smart contracts, from decentralised finance (DeFi) to web3 games to social media.
How Do Decentralised Applications Work?
Decentralised applications run on a network instead of a single computer or central server.
DApps on blockchain networks, such as the Ethereum Network, run on the blockchain network itself. Let’s use Ethereum as an example. Ethereum dApps allow applications to run functions separate from the network’s validation functions. They run on the Ethereum Virtual Machine, a protected layer of the Ethereum network.
Smart contracts often work together. It forms the heart of dApps that use several smart contracts, each supporting a different function. The user interface looks like an application or website that we can see in common web applications. However, it allows users to connect a crypto wallet to interact with the dApp.
Said access is available through any compatible crypto wallet. This makes dApps an alias in an unauthorised use.
Your wallet address becomes your identity within the application and no one can block access to the dApp. However, some projects may block access to the user interface depending on the region and restrictions or regulatory uncertainty in a particular country.
These smart contracts can be accessed through third-party dApps. Yield aggregators or target applications can be interacted with. In addition, users or communities can use dApps that they write themselves.
Usually dApps decentralise user interface elements. This is done through the users themselves. In addition, platforms such as the Interplanetary File System (IPFS) are utilised. In this way, decentralised hosting for user interface features is also offered.
The technique also uses a network instead of a single server as a host. Finally, decentralised applications are usually open source. This means that anyone can study the code for smart contracts. In a later section, we will discuss the basic tools needed to use decentralised applications.
Brief History of dApps
Bitcoin
Although it was the first cryptocurrency to be meaningfully adopted and the Bitcoin network supports smart contracts, its support for smart contracts is limited compared to newer networks. These limitations led to the development of the Ethereum project.
Ethereum introduced a Turing-complete programming language called Solidity, which allows developers to build powerful applications that run on the Ethereum Virtual Machine. Since the 2015 launch of Ethereum, countless new blockchains supporting smart contracts have been released. However, most dApp development focuses on a smaller set of chains.
Advantages of Decentralised Applications
dApps offer several advantages over traditional centralised applications. Privacy, data ownership and transparency are among the most compelling reasons why many people prefer dApps.
- No Central Authority
The absence of a central authority and decentralised governance make dApps a truly democratic ecosystem. However, governance is typically based on token-based voting rather than one person, one vote. It gives those with more tokens a higher voice in governance. Yet access is open to all and cannot be restricted or censored due to the decentralised nature of the network.
- Transparency with Open Source
Almost all dApps are open source. This allows the community to study the code and decide whether to use the app based on its functionality.
Closed-source applications leave users in the dark. Or it requires detective skills to discover what the app does behind closed doors and what information it logs.
The open-source nature of dApps also allows auditing firms to evaluate the code for bugs, malicious code or potential exploits.
- Token Rewards
Many dApps offer token rewards that allow users to earn tokens in various ways. For example, users who lend money on Compound Finance can earn COMP tokens in addition to the interest rate paid on the lending token.
The Pendle dApp pays liquidity providers clearing fees for the pool, PENDLE incentives, and in many cases protocol incentives paid in third-party tokens such as AAVE or COMP.
Disadvantages of Decentralised Applications
Decentralised applications come with some disadvantages, such as bugs or other security vulnerabilities. They also come with a learning curve.
- Smart Contract Vulnerabilities
In half of 2024, nearly half a billion dollars was lost due to hacks and crypto rug pulls. By comparison, bank fraud losses exceeded $10 billion in the US in 2023.
Crypto markets represent a small fraction of the market share held by traditional financial institutions. Before interacting with a dApp, investigate the audit history as well as additional risks that may arise from using the app, such as slippage or permanent loss. We will address this issue shortly.
- Complexity of Use
Many popular decentralised applications offer a simple user interface and easy-to-understand functionality. However, some use very complex algorithms or complicated interfaces that make them difficult to use or invite errors.
For a beginner, it is wiser to use decentralised apps that are easy to understand. As you learn about the crypto ecosystem, it makes sense to move to more complex applications. In this way, the process runs more smoothly.
- Scalability Issues
More complex dApps can burden the network, resulting in higher transaction costs for interacting with these smart contracts.
Ethereum is working on various scaling solutions that promise to increase speed and reduce transaction costs for both the Mainnet network and Layer 2 chains. However, many decentralised applications available on Mainnet are also available on popular Layer 2 chains such as Arbitrum.
Decentralised applications offer permissionless access to trading, finance, gaming applications and much more. These applications are usually open source. This means that the code is publicly available and usually also uses decentralised governance.
Token holders vote on proposals for the dApp. To connect to dApps, you will need a crypto wallet compatible with the blockchain you want to use. You will also need gas tokens for this chain.
What are the biggest dApps?
Some of the most popular dApps are Lido, which offers liquid ETH staking, and Aave, which offers permissionless lending and borrowing. Uniswap, another popular dApp, allows users to trade numerous tokens. It supports 21 blockchains.
What are the best dApps for beginners?
If you’re new to decentralised applications, you might consider lending on a platform like Aave to generate returns. For swaps, consider Uniswap, which provides an easy-to-use trading platform.
Is it safe to connect my wallet to dApps?
Proven and audited dApps are generally secure. However, the smart contracts used by these apps may still have undiscovered vulnerabilities. Be extremely cautious with new dApps without an audit trail.
Does Bitcoin use dApps?
Bitcoin itself does not support dApps in the traditional sense due to limitations in the scripting language. However, a few Bitcoin Layer 2 networks, such as Merlin, offer access to dApps similar to those found on Ethereum or Solana.
How do you check if a dApp is legitimate?
Research the app’s reputation and usage statistics. Sites like DeFi Llama can help you understand how much the app is used (and trusted) by the community. Also, look for verifiable audits from reputable audit firms. It is wise to be sceptical of new dApps until you have a solid audit trail.