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What Are Decentralised Applications and How Do They Work?

Decentralised applications (“dapps”) provide services similar to those offered by typical consumer applications. But, unlike typical applications, they use blockchain technology to grant users more control over their data by eliminating the need for centralised intermediaries to manage the data. This makes the service they provide “decentralised”.

Digital apps are ever-present in today’s world. Consumers use apps for sending email, paying for parking, finding dates, and countless other use cases. Under conventional models of control and ownership, consumers usually hand over personal data to the company providing the service. With a decentralised app however, users theoretically gain more control over their finances and personal data since they don’t have to entrust anyone else to store and secure the information. However, some experts remain skeptical this will work in practice.

One of the main goals of Vitalik Buterin — the founder of Ethereum, the platform that supports the world’s second-largest digital asset — is to make these kinds of apps easier to create. However, there are many challenges in trying to reach this goal.

Hundreds of dapps exist today on Ethereum, ranging from a Twitter replacement to a decentralised virtual reality game. Many are slow and difficult to use, but they give a taste of the potential for decentralised apps in the long term. Developers hope Ethereum 2.0, a long-awaited upgrade that officially started being rolled out on 1 December 2020 will ease these problems in the coming years.

How does a DAPP work?

Dapps built on Ethereum use blockchain technology to connect users directly. Blockchains are a way to tie together a distributed system, where each user has a copy of the records. With blockchains, users don’t have to go through a third party, meaning they don’t have to share control of their data with someone else.

By their nature, centralised entities have power over the data that flows into and out of their networks. For example, financial entities can stop transactions from being sent, and Twitter can delete tweets from its platform. Dapps put users back in control, making these kinds of actions difficult if not impossible.

There isn’t one agreed-upon definition of a dapp as it’s a relatively new concept. But the key characteristics of a dapp include:

  • Open source. The code is public for anyone to look at, copy and audit.
  • Decentralised. Dapps don’t have anyone in charge, so no central authority can stop users from doing what they want on the app.
  • Blockchains. If there isn’t a central entity, then what’s holding the app together? Dapps use an underlying blockchain (such as Ethereum) to coordinate instead of a central entity.
  • Smart contracts. Decentralised applications use Ethereum smart contracts, which automatically executes certain rules.
  • Global. The goal is for anyone in the world to be able to publish or use these dapps.

What are dapps used for?

The Ethereum white paper published by Ethereum creator Vitalik Buterin in 2013 splits dapps into three main types:

  • Financial apps. These are applications where money is involved.
  • Semi-financial apps. Decentralised apps that involve money, but also require another piece, such as data from outside the Ethereum blockchain.
  • Other apps. Every other type of decentralised app developers are looking to create, including online voting and storage apps.

Financial applications

Financial applications are popularly known as DeFi applications, short for “decentralised finance”.

The idea is to use blockchains (especially Ethereum) to improve more complex financial applications — such as lending, wills and insurance — and stablecoins, alternative coins that aim to stabilise digital asset prices.

Semi-financial apps

The second type of app is similar to financial apps, but it mixes money with “a heavy non-monetary side” as Buterin puts it in the Ethereum white paper.

Buterin gives the example of Ethereum developers setting up “bounties” — rewards that can only be unlocked if someone accomplishes a task. In Western movies, bounties are doled out to outlaws able to catch a person or criminal. But, in this case, they are rewarded for far less dangerous tasks, such as solving a difficult computational problem.

The magic here is the smart contract is (in theory) able to tell if the bounty hunter has provided a working solution, only disbursing the funds if this condition is met.

These smart contracts rely on so-called “oracles” that relay up-to-date information about the outside world, like how many inches of rain fell last season.

The major caveat, though, is that many developers and sceptical oracles can be used in a decentralised way. Users have to trust that the data feed is providing the correct data, and not gaming the data for their own financial interest.

Other applications: DAOs and beyond

Ethereum is a flexible platform, so developers are dreaming up other ideas that don’t fit into the usual financial classifications.

One example is to use this approach to create a decentralised social network that’s resistant to censorship. Most mainstream social apps, such as Twitter, censor some posts, and some critics argue those social apps apply inconsistent standards about what content is censored or “down ranked”.

So, with a decentralised app like Peepeth, once you publish a message to the blockchain, it can’t be erased, not even by the company that built the platform. It will live on Ethereum forever.

Decentralised Autonomous Organisations (DAOs) are one particularly ambitious breed of dapp. The goal is to form a leaderless company by programming rules at the beginning about how members can join, vote, how to release company funds, and more. Once launched, a DAO would operate under these rules indefinitely.

What challenges do DAPPs face?

Dapps are early and experimental, and developers have yet to solve several crucial problems with the underlying network holding them back. For one, dapps can be very expensive to run when Ethereum grows more congested with users. Although traditional apps sometimes have issues with scale, those issues are exacerbated in a decentralised environment, which by its nature can’t operate without a certain level of cooperation and coordination among multiple stakeholders.

How do developers create decentralised apps?

Ethereum developers have created many low-level coding tools, like smart contract builder Truffle and Web3. They provide a way to interact with Ethereum with the popular programming language Javascript. This enables developers from around the world to experiment with dapps in an effort to turn the dream into reality.

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