Chapter 6: dApps & Defi

What Are dApps and How Do They Work?

Did you know that you can earn real-life profits by breeding and growing creatures in a game? Well, you can, if the game is a dApp.
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In this section, I will tell you all about dApps!

You probably have different applications installed on your computer - things like a calendar, Facebook, a weather app, some games, and so on.

Just like you have all of these apps on your computer or phone, there are also dApps - or decentralized applications -, as well. However, there is one big difference between dApps and your common apps. Be patient though, I'll talk about that in a sec.

Now, in this section, I’ll cover what dApps are, in the first place, talk about the most common dApp types, and also ponder on how these pieces of software could affect your life, in the future.

Let’s get to it!

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What are dApps in Crypto? (Explained with Animations)

What are dApps in Crypto? (Explained with Animations) What are dApps in Crypto? (Explained with Animations)

What are dApps?

So - to begin with, let’s establish what are dApps in crypto.

As I’ve mentioned at the beginning of this section, a “dApp” stands for decentralized application. To continue with the earlier example, dApps aren’t too different from the apps that you have on your devices - games, news applications, social media platforms, and the like.

What are dApps in crypto: Decentralized application.

The key difference, however, lies in the underlying platform that hosts the app. So, if you’re using, say, TikTok, all of your information is sent back to the servers of the company - in other words, your data is collected and stored by a centralized institution.

With dApps, however, this is not the case. Instead, decentralized applications don’t have a single, governing authority - it’s in the name, really! All dApps are built not on company-specific servers, but on public blockchains.

Now, a blockchain is a special database that’s used to store information. The things that make it special are that it’s decentralized (belonging to no single authority), and that it stores information in chronological order. I won’t go further in-depth with the topic, but for the sake of this section, I’ll also mention that everyone is able to view the transactions (sales, trades, exchanges, and so on) happening on public blockchains.

If you’d like to understand how blockchains work in a more thorough manner, check out the section dedicated to this topic.

So - decentralized applications are built on blockchains. What’s the big deal?

Well, the “big deal” here is that, when you’re using a dApp, your data won’t be siphoned and sent to a centralized institution, so that they could then sell it to third-party advertisers. On top of that, dApps are governed differently, too - instead of a company making decisions, you have the community behind the dApp responsible for its well-being.

Such communities are referred to as DAOs. Since it’s a bit of a complex topic, I won’t be discussing it here - make sure to check the section about this topic to get a thorough understanding of the whole picture! Suffice to say that, with dApps, the whole community is incentivized to take care of the applications.

The easiest way to understand everything we’ve talked about up until this point is this: imagine that there are two online social media platforms, like Facebook. Say, the first one is just like the one we have now - the “traditional” Facebook, owned by Meta.

Now, let’s call the other platform “Decentralized Facebook”. That’s because, while it looks and interacts completely the same as Facebook, it does not belong to Mark Zuckerberg’s company - instead, it’s built on the blockchain and is completely decentralized.

What are dApps in crypto: Traditional Facebook VS Decentralized Facebook.

With traditional Facebook, your personal information is being collected on a regular basis. This information is then sold to advertisers so that they could target those pesky ads at you better. Your personal privacy is invaded, and sold off, for the sake of ad money.

Decentralized Facebook, on the other hand, acts nothing like that. It only sees the information that you choose to provide, and if you’d like, you are able to remain anonymous on the dApp. No targeted ads, no information gathering.

What are dApps in crypto: Two versions of Facebook.

On top of that, with our current Facebook, Meta (the company behind the platform) makes all of the decisions on what to change, improve, or update. They aren’t too concerned with what the community wants, or what’s best for the social fabric - instead, they only care about their bottom line, even if the cost is less convenient for the user.

On the flip side, a dApp version of Facebook would be looked over by the community behind it. And who knows what the platform needs better than the actual people who actively use it, every single day?!

All dApps are run with the help of smart contracts. These are automated agreements that are programmed and set on the blockchain - generally speaking, once a smart contract is engaged, it cannot be stopped, changed, or altered. If you’d like to learn more about smart contracts, make sure to check out the section "What are Smart Contracts?".

Lastly, as a quick note, in order to start using dApps for yourself, in most cases, you will need to have a cryptocurrency wallet, as well as some funds within it.

The Main Types of dApps

Now, we’ve established that dApps are applications that are based on blockchains, and that allow people to use them anonymously, securely, and without fear of data aggregation.

In order for you to get a better understanding of the topic, though, let’s take a look at some of the most popular examples of the different types of dApps that are out there.

First up, gaming dApps. Without a doubt, these are some of the most popular decentralized applications that have come out of the industry. If you’ve heard about NFT gaming or “Play-2-Earn” games, most all of them can be considered dApps.

Think about Axie Infinity, one of the most popular cryptocurrency games on the market. Within the game, you breed and grow creatures called Axies, battle other players, and are able to sell your Axie pets for real-world profits. With all of the amazing features of the game, it’s also decentralized, and built on a blockchain.

What are dApps in crypto: Gaming dApps.

What this means is that you can inspect the code behind the game, check all of its transactions, and play anonymously - no formal registrations, no “self-doxing” (or, revealing sensitive information about yourself), none of that!

Next up, decentralized cryptocurrency exchanges.

A crypto exchange platform is a place where people go to exchange different crypto assets. By default, these platforms are centralized and follow the “Know Your Customer” financial guidelines - in other words, if you want to trade cryptocurrencies on them, you will need to provide your personal information, ID, residential address, and so on.

Think of the process as you would do with a bank. In order to open a bank account, all of these procedures need to be passed, as well. However, with a bank, you can be sure that you’re providing information to a reliable, established business.

With cryptocurrency exchanges, though, things aren’t always that simple. Many exchanges, to this day, aren’t really well-established, and you might not even be aware of who you’re dealing with.

On top of that, crypto exchanges do still get hacked, on a rather frequent basis. You risk not only losing your cryptocurrencies but also getting your personal information leaked, as well!

Now, with a decentralized cryptocurrency exchange (also known as a DEX), most of those concerns are nullified. You won’t need to reveal your personal information, DEXes usually don’t hold your crypto assets, and you are able to trade some niche crypto assets on them, as well!

The last example that I want to give you while talking about what are dApps is that of the metaverse.

Now, if you’ve spent any time online in the past half a year or so, you might have heard the big news - Mark Zuckerberg, the CEO of Facebook, has announced that his company will now be called Meta and that they will invest in creating metaverse-based technology.

This is a HUGE topic, so I would highly suggest you’d go and check the section "What is the Metaverse?". In short, though, Mark isn’t the first guy to come up with the concept - a “metaverse” is actually just a digital world where you can have your own avatar, and interact with other people!

Where do dApps come in, you might ask? Well, when you’re baking a cake, a cake tin is absolutely necessary - if you try to make a cake without one, it will probably turn out a blob - formless, squished, and unappealing.

What are dApps in crypto: Mark Zuckerberg investing in metaverse-based technology.

The same logic applies to the metaverse, as well! If the underlying technology is poorly-made, the concept itself will be a fluke, too. On the flip side, if the metaverse was built on a decentralized application, this would give it a huge leap in the right direction.

How so? Well, users would be able to remain anonymous, all of their transactions and interactions would be recorded on the blockchain, and everything happening within the metaverse would be provably fair. In other words, everything related to the digital world would be following the rules of the smart contract lying underneath!

Now, I really don’t want to get any techier than I already have, so I’ll stop with the dApp examples here. That being said, my point through all of this was that dApps have infinite potential - there are countless examples and possibilities of how they can be integrated into our lives!

dApps in the Future

With time, everything is slowly advancing and getting more intricate - it’s certain that decentralized applications will only improve in the future, too! Which dApps could we see sticking around, though - which of them have the best potential?

What are dApps in crypto: dApps in the future.

Well, people probably asked these questions in the early 2000s, when tech stocks were dominating the financial landscape - no one knew which companies would survive and go on to become multi-billion dollar businesses, and which ones would fail!

When it comes to dApps, decentralized exchanges and projects such as the metaverse are surely going to stick around in people's minds, at least for some time - projects like these serve some awesome purposes and can be useful in advancing the technology sector, as a whole.