Apple arguably said it best back in 2009: “There’s an app for that.”

Thanks to apps, everyday tasks are as easy as a swipe or tap. But this convenience comes at a cost: Apps collect vast amounts of user data, and their centralized design – which relies on third-party servers and platforms – leaves this sensitive info vulnerable to misuse, breaches, or unauthorized access.

Decentralized apps (dApps) offer an alternative. Though still in their early stages, many blockchain developers and crypto enthusiasts consider dApps to be a key step toward an internet where users have greater control over their personal data.

In this guide, we’ll explore what dApps are, how they differ from traditional apps, and ways to engage with them.

What does dApp mean? Explaining decentralized applications

dApps share many of the same use cases as the millions of traditional apps downloadable from Apple's App Store and Google Play. They support functions like financial transactions, social networking, gaming, online marketplaces, and content sharing. But instead of relying on centralized servers, they leverage blockchain technology, offering users greater control over their data and interactions.

For example, dApps can facilitate secure payments and lending through decentralized finance (DeFi) platforms, enable peer-to-peer (P2P) trading of digital assets, host community-driven social media platforms, or even power immersive blockchain-based games. These applications demonstrate how dApps can replicate and expand upon the capabilities of traditional software while operating in a decentralized ecosystem.

Developers build dApps using "smart contracts," which are comprised of executable code that is deployed on compatible blockchains like Ethereum (ETH) or Solana (SOL). These smart contracts facilitate interactions with dApps by enabling users to execute specific functions on the smart contract. For example, a smart contract may contain a swap function that enables a user to swap one digital asset for another. Transactions within a dApp are recorded on transparent, distributed ledgers, fostering user trust without the need for intermediaries.

Centralized vs. decentralized apps: What's the difference? 

Unlike dApps, centralized apps rely on a single point of control to store data and offer services. For example, tech companies like Meta or Amazon manage app infrastructure through tightly controlled cloud servers. This top-down design is scalable and efficient, but it comes at the expense of security and user privacy. The need to rely on cloud servers not only makes centralized apps more vulnerable; users must also trust third-party companies with sensitive information.

dApps aim to solve these challenges by replacing centralized cloud servers and corporate control with a peer-to-peer (P2P) infrastructure built on blockchains. In this setup, every node on the blockchain contains a copy of the distributed ledger, which eliminates single points of failure. The transparency and immutability of blockchain technology also helps protect against censorship and data manipulation. 

Some dApps encourage direct community involvement through governance protocols like decentralized autonomous organizations (DAOs), allowing members to vote on development proposals and decisions.

Why are dApps important?

For web3 supporters, dApps address many of the limitations of traditional applications and create a safer way to interact with the internet. dApps may be relatively new, but both developers and users have already noted a few areas where they shine:  

• Accessibility: Blockchain's permissionless nature ensures that dApps are available in any region with internet access. This openness allows users to access services even in areas where laws or restrictive policies prevent centralized companies from operating. 
• Strengthened security: By distributing data across multiple nodes rather than centralizing it on a single server, dApps reduce the risk of hacks and targeted exploits. dApps also allow users to share less personal information because they authenticate through self-custodial wallet addresses.
• Greater privacy and user control: With dApps, users retain ownership of their digital assets and data through their linked wallets. This structure minimizes privacy risks, eliminating the need for know-your-customer (KYC) details, passwords, or usernames.
• Increased transparency and data immutability: dApps provide full transparency of transaction data, allowing anyone to view a complete transfer history by searching the blockchain ledger through wallet addresses. Blockchain's cryptographic algorithms also ensure data is both irreversible and resistant to censorship.

Prominent dApp examples and categories  

The possibilities for dApp development are vast, and the list continues to grow. Regardless of their use case, dApps directly challenge their centralized counterparts, offering users blockchain-based decentralized alternatives. Here’s a closer look at how dApps are transforming industries and redefining user experiences in the digital space:

Decentralized finance (DeFi)

Decentralized finance (DeFi) dApps offer traditional financial services without needing institutions like banks and brokers. Bitcoin (BTC) is arguably the first DeFi application, but this term typically refers to the financial dApps that started to gain traction following Ethereum's introduction of smart contract technology. Early projects like MakerDAO (MKR) showcased the possibility of crypto lending by issuing the decentralized stablecoin DAI, and decentralized exchanges (DEXs) like Uniswap (UNI) perfected the technology behind P2P swapping. 

Whatever their use case, dApps typically use smart contract-driven protocols, such as liquidity pools, which hold crypto contributions from users in decentralized vaults to facilitate P2P transactions. Anyone with cryptocurrency and a compatible wallet can access DeFi dApps to trade, lend, borrow, and earn interest.

Blockchain gaming

Like traditional video games, blockchain-based games aim to create fun, engaging virtual experiences for users. A difference with gaming dApps, however, is the ownership rights they offer. What sets gaming dApps apart is the ownership rights they provide. Built on P2P blockchains, these games let players keep tokens or virtual collectibles earned during gameplay in self-custodial wallets. Beyond granting control over digital assets, blockchain games often include decentralized governance, fostering tight-knit web3 communities where players have a voice in development.

Blockchain gaming gained traction in 2017 with the success of CryptoKitties on Ethereum, an early web3 game where players could create, buy, and sell animated cat non-fungible tokens (NFTs) in a virtual market (more on NFTs below). Later games like Axie Infinity expanded on this model with play-to-earn (P2E) mechanics, rewarding players with cryptocurrency for in-game activities. Meanwhile, dApps like The Sandbox (SAND) and Decentraland (MANA) focus on immersive "metaverses," offering spaces for socializing, developing virtual real estate, and attending live events.

NFT marketplaces

NFTs are a subcategory of digital assets, each with distinctive metadata linked to a single blockchain address. Whether representing art, music, or profile pictures, NFTs provide holders with verifiable ownership rights over scarce virtual tokens, often accompanied by perks like VIP merchandise or event tickets.

Unlike cryptocurrencies, NFTs don’t have a one-for-one market price on exchanges. Instead, these unique, non-duplicable tokens resemble collectibles like trading cards, requiring dedicated platforms for smooth exchanges and organic price discovery.

To support NFT transfers in the crypto ecosystem, several dApps have adopted auction-style formats similar to eBay. On non-curated platforms like OpenSea, collectors can create, buy, and sell NFTs directly through their crypto wallets. Meanwhile, curated markets like Nifty Gateway focus exclusively on NFT artworks from prescreened artists. In either case, these NFT-focused dApps offer users a transparent and convenient way to trade digital collectibles while maintaining full control of their wallets.

Social media

While blockchain-based social media sites have yet to put a dent in companies like Meta, dApp developers are working on web3 alternatives that mimic the features of other popular platforms. One of the first dApps to showcase this use case was Steemit in 2016, which rewarded users with the STEEM cryptocurrency for creating and curating content. More recent examples include dApps like Warpcast, Mastodon, Lens Protocol, and Minds, where users maintain full control of their personal data and share content without fear of censorship.

Beyond promoting online privacy and freedom of speech, social media dApps offer unique opportunities for users to monetize their activity. From crypto tipping to creating NFTs, influencers and content dApps offer creators more tools to generate revenue compared to traditional ad-based platforms.

Enhance your crypto experience with CoinTracker 

Exploring the expanding world of dApps is exciting, but it comes with the responsibility of managing your transaction history. CoinTracker's Portfolio Tracker makes it easy to monitor all your transfers in one place, with seamless integrations to your crypto wallets and exchange accounts. CoinTracker’s advanced software also records and identifies countless activities on smart contracts for the most accurate and compliant crypto tax forms. 

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Disclaimer: This post is informational only and is not intended as tax advice. For tax advice, please consult a tax professional.