"dApp" is short for "decentralized application". To understand what we mean by this, let’s first define what ‘application’ means in this context.
A web or mobile application is simply data and code that you can interact with via your browser or phone. Facebook, Twitter, Venmo and Siri are all examples of applications. Applications always used to be centralized. In a centralized app, the data they interact with and the code that displays the user interface are hosted on a single server or a cluster of servers which a person or a company controls.
Even if an application is hosted on a cloud service such as Amazon Web Services or Google Cloud, the virtual servers containing the application code and data are permissioned: they are controlled by a centralized entity. This means that an individual or company can change the underlying data or change the way the app works with no warning.
When Bitcoin was developed, we suddenly had access to a permissionless network that everyone could access and anyone could host. Ethereum took this one step further by enabling developers to write code that could run on a permissionless network.
This was the crucial step forward that allowed dApps to be created. The user interface of a dApp may look the same on your web browser or mobile phone. But the code underneath is running on a blockchain and you identify yourself by connecting your wallet rather than logging in with a password.
What can I do with a dApp?
Just like centralized apps, dApps can be used for anything. Because they grew out of the cryptocurrency ecosystem and have token-based economies, many dApps have a financial focus.
The entire decentralized finance (DeFi) ecosystem is made up of dApps. The best known are DEXs such as UniSwap, SushiSwap, PancakeSwap, lending protocols and other financial services.
Until about a year ago, most dApps were DeFi-focused. But the explosion in the popularity of NFTs has meant millions more people using NFT marketplaces such as OpenSea, Rarible, AtomicHub and SolanArt. Games or virtual worlds where users hold their assets in their wallets are also great examples of dApps. The likes of Decentraland, The Sandbox and CryptoVoxels are attracting an entirely new audience to dApps. And play-to-earn blockchain games such as Axie Infinity provide a financial incentive for new users to enter the space.
Alongside DeFi and gaming, we are also seeing the evolution of decentralized publishing platforms (Mirror.xyz) and messaging services (Inb0x.life). Just like there is an app for everything, soon there will be a dApp for everything.
You can track which dApps are most popular and see which sectors are rising by checking out sites like dappradar.com and dappranking.com.
What are some of the challenges facing dApps?
Because dApps are built on crypto infrastructure, giving people a user experience that matches the standard of centralized apps can be challenging. High gas fees and intermittent delays to transactions when the network is congested can sometimes deter consumers.
While many users are drawn in by the chance to make money on DEXs or NFT marketplaces, dApp creators also need to make their users aware of the fact that their token value can go down as well as up. In a world where most people are used to transacting in fiat currencies, this can sometimes come as a shock.
Potentially the greatest challenge facing dApps, however, is an overreaction by regulators. Most dApp developers welcome sensible regulation as it helps create a more stable environment. But some governments may overreact and place restrictions on dApp developers that temporarily stifle the growth of the sector.
What is the future of dApps?
NFTs have been a real game-changer for dApps. The NFT marketplace OpenSea is the largest dApp by volume on Ethereum and the story is the same for other blockchains. If this trend continues, NFTs will most likely be the factor that pushes dApps towards mass adoption.
One of the big questions about how dApps will develop in future is how decentralized they will be in reality. For example, OpenSea recently froze one collector’s account after reports that it contained stolen NFTs. And CryptoKitties, the game that made its creators DapperLabs famous, does not allow NFT owners to retain the copyright to their NFTs. The intellectual property of each cute kitty belongs to the centralized company.
While the rapid growth of other Layer 1 technologies has reduced the risks relating to Ethereum’s scalability issues (see our earlier blog post), the future of dApps is in part dependent on the future of Ethereum. If the move to Ethereum 2.0 works out as planned, then this will reduce costs and help increase adoption.
The development of the metaverse will be another driver for dApps. As the worlds of blockchain-based play-to-earn games, NFTs and DeFi begin to converge, the popularity of dApps should explode. We expect that the most important trend here will be interoperability, as users seek to migrate assets between Layer 1s or between Layer 1 and Layer 2 blockchains.