Gareth Johnson
Gareth Johnson
Updated on January 11, 2022

Bitcoin (BTC), the most popular cryptocurrency, was launched over a decade ago, but its blockchain protocol continues to be used for developing new fintech solutions and giving cryptocurrencies new use cases. For instance, there is a whole DeFi industry around decentralized applications (dApps), i.e. apps that run on blockchain technology.

The majority of these dApps are developed on the Ethereum network, although some newer distributed ledgers like EOS or Tron have lately joined the game. Decentralized applications use blockchain to process data across distributed networks and fulfill the transaction by using smart contracts.

In this article, we’ll focus on these apps of the future, the way in which they function, and the ways in which they can be used.

What Are Blockchain-Based Decentralized Applications?

A decentralized application, or dApp for short, is a digital program or application that’s based on a trustless peer-to-peer network and built using blockchain technology. Like cryptocurrencies, dApps aren’t controlled by a central authority as their backend codes run on a P2P network, instead of a centralized server.

The frontend code and user interface can be written in any programming language and are then connected with the dApp’s backend code. Moreover, the frontend code can be hosted on decentralized storage providers like IPFS or Swarm, which increases the apps’ safety and security.

DAPP word formed by wood letter blocks on wood table

Nowadays, there are various kinds of dApps, some of them use their own blockchain, while others are built on already existing blockchains. As we’ll see below, decentralized apps utilize digital assets for more than just monetary transactions.

In order for an application to be decentralized, it has to have the following qualities:

  • Open-source: This means that no one will have full control over the dApp’s tokens, records, and data. Also, a decentralized app has to store and cryptographically secure its data on the decentralized public ledger and its source code should be available for the public.
  • Decentralized nature: All the records of the dApp’s activities have to be kept on a decentralized public blockchain and not on a central server.
  • Algorithm: The app community has to achieve an agreement on which cryptographic algorithm will be used in order to achieve proof of value.
  • Incentivization: The dApp should find a way to reward its network users for keeping the network healthy and confirming the transactions.

How Do DApps Utilize Smart Contracts?

Decentralized applications function by implementing all of the four features that we’ve just mentioned. This way the dApp becomes an open-source app that is implemented on a decentralized ledger backed by cryptography. These applications are powered using tokens that are created with cryptographic algorithms (e.g. Proof of Work). 

The fact that their source code is open means that everyone can access it and make their own contribution to it. This way the process for developing a good dApp is much faster.

But the thing that actually stands behind the dApp and helps them work is the smart contracts. In fact, smart contracts are programs that are stored on a blockchain network and run only when certain conditions have been fulfilled. Usually, these contracts are used to implement agreements between participants of the network, with no time wasted or middlemen involved.

So, these smart contracts demonstrate the core logic of a dApp. The user interface of a dApp is identical to any mobile application or website. The front end is developed to represent what users will see, and the back end of a dApp represents the business logic, which consists of one or more smart contracts that communicate with the underlying blockchain technology.

What Are DApps Used for?

First of all, we can divide dApps into three main categories:

Male hands using laptop with market graphs
  • Financial blockchain apps.

These applications, also known as DeFi (decentralized finance), offer you secure methods for managing your money and finances. The main purpose of financial applications is to improve and simplify complicated financial apps like developing stablecoins, i.e. alternative coins whose value is pegged to that of fiat currencies, developed to stabilize the prices of digital currencies. Algorand, Chain.io, and Bitcoin Atom are some financial blockchain apps.

  • Semi-financial blockchain apps.

This type of app is a combination of data and money that resides outside of the blockchain. A good example of these types of apps is the Initial Coin Offerings (ICO). There are also semi-financial apps that can help financial institutions and governments to monitor the exchange of cryptocurrencies. Examples of this type of app include Chiper, Chainlink, and Chainalysis.

  • Fully functioning dApps.

These apps utilize every characteristic of distributed and decentralized systems. Examples of these apps include decentralized governance, healthcare apps, tracing apps, and apps for online voting. Fully-functioning dApps are the most popular decentralized applications because they aren’t financial at any level. You can take a look at KYC-Chain (app for verifying customer’s identity), Circular (tracing app), BurstIQ (healthcare app), or Audius (music app) to get the idea.

Benefits of Decentralized Applications

DApps have many advantages over centralized apps such as:

  • Preventing Internet censorship. Due to the fact that no central authority controls the dApp, it becomes extremely difficult for any government or a person to limit or control the access to the decentralized app. 
  • No point of failure. Because dApps are based on a peer-to-peer decentralized network, there isn’t a single point of failure that can be caused by centralized servers. This significantly lowers the chances of restrictions or downtime.
  • Secure development. DApps are open-source, which means that the development of the ecosystem happens faster and in a more secure environment.

A Few Words Before You Go…

Since the development of blockchain technology, there’s been a huge growth in the crypto universe. Being able to store data in a decentralized way was a necessary step forward on the road towards decentralized code execution. Thanks to the Ethereum blockchain, it’s now possible to deploy smart contracts worldwide and power the back end for existing and future decentralized apps.