Decentralized applications (DApps) are evolved blockchain-driven siblings of your everyday apps, with a touch of smart contract magic courtesy of the Ethereum network. To users, they’re practically indistinguishable from their traditional counterparts but come packed with an expanded set of features.

Traditional finance systems often revolve around concepts like borrowing, lending, and savings, all tightly governed by central authorities like banks. So, how exactly do everyday financial activities, like taking out a loan, unfold in this decentralized landscape? 

Surely, an exciting journey into the future of finance that is worth exploring.

History of DApps

Bitcoin pioneered blockchain networks, laying the groundwork for a revolutionary technology. Yet, the story doesn’t end with simple financial transactions. In 2013, a visionary, Vitalik Buterin, introduced Ethereum with his friends, marking a shift towards something much grander – a decentralized way of life.

Buterin’s dream involved a blockchain-powered internet where regular users had a say, not big corporations. To turn this vision into reality, Ethereum introduced smart contracts – essentially automated if-then statements with unchangeable rules embedded in their code. The beauty of it? These contracts made intermediaries obsolete, allowing parties to transact directly without relying on centralized platforms.

In a fascinating turn of events in 2014, a report titled “The General Theory of Decentralized Applications, DApps” hit the headlines. Crafted by experienced minds like David Johnston and Shawn Wilkinson, it laid the foundation for what we now know as DApps, a defining moment in the evolution of blockchain technology.

According to the paper, DApps are entities defined by the following characteristics:

• Open-Source and Third-Party-Free: A DApp’s code must be open-source and function independently, free from third-party interventions. Users have control, actively proposing and voting on changes automatically implemented.
• Public Blockchain Requirement: All information within a DApp must be stored in a publicly accessible blockchain network. The emphasis here is on decentralization, ensuring no vulnerable central point for potential attacks.
• Cryptographic Token Usage: DApps should incorporate a cryptographic token for access, rewarding contributors like miners and stakers with the same token. It serves as a medium for transactions within the DApp.
• Consensus Method with Token Generation: A DApp must employ a consensus method that generates tokens, examples being proof-of-work (PoW) or proof-of-stake (PoS), ensuring a reliable and secure network operation.

Now, let’s break down the paper’s classification of DApps in a more relatable way.

Layer-1 DApps 

These are like the pioneers, standing on their blockchain. Think of big players like Bitcoin they operate independently and have their own set of rules baked into the system. It’s like having their little world.

Layer-2 DApps

Picture these as the cool extensions built on top of the Layer-One DApps. They leverage the power of the existing blockchain, often acting like protocols and using tokens for interactions. Imagine a scaling solution on Ethereum it’s like a second layer handling transactions before they officially hit the main chain.  

Layer-3 DApps

These are like the master organizers sitting on top of Layer-Two DApps. They store all the info needed for the other two layers to collaborate. Think of it as the storage unit for application programming interfaces (APIs) and scripts

necessary for Layer One and Layer Two to play nicely. For instance, a Layer-Three protocol might host a bunch of Layer-Two DApps, making the whole user experience seamless.

Significance of DApps?

Decentralization brings a number of perks compared to apps tied to a centralized network. The game-changer here is the ingenious smart contract, cutting off the need for third parties. Take Venmo, for instance it lets you send money to anyone, but try moving that cash to your bank, and dang, there’s a fee. Plus, it’s a waiting game for the funds to show up, often taking days.

Now, with a decentralized app, you’re looking at little to no costs. 

And guess what? DApps don’t play on centralized servers either. That’s where the beauty of being attack-proof comes in no physical target, no worries. It’s not just secure; it’s always up and running, no downtime, always accessible.

The cool thing about DApps is their versatility. Whether you’re into gaming, medical stuff, governance, or just need some file storage, DApps have your back. Using them feels almost the same as your regular apps, but here’s the twist. It’s Web 3.0, a world where information decentralizes. Remember when the web was this open space for everyone?

You get to choose what info to share, like just the essentials for a medical checkup or a loan. You decide who sees it and for how long. Companies might even pay you for this access, turning the tables for the benefit of all users. Trust is a big deal, especially in a world where even the supposedly super-secure giants leak usernames and passwords. In the Web 3.0 era, trust is earned and not just assumed.

DApps Shortcomings

DApps hold the promise of a future without corporate dominance, but again, they face significant challenges. The absence of a central authority can lead to slower updates and changes, as decisions require consensus from the governance, causing potential delays of weeks or even months. 

More, DApps need a substantial user base to function effectively, involving nodes, protocols and users. Currently, it requires users to download a DApp-supported browser, send crypto to a wallet, and interact from there. While tech-savvy users may navigate this process, it poses a barrier for users unfamiliar with such procedures.

DApps Around the World

The potential for transformative impact cuts across various sectors. 

• In finance, DApps offer a more efficient and cost-effective way to conduct transactions, challenging traditional models. 
• Social media see a shift towards user-controlled platforms, ensuring privacy and data ownership. 
• The gaming industry benefits from decentralized structures, fostering true ownership of in-game assets. 
• Voting and governance have become more transparent and secure, enhancing democratic processes. 
• When it comes to fundraising and advertising, DApps provide innovative solutions, ensuring a fair and accountable ecosystem. 

As DApps continue to evolve, their applications across the globe promises a future shaped by decentralization and user empowerment.

Image Source: Shutterstock Stock

Disclaimer: This article is provided for informational purposes only. It is not offered or intended to be used as legal, tax, investment, financial, or other advice.