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What are dapps?
Decentralised applications (also known as dapps) are at the heart of many technologies. While they have been used before to run online multiplayer games, more recently the concept of dapps has been applied in blockchains and cryptocurrencies such as Bitcoin.
Traditionally, most databases and ledgers have information written in. The system is centralised and usually verified by an accountant or a banker. On the other hand, a decentralised application has an open, user-run database or ledger, cutting out the need for a third party to oversee all the transactions.
The basics: centralised and decentralised applications
An application, in technology terms, is when a software program is created and designed to carry out a specific goal, like Gmail or YahooMail. These are applications that have been designed to let you send and receive emails.
An application can be centralised or decentralised. A centralised application is where people using the application depend on a central authority to get their messages sent and received. In the previous example, this would be Google and Yahoo.
On the other hand, a decentralised application is open, with no geographical limitations and no central authority monitoring these transactions. So how does it work?
What is a decentralised application?
A decentralised application (dApp or dapp) essentially connects people over the internet. It gives them a relatively secure and trustworthy record of their transactions (both financial and non-financial) without giving control to a third party.
A dapp is also a distributed application. A distributed application has multiple people across the world linked through a network with no overseeing entity. This also means that business can be conducted anytime, anywhere. So you could be sitting in Sydney but transacting with someone in San Francisco.
Is blockchain a type of decentralised application?
A blockchain network is a decentralised application because it is a distributed, public, open source technology with no central authority. It uses Distributed Ledger Technology (DLT). A DLT creates an open, general ledger on the network where everyone can see every debit, credit, and line item. Once it all tallies up, the blockchain generates cryptocurrency, like Bitcoin.
In fact, Bitcoin uses DLT and has a consensus mechanism called proof-of-work, which helps establish the authenticity of the transaction. Proof-of-work becomes important because there is no central agency to verify transactions when it comes to digital currency. If you have a Bitcoin to spend, proof-of-work ensures that it goes towards one transaction only and doesn’t allow you to use the same Bitcoin for multiple transactions.
What is decentralised finance?
Decentralised finance (shortened to DeFi) uses the blockchain network and smart contracts to make financial products available to everyone on the network with no bank or brokerage acting as facilitators. Anyone with an internet connection can access a DeFi system that is largely owned and run by its users. It has become a popular market to finalise transactions, and billions of dollars worth of crypto has flowed through DeFi applications.
Bitcoin was one of the first few DeFi applications. You can send Bitcoin anywhere around the world. This is done by having all the people on the blockchain network agree on the ledger of accounts without the need for a banker or an accountant.
In a DeFi system, a smart contract acts as a financial institution in a transaction. It can hold funds or send/refund them based on the conditions listed in it. Smart contracts can set boundaries, like a regular contract, and they enforce them automatically via a computer code.
Disclaimer
This article is over two years old, last updated on March 22, 2022. While RateCity makes best efforts to update every important article regularly, the information in this piece may not be as relevant as it once was. Alternatively, please consider checking recent cryptocurrency articles.
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