What Are Dapps? How Decentralized Cryptocurrency Applications Work
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Decentralized applications, typically known as “dapps” or “dApps,” are cryptocurrency programs such as games and financial products that run on a blockchain network rather than a centralized server controlled by a single company.
Dapps are a broad category in the world of cryptocurrency. The term could describe anything from a decentralized crypto exchange to a social network where users control any revenue generated by their posts.
» Learn more: NerdWallet's picks for best crypto exchanges
Dapps are a vital component of the concept known as "Web3," which seeks to sap some of the power accumulated by internet companies in recent decades. In addition, projects focusing on decentralized finance, or DeFi, are also considered dapps.
Dapps run programs known as smart contracts, which automatically carry out functions (distributing payments, for example) when certain conditions are met. That means Ethereum is the largest cryptocurrency network on which dapps are available because Bitcoin does not support complex smart contracts.
Dapps can have some benefits compared with centralized applications because they can give users some authority and control over their function. But they can also be confusing and potentially offer fewer consumer protections. In addition, because no one entity controls a dapp, you might find it challenging to get help if something goes wrong.
Dapps vs. centralized services
So what does it mean for an application to be centralized, and why would you care? In part, the answer depends on who you are willing to trust.
Do you prefer to do business with established, accountable organizations, even if they're making some money on the deal? Or are you interested in trying out a new and potentially risky technology that allows you to cut out the middleman and transact directly with other users?
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Keep in mind that just because an application is decentralized does not mean it is free. For example, dapps and other cryptocurrency projects usually have transaction fees, which perform two functions:
They compensate users who participate in the governance and functions of the network.
They prevent spam transactions from overwhelming the network.
Are dapps really decentralized?
Dapps, despite their name, may have some level of centralization. For example, when a project launches, its creators may have significant control that they can relinquish over time if they distribute power to users (usually in the form of cryptocurrency tokens).
Like many cryptocurrency projects, dapps may also have a central foundation or organization tasked with promoting a project, funding its development and proposing ideas for improving it.
If decentralization is important to you, you should consider reading the "white paper" for the project you're considering. This founding document describes the developers' plans for a crypto project's operation.
What are the best dapps?
There are several ways to evaluate dapps. Some commonly used metrics center on:
The total value of cryptocurrency deposited in a dapp's smart contracts. As of early November 2022, the analytics site DappRadar reported that the highest balance dapp was Ethereum's ETH2 Deposit Contract, which is one way that users have earned staking rewards for holding ETH.
The number of unique users a dapp has. This measure considers the number of unique crypto wallets interacting with a project and can give a sense of the widespread public interest. (Worth remembering: it's normal for one person to have multiple crypto wallets.) For example, DappRadar's analysis of monthly active wallets in November 2022 found the highest number of wallets were using PancakeSwap, a decentralized exchange; Hooked, a social app; and Trickshot Blitz, a game.
The amount of capital flowed into a dapp over a given period. According to DappRadar, the highest monthly volume dapps in November 2022 were decentralized finance applications or exchanges. Some of the top players were Uniswap, 1inch and PancakeSwap.