In 2011, legendary venture investor Marc Andreessen of Andreessen Horowitz wrote a seminal piece in which he declared that “software is eating the world.” By 2012, British news outlet The Guardian proclaimed that “apps have taken over the world.”
Decentralized applications take this even further.
You only need to glance at your smartphone to know that most of the apps we use today are run by centralized companies. For example, Facebook has complete control over its service, including its smartphone app. It makes frequent changes to the app interface, features, and terms and conditions of use. Facebook also controls the codebase and the data it harvests from its app and how that data is stored and used.
In contrast, decentralized applications are open and not necessarily controlled by a single person or entity. Decentralized applications, or dApps, run on distributed networks, such as a P2P network or a blockchain like Ethereum. For the purposes of this explanation, we’ll only focus on blockchain-based applications.
All applications are based on programming, and the programming for a dApp is contained in its underlying smart contracts. In the case of Ethereum, the Ethereum Virtual Machine executes the smart contract code via the processing capabilities of the Ethereum network.
All actions associated with the dApps smart contracts, including the underlying smart contract code, are stored on the Ethereum blockchain. Therefore, they share the following features:
Anyone can view the underlying code of a decentralized application and see all the associated transactions, including which addresses funds moved from and to.
Nobody can edit, delete, or otherwise amend any decentralized application’s code or transactions. Transactions are preserved as part of the blockchain’s history. If a decentralized application needs to be updated, the developers generally build and release an entirely new version. However, users can still access the old version via the blockchain if they wish.
The immutability feature also means that decentralized apps are effectively uncensorable by governments or other external parties. Similarly, the open nature of a blockchain means that dApp developers can’t block people from using their dApp, or interfere with their transactions.
Some applications, both centralized and decentralized, allow users to store assets within the app. For example, you might pre-load an account balance or purchase in-app assets to play a game. With centralized apps, you’re generally trusting the developer with your assets, and there is a risk that if the developer goes out of business, you could lose your assets.
Decentralized applications usually store assets on the blockchain as tokens. Users may be able to link their private wallets to the dApps so their assets can interact with the app, but they can often retain control of their assets and aren’t required to trust a third party. However, this does depend on the type of dApp and how the assets are used, so it’s worth checking.
As things stand, using decentralized applications can pose a degree of risk. How much risk depends on factors such as the type of application, the quality of the underlying smart contract code, the level of investment involved, and the relative expertise of the user when it comes to blockchain and cryptocurrencies.
Over the last year, as decentralized financial applications have risen in popularity and prominence, smart contract risk has become one of the biggest perils facing investors. In fact, one security firm estimates that DeFi hacks accounted for 76% of all major hacks in the world in 2021 so far.
As a result, several developers have launched DeFi insurance applications, which allow users to take out cover to protect against the risk of such attacks.
Furthermore, it’s becoming increasingly common for protocols to have their code audited by third-party security firms as a way of catching bugs and errors before they arise. Many also offer bug bounties to eagle-eyed developers who might spot issues with their code.
The risks of decentralized applications notwithstanding, the future is bright for dApps. Arguably, any technology must go through a teething phase for it to embed, develop, and mature. For example, the earliest days of cryptocurrencies were characterized by incidents such as the Mt.Gox exchange hack and the Silk Road takedown.
While these events were bad for the image of digital assets in the short term, the sector has now evolved to the point where there’s a wide range of reputable service providers, such as EQONEX, which seek to work in harmony with regulators and provide peace of mind for investors.
Similarly, as DeFi and decentralized applications continue to attract legitimate investment, the sector will eventually stabilize. In the meantime, decentralized applications offer a fun and innovative way to experiment with a growing segment. However, the cautious mantras of “do your own research” and “don’t invest more than you can afford to lose” stand as true as anywhere else in crypto.
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