Decentralized Finance Protocols are components that makes up DeFi. Without these components in place DeFi cannot work. In our previous articles on this subject matter we took a look at Stablecoins and Decentralized Exchanges. Now it’s time to explore the next important component of DeFi called Decentralized Applications also. known as DApps.
Decentralized Applications: What is a smart contract?
Before we go into defining what a decentralized application (DApp) is you need to have an idea of what a smart contract is.
The smart contract technology was introduced formally in 2015 by Ethereum. In simple terms a smart contract is a computer program deployed on a blockchain which is based on an agreement between two or more parties that will only execute if specified conditions set out are met. It’s important to note that through the use of smart contract you do not need a third party or central authority. In other words smart contract is the digital version of contracts; which is executed automatically upon satisfying predefined conditions. A smart contract is self executing.
What is a Decentralized Application?
I believe we already know what being decentralized means and we also have knowledge of what blockchain is?
Decentralized application is an application that runs on decentralized P2P network governed by all the members and not a single central authority. Decentralized applications are like an interface for smart contracts and the blockchain.
Basically, decentralized applications provide us an interface to use smart contracts and the blockchain in a user friendly manner. Decentralized application can be referred to as smart contract in its refined state with hidden lines of code and a user friendly interface.
Imagine how difficult and time consuming it would be to access your Ethereum wallet for an average user with no knowledge of coding if a decentralized application like MyEtherWallet wasn’t built to act as an interface for the smart contract and blockchain? Now to access your wallet you simply need a few clicks and your private key.
- They act as an interface between the smart contract and blockchain.
- They make accessing the smart contract functions user friendly and easy.
- Decentralize the idea of creating applications with no government or central authority having total control.
- There’s high levels of data security due to deployment of smart contracts governed by private keys.
Categories of DApps
DApps are divided into three main categories according to the ethereum whitepaper. These three categories include:
1. Money and Financial Management DApps:
Decentralized applications can be used for fast, secured and cheap money transfers. By utilizing blockchain technology, dapps can be deployed in managing our finances, money transfers, lending and other financial services by eliminating centrality and improving security due to the consensus mechanism that is impossible to change without a majority. Ethereum wallets like MyEtherWallet and Imtoken are a good example. This is where DeFi comes into play through the utilization of dApps.
2. Business Process Management Dapps:
Companies can integrate blockchain technology through the use of decentralized applications to streamline business processes without human intervention. In a nutshell this category of dApps have to do with money and financial management but also includes information on how to manage these processes utilizing blockchain technology. A good example is the use of DApps in logistics management for tracking cargoes utilizing blockchain technology through smart contracts. Another example is IBM Food Trust, it’s built on the IBM Blockchain for supply chain transparency.
Nestlé has added its Zoégas coffee brand to the IBM Food Trust blockchain and partnered with the Rainforest Alliance to bolster the coffee’s data traceability.
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3. Decentralized Autonomous Organization (DAO) DApps:
DAO is a digital form of a real world organization which operates in a decentralized automated manner and exist on a blockchain through the use of smart contracts.
Here, a decentralized network of autonomous agents perform tasks, which can be conceived in the model of a corporation running without any human involvement under the control of a set of rules. To become an organization more formally, a Dapp might adopt more complicated functionality such as a constitution, which would outline its governance publicly on the blockchain, and a mechanism for financing its operations such as issuing equity(tokens) in a crowdfunding. DAOs/DACs (decentralized autonomous organizations/corporations) are a concept derived from artificial intelligence.
What can you do with a Decentralized Application?
Ethereum paved the way for smart contract platforms. In its whitepaper, it was stated that the intention of Ethereum is to create an alternative protocol for building decentralized applications with emphasis on development time, security, and scaling. Ethereum allowed developers from all over the world to run their Dapps on top of their platform.
Ethereum developers made decentralized applications that have real-life use cases, ranging from asset management to resource planning.
Decentralized Applications can be used for the following
- Trading cryptocurrencies : Decentralized Exchanges are a good example of DApps.
- Storing your crypto assets: these includes cryptocurrency wallets like MyEtherWallet, Imtoken, Bitcoin wallet, etc
- DeFi: Decentralized Finance can only be possible through the use of decentralized applications. In order to offer decentralized financial (DeFi) services you would first need to build a decentralized application which would serve as a platform for your products and services.
- DApps can be built for business management processes a good example is power ledger. Power ledger is a DApp for the power sector that lets people sell their extra electricity in a peer to peer marketplace. Recently I attended #ETHLagos meet up event in Abuja where we brainstormed on how to tokenize energy through the use of Ethereum smart contracts.
- DAO category of dApps can be deployed for elections. This will stamp out corruption in elections like changing figures, vote buying, ballot box snatching, etc. A group of developers that are looking to solve these issues has created FollowMyVote, which will allow people to vote using the Ethereum blockchain. By using a decentralized application to verify voters identities, elections can now be safe, secure and transparent. Another good example is Univote, a voting platform decentralized application developed by students of University of Jos, Nigeria. The DApp enables users to do the following: Create elections, Add candidates, Cast votes, Watch live score and See final vote tally.
The big deal is, you can build a decentralized application for anything as long as a smart contract has been deployed for it.
For instance a decentralized application can be built through the use of smart contracts for you to sell your car through the following steps:
- You tokenize your car into a smart contract (this is possible using a token that represents the ownership of your car).
- You now set a price for your car let’s say 100 ETH. The smart contract’s condition is that IF someone sends 100 ETH to the smart contract THEN the token(this represents ownership of your car) is sent to that person’s address
- So, if someone wants to buy your car, all they need to do is send the right amount of ETH to the smart contract.
- If it’s the right amount, the token (which represents ownership of your car) is sent to that person and the 100 ETH is sent to you. If it is not the right amount, then the ETH will be returned to the sender and your car(your token created) stays in the smart contract.
By using the smart contract, you do not need a broker. You do not need to pay any application fees either. There is no central authority to trust, and so no commission can be charged! All you will have to pay is the Ether transaction fee also called gas for the nodes on the Ethereum network that are mining/verifying transactions. Ethereum gas fees are quite low and affordable ranges from $0.3 to $1.30.
Characteristics of Decentralized Applications
For an application to be called decentralized it needs to posses all four characteristics listed below:
- Open Source – The source code of application must be made available to everyone.
- Decentralized – Uses blockchain technology and not controlled by any government or central authority.
- Incentivization: As the app is based on the decentralized blockchain, the validators of the records on the network must be incentivized with crypto tokens or any form of digital asset that has value.
- Algorithm – Generates tokens and has an inbuilt consensus mechanism. It is self executing.
Blockchain enthusiasts believe Decentralized Applications will transform many sectors ranging from Energy, Politics, Finance, Business, Real Estate, etc. So far so good we have seen a wide range of DApps already built for different industries and are being utilized in our world today.
The Banking and Finance Industry has witnessed some new disruptive innovations through the use of blockchain technology harnessing the power of smart contracts to build dApps that offers decentralized financial (DeFi) products and services not limited to only the banked, but extends to the unbanked population. One advantage of this kind of financial products and services is no government or central authority has autonomy or control over it.
This is the possibility Decentralized Finance (DeFi) brings through the use of dApps.