Understanding Decentralised Applications (dApps): A Guide For Businesses
Table of contents
- What are dApps and How Do They Work?
- How are dApps Different from Regular Applications?
- Are there any Useful dApps?
- Why are dApps Important for Business?
- What are the Downsides to Using dApps?
- What is the Future of Decentralised Applications?
Decentralised apps (dApps) have attracted attention in recent years—and for good reasons. dApps offer a richer feature set than regular centralised applications and promise more benefits for users and businesses.
While dApp development is an emerging field, the technology has many applications in the business sector. We'll look at the meaning of dApps and their potential use-cases, along with the pros and cons of using them.
Let's dive in!
What are dApps and How Do They Work?
Decentralised or distributed applications ("dApps") run on a blockchain or peer-to-peer (P2P) network. These apps operate using computing power from different computers, not a central server.
According to David Johnston, CEO of dApp Fund, a dApp must have the following features:
- It must be open-source and implement changes approved by network peers (users) through voting.
- It must generate tokens through a consensus mechanism, such as proof-of-work (POW) and proof-of-stake (POS).
- POW mechanisms allocate rewards based on the user's participation in running the app (usually through "mining").
- POS mechanisms allocate rewards according to a user's overall stake in the system.
- It must have a native token, aka cryptocurrency, for using the app and rewarding vital players in the ecosystem—miners, stakers, etc.
- It must run without external control and be decentralised enough to prevent a single point of failure.
- It must store transaction data on a public blockchain.
How are dApps Different from Regular Applications?
As explained at the beginning, dApps are very different from the legacy apps we know. To illustrate this difference, let's compare a dApp to a regular Web app like Facebook.
Facebook has access to the app's backend and can control everything from that backend. For example, Facebook could remove a user from the network, as it has infamously done in the past. In contrast, users cannot be removed from a dApp, except with the approval of all peers in the network.
With a dApp, no central entity has exclusive access to the backend. This is different from a traditional app, where there's a central entity running the entire service via centralised servers.
Instead, the smart contract (aka the backend) which powers those apps lives on blockchain's innumerable computer nodes. Smart contracts store the logic or programme code that controls how the dApp function.
Here’s a handy guide on how smart contracts work.
Another major difference between dApps and traditional applications: dApps don't require personal information from users to grant access. For instance, popular dApps like OpenSea or Uniswap allow users to login by connecting their cryptocurrency wallets.
If the same users want to use a regular app like Facebook, it'd require submitting personal details like age, name, sex, location, and date of birth. They'll also submit their mobile numbers and email addresses to authenticate accounts.
With data privacy becoming a hot topic, the anonymous nature of dApps makes them a good investment for savvy businesses. This way, companies can guarantee users maximum data privacy and increase consumer trust.
Are there any Useful dApps?
The uber-popular CrytoKitties game was one of the earliest dApps to receive widespread attention. However, dApps have expanded beyond gaming and are now applied to business.
Here are some business use-cases for dApps:
1. Decentralised Cloud Storage
Enterprises have relied on cloud storage options like Google, Dropbox, and OneDrive to store large amounts of data. While cloud storage has improved information storage for businesses, the trade-off for companies is lower data safety. Malicious individuals can target data silos and quickly take over databases belonging to corporations.
Decentralised storage is the ultimate solution for businesses safely storing enormous data. These blockchain-powered apps ditch the data-silo arrangement of legacy storage solutions and instead rely on distributed computing systems.
Accessing files stored in these would require hacking the entire network, which is difficult—if not outrightly impossible. Moreover, the data stored can only be decrypted by those with access to the cryptographic keys.
Sia is a real-world example of a blockchain-powered storage platform. Using p2p technology, Sia allows users to rent out unused storage space to clients. The latter can pay using the platform's native token (Siacoin).
Other examples of blockchain-enabled cloud storage platforms include:
2. Decentralised Finance
No other area has benefited from the introduction of dApps than the finance industry. With the introduction of Ethereum-powered dApps post-2017, decentralised finance (DeFi) has grown exponentially.
DeFi solutions are built to provide similar services to traditional banking institutions. The difference between both lies in their design and function.
Traditional finance operates through a network of intermediaries, including bankers, brokers, and more. The interference of external parties often slows down transactions and affects user experience.
Besides, these legacy structures give financial organisations total control of the ecosystem. For more, a bank can freeze your account without providing any reason.
DeFi solves the problem with regular banking and financial services. These dApps built on the blockchain ecosystem can provide the same benefits without the downsides of a standard finance solution.
DeFi applications can perform the following:
- Decentralised lending
- Asset and derivatives trading
- Market predictions
- Automatic contract settlements
- Reserve banking
Each of these DeFi applications has its benefits. For example, a decentralised lending platform will allow moneylenders to earn better interest on funds, as there's no intermediary, i.e., banks, charging fees.
Similarly, automatic contract settlements can help insurance businesses streamline operations. Insurance companies can program claims to activate once specific criteria are fulfilled. That reduces disputes common with claims processes and guarantees a smoother experience for customers.
Examples of DeFi dApps include:
3. Corporate Governance
Another area in business where dApps shine is corporate governance. For the uninitiated, corporate governance operates on shareholder franchise—the principle that shareholders should contribute to corporate decision-making. Shareholders vote on mergers, acquisitions, board appointments, and other significant decisions.
However, the current system has many downsides:
- Shareholders may be unable to attend a physical meeting. Additionally, organising these meetings can run up company expenses.
- Errors can occur during the balloting process. In a famous case, Nelon Peltz successfully challenged the results of a Procter and Gamble (P&G) board election, with a recount showing he won by over 40,000 votes.
- Investors cannot vote anonymously. In most cases, shareholders cannot protect their identity during the elections. This may lead to significant backlash, especially with the controversial nature of certain decisions.
dApps can solve these problems and simplify corporate governance for large businesses. A blockchain-enabled voting system will allow investors to vote seamlessly and anonymously on agenda items tabled for discussion.
Votes are logged on blockchain's immutable and open ledger, so irregularities are unlikely to occur. More importantly, running voting on a dApp is faster—not to mention cheaper—than organising long-winded meetings.
Aragon is a dApp built to help developers create decentralised businesses that incorporate blockchain-powered corporate governance. The dApp has a native token $ANT, which allows users to vote, make proposals, and participate in dispute resolution.
Why are dApps Important for Business?
Businesses have a lot to gain from integrating dApps into their business operations. From improving customer privacy to simplifying routine actions, dApps can help companies to run better.
Here are some reasons using a dApp is good for your business:
1. Better Data Safety
On a dApp, user information is stored on shared databases and distributed across thousands of computer nodes. Even if a node were hijacked, it would be impracticable to steal all the data since each node would need to be hacked.
Compare that to a traditional app like Yahoo. In 2013, Yahoo's central servers were breached, resulting in millions of data records getting stolen and sold on the Dark Web*
Some dApps don't even require users to provide personal information before running the service. Without sensitive information stored anywhere, there's nothing for hackers to steal.
2. Reduced Downtime
Many traditional applications run on a central server. If the said central server develops a fault, the entire app ecosystem will suffer. For instance, Facebook's (now Meta) servers crashed in October 2021, cutting off millions of users and businesses who depend on Facebook, Instagram, and WhatsApp, and other apps owned by the corporation.
dApps run on P2P, blockchain-enabled networks. There's no single point of failure, preventing service interruptions and reducing application downtime. Even if a computer node crashes, the rest of the network will continue to function seamlessly.
3. Saves Costs
dApps can help businesses save money, especially as they don't have to use intermediaries. For example, moneylenders can save on middleman fees since a DeFi lending marketplace promotes direct contact with borrowers.
Businesses don't need to store data in silos or build expensive data centers. They neither need to hire experts to manage troves of user information stored in databases.
4. Enhanced Borderless Operations
Because dApps run on multiple servers, it is difficult to stop their operations—especially in a particular region. With the lack of a standard IP address, governments cannot restrict an application. For businesses, this means easier expansion into other countries.
5. Simplified Operations
Thanks to smart contracts, dApps can solve many operational issues that businesses confront daily. For example, insurance companies can promote easier settlements, faster payouts, and more satisfied customers by using a trustless system to process claims. Similarly, businesses can get paid faster for services.
6. Lower Barriers to Access
With a dApp, businesses can reduce the barriers preventing customers from accessing services. Customers trying to sign up for a regular bank account must deal with a great deal of paperwork and regulatory constraints, which discourages many from signing up. Which explains why more than 1.7 billion people are unbanked.
Innovative dApp-powered enterprises can drastically improve ease of access for potential customers. DeFi solutions are already promoting financial inclusion and reducing the world's unbanked population.
7. Higher Trust
The decentralised nature of dApp helps increase the trust in the project. First, users can always see and approve changes to the architecture of a dApp. This prevents the problem of developers introducing changes arbitrarily without consulting users—a common occurrence with centralised applications.
Also, there are no central data storage or governing authorities for dApps. As a result, the average user is confident their data won't get manipulated by corporate interests.
What are the Downsides to Using dApps?
Using dApps presents many opportunities for smart businesses. From DeFi to better supply chain management, dApps can transform business operations. But there are some downsides to using these solutions, many of them because dApps are relatively new technology:
1. Poor User Experience
Early dApp users have to make do with the less-than-ideal user experience available on the applications. If a user needs to access a blockchain-powered dApp, they must set up a private and public key.
With a regular app, users can login using a password and username. Many prefer to use centralised applications for this ease of use, despite poor security and unrestricted data harvesting.
2. Scalability Issues
Most apps used today started as bare-bones MVP (Minimum Viable Product). With time, developers modified the base structure of such apps to handle the influx of new users. This allowed apps like Facebook, Uber, and Twitter to scale.
Given their complex architecture, scaling dApps is a more challenging task. For starters, developers cannot easily modify the source code after deploying it on the blockchain. One cannot launch a dApp and add new features to encourage scalability.
The only solution is to build apps to scale from the onset. However, every developer admits building an app to scale immediately post-market launch isn't easy.
3. Difficult Maintenance
Aside from being hard to scale, dApps are difficult to maintain. That's because developers cannot fix bugs and improve the system unless each peer on the network updates their node software. Regular apps are centralised and can be modified by the developer if an operational problem surfaces.
4. Slow Performance
Blockchain's low throughput often limits dApp usability. If a dApp uses too much computing power, the entire network may get congested.
Ethereum, the choice ecosystem for many dApp projects, processes 10 to 15 transactions per second. Should more transactions occur, the number of unvalidated transactions will spike, slowing down network speed.
When CryptoKitties ballooned in users and crashed the Ethereum network, that's what happened. For individuals accustomed to near-instant processing ON centralised applications, the lag time on dApps may be discouraging.
5. Problematic User Verification
User anonymity is one of the best features of dApps. Still, apps need users to verify identity in some manner before using the app. User verification becomes problematic since there is no central authority controlling the dApp.
Centralised applications verify users through the Know Your Customer (KYC) process. This is usually done by asking new users to submit scanned documents or enter an OTP.
A dApp cannot send SMSes or verify documents. The alternative would be to ask users to create a digital identity. However, that's difficult and could further compound the user experience problem for dApps.
What is the Future of Decentralised Applications?
While dApps need more development, their utility is undeniable. Already, developers are working hard to make dApps mainstream—it's only a matter of time before their popularity increases.
However, it is essential to understand the challenges confronting the dApp ecosystem. Businesses must invest in seasoned developers who understand the field and can pre-test dApps thoroughly to ensure maximum usability and scalability.
Further reading on dApps: