DApps: When Apps Run on Blockchain

Most applications rely on a company to run its backend, store data, and process user actions. This has proven effective for many use cases, but it also results in users having to entrust their accounts, assets, and transactions to that entity.

That model, however, sits somewhat at odds with the idea behind cryptocurrency. Crypto was created in order to enable people to transfer and manage their value without relying on a central entity entirely. If users still have to hand control of their assets and transactions back to a centralized platform every time they interact with an application, much of that benefit is lost..

The need for applications that could operate on the same decentralized infrastructure as crypto itself led to the creation of dApps.

1The Idea Behind dApps 

A dApp is short for decentralized application, and is an application that utilizes blockchain-based components to handle some of its core functions.

Rather than relying entirely on a central entity to process transactions, enforce rules, or record ownership, a dApp can utilize smart contracts to handle these functions on a blockchain. This provides users with a greater degree of control over their digital assets, all while allowing transactions and ownership records to be independently verifiable.

A dApp is an application that uses blockchain-based components.

That said, dApps do not have to run entirely on a blockchain. The frontend can utilize conventional web infrastructure, as long as functions that benefit from independent execution or transparent records are handled by smart contracts.

2What Are dApps Used For?

dApps can support various activities that would traditionally require a centralized platform or intermediary.

DeFi dApps

Decentralized finance (DeFi) is one of the largest use cases for dApps.

Decentralized exchanges (DEXs), for one, utilize smart contracts and on-chain liquidity mechanisms to execute token swaps. This bypasses the asset deposition practice common in centralized exchanges, and allows users to trade while having crypto in their own wallets until the transaction is executed.

DeFi dApps also can allow users to supply their assets to financial protocols and earn a return. Lending protocols such as Aave and Compound allow users to deposit their assets that can be accessed by borrowers, with lenders in turn able to earn yield. A similar model can also be seen in liquidity pools, in which users provide tokens that enable others to trade, and receive a share of the trading fees generated by the pool.

DeFi dApps use smart contracts to enable non-custodial trading, lending, borrowing, and liquidity provision.

Staking applies the model to blockchain participation. Depending on the network or protocol, users can lock or delegate tokens to support the network. The rewards they receive are determined by specific rules on these platforms.

NFT and Gaming dApps

NFT and gaming dApps utilize blockchain to provide users direct ownership of certain digital assets instead of keeping them solely within a platform's database.

NFT marketplaces are a common application of dApps. Users can connect a wallet to browse, buy, sell, and transfer NFTs. Depending on the project, the NFT can represent a collectible, membership, or another digital asset.

Blockchain games apply the same concept to in-game assets. Players may be able to own, trade, and transfer items such as characters, equipment, or collectibles outside the game's internal system. This allows users greater control over how these assets can be used or exchanged.

NFT and gaming dApps let users own, trade, and transfer digital items.

DAOs, Social dApps, and Other Uses

Decentralized autonomous organizations (DAOs) is an application in which dApps are used to coordinate activities and decision-making between users. A governance dApp may allow token holders to submit proposals and vote for changes or delegate their voting power. As with other activities, all of these results are also recorded on-chain.

This same concept is exercised in social platforms. On social dApps, users may have an on-chain identity or digital assets that can be used across different applications. This gives them greater control over identities, content, or community participation instead of having the platforms control everything.

DAOs use dApps for proposal submission, voting, delegation, and on-chain governance records.

Beyond governance and social applications, dApps are also being used to coordinate other activities that involve shared ownership, payments, or access to resources. These include (but are not limited to) decentralized payments, decentralized identity, DePIN, decentralized storage, and real-world assets (RWAs).

3Where Do dApps Run?

Different networks support different dApp ecosystems. The distinctions between these ecosystems can affect transaction fees, supported wallets, available applications, and how users move their assets between networks.

Ethereum and Its EVM Ecosystem

Ethereum is one of the largest and most established ecosystems for dApps. Its smart contract infrastructure supports applications across DeFi, NFTs, gaming, governance, and other use cases.

A large part of this ecosystem is the Ethereum Virtual Machine (EVM), which provides a standard environment for executing smart contracts. Since EVM-based development is quite widespread, developers can build applications that function across Ethereum and other EVM-based networks.

Ethereum is a major dApp ecosystem supported by the Ethereum Virtual Machine.

Polygon is one such network. It supports Ethereum-compatible smart contracts and applications. This allows many dApps to operate across both ecosystems using similar development tools and wallet infrastructure.

Ethereum's mainnet, unfortunately, can become expensive when demand for block space is high. This has led to the growth of Layer 2 networks, which process transactions separately while utilizing Ethereum for security and settlement. An Ethereum-based dApp may, therefore, be available on mainnet as well as on one or more Layer 2 networks.

Solana

Solana is another major blockchain ecosystem for dApps, offering an alternative to Ethereum for applications that require frequent on-chain activity. This network exists to process transactions quickly and at relatively low cost, which has helped it attract dApps across trading, payments, gaming, and DeFi.

Solana is a major dApp ecosystem focused on fast, low-cost transactions.

The ecosystem is built on Solana's own network architecture and tooling rather than the EVM-based infrastructure used on Ethereum. As a result, Solana dApps utilize a separate wallet and tooling ecosystem. This also means that Ethereum wallets cannot interact with them directly.

Other Blockchain Ecosystems

Ethereum and Solana are some of the most prominent dApp ecosystems, but there are many others that exist. Many other blockchains support dApps, with some using approaches that differ from the EVM or Solana's architecture. 

Cardano, for instance, utilizes a model designed to make transaction outcomes more predictable, providing developers with greater certainty of how smart contracts will behave when building dApps on the network.

In contrast, Bitcoin has a more limited role in being a general-purpose dApp platform, since its base layer was designed primarily for payments and value transfer. To support more complex applications, developers often have to use additional layers or networks that extend Bitcoin's functionality. 

Multi-Chain and Cross-Chain dApps

Some dApps are available on multiple blockchain networks rather than being confined to a single one like most. These are called multi-chain dApps, which have separate deployments on different networks. For instance, a DeFi protocol may have deployments on Ethereum and other supported networks, with each deployment having its own contracts, assets, and liquidity.

A cross-chain dApp, on the other hand, is designed to connect activity across different blockchains. It may enable users to transfer assets or data between blockchains through bridges or other interoperability mechanisms.

4Are dApps Safe?

The differences that we just discussed in how and where dApps operate also affect the risks users face.

Smart Contract Risk

Smart contracts control the functions a dApp performs on-chain. If a contract has a vulnerability, an attacker may be able to bypass its rules, manipulate its behavior, and withdraw assets without any authorization.

The problem can become worse if a vulnerability is found after deployment. The reason is that developers cannot always fix a smart contract by releasing a new version as they would with a conventional application. Depending on how the smart contract is designed, fixing it may require an upgrade mechanism, migrating users to a new contract, or may not be possible at all. A vulnerability may, therefore, remain exploitable even after it is discovered.

Smart contract vulnerabilities can let attackers bypass rules or steal assets.

As such, users should check if the contracts underlying a dApp have been reviewed before putting their funds into the protocol. Publicly available code will allow users and security researchers to inspect how the contract works, while independent audits can reveal existing vulnerabilities.

Neither are a guarantee of safety, unfortunately. An audit covers only a specific version and scope of code, so users should check if it covers the contracts they will interact with, and if those contracts have changed since the audit.

Bridge and Oracle Risk

A dApp can still be exposed to risks even when its own smart contracts are working as intended, as some dApps rely on external systems to perform essential functions.

For example, a lending protocol may rely on an oracle to provide asset prices when determining if a user's collateral is sufficient. If the oracle provides incorrect data, the protocol may liquidate a position unnecessarily or allow borrowing when collateral is insufficient.

Similarly, a cross-chain dApp may rely on a bridge to transfer assets or messages between blockchains. In case the bridge is compromised, assets transferred through it may be stolen or become inaccessible.

The dApp is only as reliable as the external systems that its critical functions rely on. This is why users need to understand these dependencies when considering the overall risk of an application.

Phishing Apps and Websites

Even if you’ve done your research and everything on the legitimate platform is working correctly, a lapse of judgement can still have you ending up on an illegitimate platform. Attackers can copy a legitimate application's website and branding, utilize look-alike domains, or distribute fraudulent links through search results, social media, and direct messages.

This is why the official project website and documentation should be anyone’s starting point for finding the correct dApp and contract addresses.

Even legitimate dApps can be imitated through fake websites.

Project Track Record and Metrics

All of the risks discussed above describe what can go wrong, and a dApp's history is what will show you how these risks played out. Past exploits, outages, or other incidents can demonstrate weaknesses that may not be apparent based on the project's design.

What matters is not just whether an incident has occurred, but what caused it, which component is affected, if users have lost funds, etc. How the team responded and whether the underlying issue was resolved should also be a core aspect of your evaluation.

On-chain metrics such as total value locked (TVL), trading volume, liquidity, and active wallets can provide further context about how a dApp is being used. However, they should not be considered as evidence that the protocol is secure. High activity will not remove technical or operational risks.

5A Final Word on dApps

CoinMinutes' final goal when writing this article is not to tell you which dApps to use. Rather, we hope to provide you with the information needed to understand how dApps work and make informed decisions when using them.

Now that you've somewhat grasped some of the main concepts of dApps, perhaps a more in-depth look into specific dApps and how to assess them is in queue. Or maybe exploring other ways to use crypto is more so your cup of tea?

If those are the kinds of crypto coverage you are looking for, check out our website at https://coinminutes.com/ for more updates.