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APY vs APR: What’s the Difference?
Key takeaways
You have likely seen these two similar-sounding terms, APY and APR, when looking into decentralized finance (DeFi) products.
APY, or annual percentage yield, incorporates interest compounded quarterly, monthly, weekly, or daily, while APR, or annual percentage rate, doesn’t. This simple distinction can make a significant difference to the calculations for returns over a period of time. It is therefore important to understand how these two metrics are calculated and what it means for the returns that you can earn on your digital funds.
APR vs. APY
APR and APY are both fundamental for the purposes of personal finance. Let’s start with the simpler term, annual percentage rate (APR). It is the interest rate a lender earns on their money — and that a borrower pays for using it — over one year’s time.
For example, if you put $10,000 into a bank savings account with a 20% APR, you will get $2,000 in interest after one year. Your interest is calculated by multiplying the principal amount ($10,000) and the APR (20%). So, after one year, you will have a total of $12,000. After two years, your capital will amount to $14,000. After three years, you will have $16,000, and so on.
Before getting into annual percentage yield (APY), let’s first understand what compound interest is. Put simply, it means earning interest on the previous interest. In the example above, if the financial institution pays interest to your account monthly, your balance will look different during each of the twelve months of the year.
Instead of getting $12,000 at the end of the 12th month, you will receive some interest each month. That interest is added to the principal sum of your deposit, and the sum on which you earn interest goes up as the months go by. Each month, you will have more money earning interest. This effect is called compounding.
Let’s say that you put $10,000 into a bank account with a 20% APR, with the interest compounding monthly. Without getting into the complicated math, you will get $12,194 at the end of one year. That is $194 more in interest earned simply by adding the effect of compound interest. How much interest you’d earn with the exact 20% APR but with interest compounded daily? That would give you $12,213.
The power of compounding is more impressive over more extended periods. After three years, you would end up with $19,309 with the same 20% APR product with daily compounding. That’s $3,309 more interest earned than that same 20% APR product without compounding.
By simply incorporating compound interest, you’d earn a lot more on your money. Notice also that the interest differs according to the compounding frequency. You earn more when the compounding is more frequent. Daily compounding will give you more interest than monthly compounding.
How do you calculate how much you can earn when a financial product offers compound interest? That’s where annual percentage yield (APY) comes in. You can use a formula to convert an APR to APY depending on the frequency of compounding. A 20% APR with monthly compounding equals 21.94% in APY. With daily compounding, it would equal 22.13% APY. These APY numbers represent the annualized interest returns you earn after incorporating compound interest.
In sum, APR (annual percentage rate) is a simpler and more static metric: It’s always quoted as a fixed yearly rate. But APY (annual percentage yield) incorporates interest earned on interest, or compound interest. It changes according to the compounding frequency. One way to memorize the difference is to remember that “yield” has five letters (one more letter than “rate”) and also represents the more complex concept (and greater earnings).
How to compare different interest rates?
From the example above, you can see that more interest can be earned when interest is compounded. Different products may present their rates as either APR or APY. Because of this disparity, it’s essential to use the same term for comparison. Be mindful when you compare products, as you may be comparing apples to oranges.
Products with a higher APY will not necessarily yield more interest than those with a lower APR. You can easily convert APR and APY using online tools if you know the frequency of compounding.
The same goes for DeFi and other kinds of crypto products. When looking at products that may advertise using crypto APY and APR, such as crypto savings and staking, make sure to convert them so that you can compare apples to apples.
Further, when comparing two DeFi products with APY, make sure that they have the same compounding periods. If they have the same APR, but one compounds monthly and the other daily, then the one that compounds daily may earn you more crypto interest.
Another important point to note is what APY means in relation to the specific crypto product you are reviewing. Some product collaterals use the term “APY” to refer to the rewards that one can earn in cryptocurrency over the selected timeframe, and not the actual or predicted returns/yield in any fiat currency. This is an important distinction to appreciate because crypto asset prices can be volatile, and the value of your investment (in fiat terms) may go down or up. If the crypto asset prices fall drastically, the value of your investment (in fiat terms) may still be lower than the original fiat amount you had invested, even if you continue to earn an APY in crypto assets. It is therefore important that you review the relevant product terms and conditions carefully, and do your own research, to fully understand the investment risks involved and what APY means in that specific context.
Closing thoughts
APR and APY may seem confusing initially, but it’s easy to tell one from another by remembering that annual percentage yield (APY) is the more complex metric incorporating compound interest. Because of the effect of earning interest on interest, APY is always a higher number when interest is compounded more frequently than once a year. The bottom line is always to check which rate you are looking at when calculating the interest you’d earn.
Disclaimer: This content is presented to you for general information and educational purposes only, without representation or warranty of any kind. It should not be construed as financial advice, nor is it intended to recommend the purchase of any specific product or service. Please read our full disclaimer here for further details. Digital asset prices can be volatile. The value of your investment may go down or up and you may not get back the amount invested. You are solely responsible for your investment decisions and Binance is not liable for any losses you may incur. Not financial advice. For more information, see our Terms of Use and Risk Warning.
You have likely seen these two similar-sounding terms, APY and APR, when looking into decentralized finance (DeFi) products.
APY, or annual percentage yield, incorporates interest compounded quarterly, monthly, weekly, or daily, while APR, or annual percentage rate, doesn’t. This simple distinction can make a significant difference to the calculations for returns over a period of time. It is therefore important to understand how these two metrics are calculated and what it means for the returns that you can earn on your digital funds.
APR vs. APY
APR and APY are both fundamental for the purposes of personal finance. Let’s start with the simpler term, annual percentage rate (APR). It is the interest rate a lender earns on their money — and that a borrower pays for using it — over one year’s time.
For example, if you put $10,000 into a bank savings account with a 20% APR, you will get $2,000 in interest after one year. Your interest is calculated by multiplying the principal amount ($10,000) and the APR (20%). So, after one year, you will have a total of $12,000. After two years, your capital will amount to $14,000. After three years, you will have $16,000, and so on.
Before getting into annual percentage yield (APY), let’s first understand what compound interest is. Put simply, it means earning interest on the previous interest. In the example above, if the financial institution pays interest to your account monthly, your balance will look different during each of the twelve months of the year.
Instead of getting $12,000 at the end of the 12th month, you will receive some interest each month. That interest is added to the principal sum of your deposit, and the sum on which you earn interest goes up as the months go by. Each month, you will have more money earning interest. This effect is called compounding.
Let’s say that you put $10,000 into a bank account with a 20% APR, with the interest compounding monthly. Without getting into the complicated math, you will get $12,194 at the end of one year. That is $194 more in interest earned simply by adding the effect of compound interest. How much interest you’d earn with the exact 20% APR but with interest compounded daily? That would give you $12,213.
The power of compounding is more impressive over more extended periods. After three years, you would end up with $19,309 with the same 20% APR product with daily compounding. That’s $3,309 more interest earned than that same 20% APR product without compounding.
By simply incorporating compound interest, you’d earn a lot more on your money. Notice also that the interest differs according to the compounding frequency. You earn more when the compounding is more frequent. Daily compounding will give you more interest than monthly compounding.
How do you calculate how much you can earn when a financial product offers compound interest? That’s where annual percentage yield (APY) comes in. You can use a formula to convert an APR to APY depending on the frequency of compounding. A 20% APR with monthly compounding equals 21.94% in APY. With daily compounding, it would equal 22.13% APY. These APY numbers represent the annualized interest returns you earn after incorporating compound interest.
In sum, APR (annual percentage rate) is a simpler and more static metric: It’s always quoted as a fixed yearly rate. But APY (annual percentage yield) incorporates interest earned on interest, or compound interest. It changes according to the compounding frequency. One way to memorize the difference is to remember that “yield” has five letters (one more letter than “rate”) and also represents the more complex concept (and greater earnings).
How to compare different interest rates?
From the example above, you can see that more interest can be earned when interest is compounded. Different products may present their rates as either APR or APY. Because of this disparity, it’s essential to use the same term for comparison. Be mindful when you compare products, as you may be comparing apples to oranges.
Products with a higher APY will not necessarily yield more interest than those with a lower APR. You can easily convert APR and APY using online tools if you know the frequency of compounding.
The same goes for DeFi and other kinds of crypto products. When looking at products that may advertise using crypto APY and APR, such as crypto savings and staking, make sure to convert them so that you can compare apples to apples.
Further, when comparing two DeFi products with APY, make sure that they have the same compounding periods. If they have the same APR, but one compounds monthly and the other daily, then the one that compounds daily may earn you more crypto interest.
Another important point to note is what APY means in relation to the specific crypto product you are reviewing. Some product collaterals use the term “APY” to refer to the rewards that one can earn in cryptocurrency over the selected timeframe, and not the actual or predicted returns/yield in any fiat currency. This is an important distinction to appreciate because crypto asset prices can be volatile, and the value of your investment (in fiat terms) may go down or up. If the crypto asset prices fall drastically, the value of your investment (in fiat terms) may still be lower than the original fiat amount you had invested, even if you continue to earn an APY in crypto assets. It is therefore important that you review the relevant product terms and conditions carefully, and do your own research, to fully understand the investment risks involved and what APY means in that specific context.
Closing thoughts
APR and APY may seem confusing initially, but it’s easy to tell one from another by remembering that annual percentage yield (APY) is the more complex metric incorporating compound interest. Because of the effect of earning interest on interest, APY is always a higher number when interest is compounded more frequently than once a year. The bottom line is always to check which rate you are looking at when calculating the interest you’d earn.
Disclaimer: This content is presented to you for general information and educational purposes only, without representation or warranty of any kind. It should not be construed as financial advice, nor is it intended to recommend the purchase of any specific product or service. Please read our full disclaimer here for further details. Digital asset prices can be volatile. The value of your investment may go down or up and you may not get back the amount invested. You are solely responsible for your investment decisions and Binance is not liable for any losses you may incur. Not financial advice. For more information, see our Terms of Use and Risk Warning.
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Binance Academy
--
What Are Decentralized Applications (DApps)?
TL;DR
Decentralized applications (DApps) are applications that run on top of blockchain networks. There is a great variety of DApps with different use cases, such as gaming, finance, social media, and more.
Although DApps can look similar to regular mobile apps on your phone, their backend system is different. DApps rely on smart contracts on a distributed network instead of a centralized system to function. It makes them more transparent, decentralized, and resistant to attacks, but also introduces some new challenges.
Introduction
Since the birth of Bitcoin (BTC) more than a decade ago, blockchains have evolved to unlock a host of new functionalities and use cases beyond currency. One of these new avenues is building decentralized applications (DApps) to use blockchain technology to enhance many traditional sectors and services.
What are decentralized applications (DApps)?
Decentralized applications (DApps) are smart contract-powered digital applications or programs that run on blockchains rather than centralized servers. They look and feel similar to regular mobile apps on your smartphone and offer a wide variety of services and functions from gaming to finance, social media, and much more.
As the name suggests, DApps run on decentralized peer-to-peer networks. One early report suggested that DApps have the following features:
Open-source: The source code of DApps is available to the public, meaning that anyone can verify, use, copy, and modify them. There is no single entity controlling the majority of its coins or tokens. Users can propose and vote on changes to the DApp too.
Decentralized and cryptographically secure: To ensure data safety, all information of the DApp is cryptographically secured and stored on a public, decentralized blockchain, maintained by multiple users (or nodes).
A tokenized system: DApps can be accessed with a cryptographic token. They can adopt cryptocurrencies like ETH, or generate a native token using a consensus algorithm, such as Proof of Work (PoW) or Proof of Stake (PoS). The token can also be used to reward contributors like miners and stakers.
Under this broad definition, the Bitcoin blockchain can be defined as a DApp — and arguably the first DApp ever. It’s open-source, with all data live on its decentralized blockchain, relies on a crypto token, and uses the PoW consensus algorithm. The same applies to other blockchains that have the above features.
However, today the term “DApps” generally refers to all applications that have smart contract functionalities and run on blockchain networks. The Bitcoin blockchain does not support smart contracts, so most people wouldn’t consider it a DApp.
As of June 2022, most DApps exist on the Ethereum network. It offers a robust infrastructure for DApp developers to expand the existing use cases. But as DApps mature, developers have started building them on other blockchains, including BNB Smart Chain (BSC), Solana (SOL), Polygon (MATIC), Avalanche (AVAX), EOS, etc.
How do DApps work?
DApps are applications powered by smart contracts. Their backend code runs on distributed peer-to-peer networks. A smart contract works as a set of predefined rules enforced by computer code. When and if certain conditions are met, all network nodes will execute the tasks that the contract specifies.
Once a smart contract is deployed on the blockchain, it is hard to change the code or destroy it. Therefore, even if the team behind the DApp has disbanded, users can still access the DApp.
Benefits of DApps
While the interfaces of DApps and traditional applications can look similar, DApps offer multiple benefits compared to their centralized counterparts. Web apps store data on centralized servers. A single compromised server may take down the entire network of the app, making it temporarily or permanently unusable. Centralized systems may also suffer from data leakages or theft, putting the companies and individual users at risk.
DApps, in contrast, are built on distributed networks with no central authority. With no single point of failure, DApps are less vulnerable to attacks, making it very difficult for malicious actors to hijack the network. The P2P network can also ensure the DApp continues to work with minimal downtime, even if individual computers or parts of the network malfunction.
The decentralized nature of DApps also means that users can have more control over the information they share. With no companies controlling users’ personal data, they don’t need to provide real-world identity to interact with a DApp. Instead, they can use a crypto wallet to connect to DApps and fully control what information they share.
Another benefit of DApps is that developers can easily integrate cryptocurrencies into their basic functionalities by leveraging smart contracts. For example, DApps on Ethereum can adopt ETH as payment without integrating third-party payment providers.
Limitations of DApps
DApps hold the potential to become an important part of a censorship-free future, but every coin has two sides. Decentralized applications are still in the early stages of development, and the industry is yet to resolve limitations such as scalability, code modifications, and a low user base.
DApps require significant computing power to operate, which could overload the networks they run on. For example, to achieve the security, integrity, transparency, and reliability that Ethereum aspires to, it requires every validator to run and store every transaction executed on the network. This could hurt the system’s transaction per second (TPS) rate and lead to network congestion and inflated gas fees.
Making modifications to a DApp is also challenging. To enhance user experience and security, a DApp will likely need ongoing changes to fix bugs, update the user interface, and add new functionalities. However, once a DApp is deployed on the blockchain, it is hard to modify its backend code. It would require a majority consensus from the network’s nodes to approve any changes or improvements, which could take a long time to implement.
The abundance of DApps on the market makes it difficult for one to stand out and attract many users. For a DApp to operate effectively, it needs to achieve a network effect — the more users a DApp has, the more effective it is at providing services. A larger number of users can also make the DApp more secure and protect it from hackers meddling with the open-source code.
Popular DApp use cases
DApps offer a fresh approach for businesses across many industries to reach more users. Some popular DApp use cases include GameFi, decentralized finance (DeFi), entertainment, and governance.
GameFi
GameFi DApps have been growing in popularity, which is exemplified by the rise of Axie Infinity, a play-to-earn game on the Ethereum blockchain. According to DappRadar, blockchain gaming activity in 2022 Q1 saw a 2,000% increase from 2021. It also attracted 1.22 million unique active wallets (UAW) in March 2022, with over 50% of the activity coming from gaming DApps.
Unlike traditional video games, most gaming DApps give players full control over their in-game assets. They also offer players opportunities to monetize these items outside of the game. Axie Infinity, for example, features game characters, virtual land, and gaming items in the form of NFTs. Players can store them in crypto wallets, transfer them to other Ethereum addresses, or trade with other players on NFT marketplaces. Within the ecosystem, players can compete with each other to collect ERC-20 tokens that can be traded on exchanges. Typically, the longer they play, the more in-game rewards they can earn.
DeFi and DEXs
Traditional finance relies on financial institutions to act as middlemen. Through DApps, everyone can use financial services without any central authority and maintain full control of their assets. DeFi can also benefit low-income individuals, offering them access to a broad range of financial services at significantly lower costs.
Borrowing and lending are the most popular types of financial services that decentralized applications provide. DeFi DApps offer instant transaction settlement, minimal-to-none credit checks, and the ability to use digital assets as collateral. Users can have more flexibility on DApp lending marketplaces. For example, lenders have more control over their loans by choosing which token to lend and on what platform. Users can also potentially earn 100% of the interest generated from the loan since they don’t have to pay any intermediary fees.
Decentralized exchanges (DEXs) are another crucial example of financial DApps. Such platforms facilitate peer-to-peer trading by eliminating intermediaries such as centralized crypto exchanges. Users do not need to give up custody of their funds. Instead of transferring their assets into an exchange, they trade with another user directly with the help of smart contracts. Orders are executed on-chain and directly between the users’ wallets. Since DEXs require less maintenance, they typically have lower trading fees compared to centralized exchanges. Some popular DEXs include Uniswap, SushiSwap, and PancakeSwap.
Entertainment
Entertainment is an integral part of our lives. With DApps, daily activities that people enjoy are being transformed into digital experiences that can also generate economic incentives. For example, Audius, a blockchain-based decentralized music streaming platform, removes the intermediaries that exist in the traditional music industry to connect artists and fans directly. It allows music curators to better monetize their content and produce immutable records of their work on the blockchain.
DApps are also tackling issues that social media platform users face. Centralized social media giants like Twitter and Facebook are often criticized for censoring posts and mishandling user data. With decentralized social DApps like Steemit, the community can interact freely and express their opinions with fewer restrictions and censorship while enjoying greater control of their personal information.
Governance
DApps can empower users to play a greater role in the governance of online organizations by introducing a more community-centric decision-making mechanism. With the help of smart contracts, users that hold governance tokens of a particular blockchain project can create proposals for the community to vote on and cast their votes on others’ proposals anonymously.
One of the decentralized governance models is Decentralized Autonomous Organizations (DAOs). DAOs can be considered fully autonomous DApps that use smart contracts to make decisions without a central authority. They have no hierarchy. Instead, it is economic mechanisms that align the interests of the organization with those of individual DAO members.
How to connect to DApps?
To interact with a DApp, you’ll first need a compatible browser extension wallet like MetaMask, Trust Wallet, or Binance Chain Wallet. They only take a few minutes to set up. Some even offer mobile versions for easy access.
Let’s use Trust Wallet as an example to see how to connect it to PancakeSwap on BNB Smart Chain (BSC). If you don’t have a Trust Wallet yet, check out this Academy article on how to install it on your smartphone.
Depositing BNB to Trust Wallet
To use DApps on BSC, you’ll need some BNB to pay transaction fees. For example, you can withdraw BNB from your Binance Spot Wallet.
Go to your Trust Wallet and tap [BNB Smart Chain]. Do not click [BNB Beacon Chain]. This option is for BEP-2 BNB on the BNB Beacon Chain and cannot be used to pay transaction fees on BSC.
Tap [Receive] to view your BNB deposit address. You can then copy and paste this address into your withdrawing wallet or scan the QR code to make the transfer.
After the transaction is confirmed on the blockchain, you will see the BNB amount on your Trust Wallet homepage.
Adding CAKE to your Trust Wallet list
Trust Wallet's default list of tokens does not include DApp tokens like PancakeSwap (CAKE). To make CAKE visible in your wallet, you need to add it to the list first.
Tap [Add Tokens] and search “PancakeSwap”. You will see CAKE on different blockchains. As we’re using BSC, tap to toggle on the button next to [BEP-20 CAKE].
You should now see CAKE on your Trust Wallet token list.
The next step is connecting your Trust Wallet to PancakeSwap. You can connect through the built-in mobile browser on Trust Wallet or a desktop.
Connecting to PancakeSwap via the Trust Wallet browser
1. Tap [Browser] from the Trust Wallet homepage and go to the PancakeSwap website.
2. You’ll be prompted to connect your Trust Wallet. Tap [Connect].
Connecting to PancakeSwap via a desktop browser
1. Go to the PancakeSwap website and click [Connect Wallet].
2. Click on the [Trust Wallet] icon and you’ll see a QR code on the screen.
3. Open your Trust Wallet app and go to [Settings] - [WalletConnect].
4. Tap [New Connection] and scan the QR code.
5. You’ll be prompted on the app to allow the connection. Tap [Connect].
Closing thoughts
DApps are expanding the functionality of the Web by enhancing conventional applications with blockchain technology. Decentralized applications could bring even more innovative use cases to the market in the future. As DappRadar reported, DApps recorded almost 2.4 million daily active users by Q1 2022, and user interest is expected to grow continuously. However, DApp developers and the blockchain networks they build on are yet to address the current limitations before reaching mass adoption.
Decentralized applications (DApps) are applications that run on top of blockchain networks. There is a great variety of DApps with different use cases, such as gaming, finance, social media, and more.
Although DApps can look similar to regular mobile apps on your phone, their backend system is different. DApps rely on smart contracts on a distributed network instead of a centralized system to function. It makes them more transparent, decentralized, and resistant to attacks, but also introduces some new challenges.
Introduction
Since the birth of Bitcoin (BTC) more than a decade ago, blockchains have evolved to unlock a host of new functionalities and use cases beyond currency. One of these new avenues is building decentralized applications (DApps) to use blockchain technology to enhance many traditional sectors and services.
What are decentralized applications (DApps)?
Decentralized applications (DApps) are smart contract-powered digital applications or programs that run on blockchains rather than centralized servers. They look and feel similar to regular mobile apps on your smartphone and offer a wide variety of services and functions from gaming to finance, social media, and much more.
As the name suggests, DApps run on decentralized peer-to-peer networks. One early report suggested that DApps have the following features:
Open-source: The source code of DApps is available to the public, meaning that anyone can verify, use, copy, and modify them. There is no single entity controlling the majority of its coins or tokens. Users can propose and vote on changes to the DApp too.
Decentralized and cryptographically secure: To ensure data safety, all information of the DApp is cryptographically secured and stored on a public, decentralized blockchain, maintained by multiple users (or nodes).
A tokenized system: DApps can be accessed with a cryptographic token. They can adopt cryptocurrencies like ETH, or generate a native token using a consensus algorithm, such as Proof of Work (PoW) or Proof of Stake (PoS). The token can also be used to reward contributors like miners and stakers.
Under this broad definition, the Bitcoin blockchain can be defined as a DApp — and arguably the first DApp ever. It’s open-source, with all data live on its decentralized blockchain, relies on a crypto token, and uses the PoW consensus algorithm. The same applies to other blockchains that have the above features.
However, today the term “DApps” generally refers to all applications that have smart contract functionalities and run on blockchain networks. The Bitcoin blockchain does not support smart contracts, so most people wouldn’t consider it a DApp.
As of June 2022, most DApps exist on the Ethereum network. It offers a robust infrastructure for DApp developers to expand the existing use cases. But as DApps mature, developers have started building them on other blockchains, including BNB Smart Chain (BSC), Solana (SOL), Polygon (MATIC), Avalanche (AVAX), EOS, etc.
How do DApps work?
DApps are applications powered by smart contracts. Their backend code runs on distributed peer-to-peer networks. A smart contract works as a set of predefined rules enforced by computer code. When and if certain conditions are met, all network nodes will execute the tasks that the contract specifies.
Once a smart contract is deployed on the blockchain, it is hard to change the code or destroy it. Therefore, even if the team behind the DApp has disbanded, users can still access the DApp.
Benefits of DApps
While the interfaces of DApps and traditional applications can look similar, DApps offer multiple benefits compared to their centralized counterparts. Web apps store data on centralized servers. A single compromised server may take down the entire network of the app, making it temporarily or permanently unusable. Centralized systems may also suffer from data leakages or theft, putting the companies and individual users at risk.
DApps, in contrast, are built on distributed networks with no central authority. With no single point of failure, DApps are less vulnerable to attacks, making it very difficult for malicious actors to hijack the network. The P2P network can also ensure the DApp continues to work with minimal downtime, even if individual computers or parts of the network malfunction.
The decentralized nature of DApps also means that users can have more control over the information they share. With no companies controlling users’ personal data, they don’t need to provide real-world identity to interact with a DApp. Instead, they can use a crypto wallet to connect to DApps and fully control what information they share.
Another benefit of DApps is that developers can easily integrate cryptocurrencies into their basic functionalities by leveraging smart contracts. For example, DApps on Ethereum can adopt ETH as payment without integrating third-party payment providers.
Limitations of DApps
DApps hold the potential to become an important part of a censorship-free future, but every coin has two sides. Decentralized applications are still in the early stages of development, and the industry is yet to resolve limitations such as scalability, code modifications, and a low user base.
DApps require significant computing power to operate, which could overload the networks they run on. For example, to achieve the security, integrity, transparency, and reliability that Ethereum aspires to, it requires every validator to run and store every transaction executed on the network. This could hurt the system’s transaction per second (TPS) rate and lead to network congestion and inflated gas fees.
Making modifications to a DApp is also challenging. To enhance user experience and security, a DApp will likely need ongoing changes to fix bugs, update the user interface, and add new functionalities. However, once a DApp is deployed on the blockchain, it is hard to modify its backend code. It would require a majority consensus from the network’s nodes to approve any changes or improvements, which could take a long time to implement.
The abundance of DApps on the market makes it difficult for one to stand out and attract many users. For a DApp to operate effectively, it needs to achieve a network effect — the more users a DApp has, the more effective it is at providing services. A larger number of users can also make the DApp more secure and protect it from hackers meddling with the open-source code.
Popular DApp use cases
DApps offer a fresh approach for businesses across many industries to reach more users. Some popular DApp use cases include GameFi, decentralized finance (DeFi), entertainment, and governance.
GameFi
GameFi DApps have been growing in popularity, which is exemplified by the rise of Axie Infinity, a play-to-earn game on the Ethereum blockchain. According to DappRadar, blockchain gaming activity in 2022 Q1 saw a 2,000% increase from 2021. It also attracted 1.22 million unique active wallets (UAW) in March 2022, with over 50% of the activity coming from gaming DApps.
Unlike traditional video games, most gaming DApps give players full control over their in-game assets. They also offer players opportunities to monetize these items outside of the game. Axie Infinity, for example, features game characters, virtual land, and gaming items in the form of NFTs. Players can store them in crypto wallets, transfer them to other Ethereum addresses, or trade with other players on NFT marketplaces. Within the ecosystem, players can compete with each other to collect ERC-20 tokens that can be traded on exchanges. Typically, the longer they play, the more in-game rewards they can earn.
DeFi and DEXs
Traditional finance relies on financial institutions to act as middlemen. Through DApps, everyone can use financial services without any central authority and maintain full control of their assets. DeFi can also benefit low-income individuals, offering them access to a broad range of financial services at significantly lower costs.
Borrowing and lending are the most popular types of financial services that decentralized applications provide. DeFi DApps offer instant transaction settlement, minimal-to-none credit checks, and the ability to use digital assets as collateral. Users can have more flexibility on DApp lending marketplaces. For example, lenders have more control over their loans by choosing which token to lend and on what platform. Users can also potentially earn 100% of the interest generated from the loan since they don’t have to pay any intermediary fees.
Decentralized exchanges (DEXs) are another crucial example of financial DApps. Such platforms facilitate peer-to-peer trading by eliminating intermediaries such as centralized crypto exchanges. Users do not need to give up custody of their funds. Instead of transferring their assets into an exchange, they trade with another user directly with the help of smart contracts. Orders are executed on-chain and directly between the users’ wallets. Since DEXs require less maintenance, they typically have lower trading fees compared to centralized exchanges. Some popular DEXs include Uniswap, SushiSwap, and PancakeSwap.
Entertainment
Entertainment is an integral part of our lives. With DApps, daily activities that people enjoy are being transformed into digital experiences that can also generate economic incentives. For example, Audius, a blockchain-based decentralized music streaming platform, removes the intermediaries that exist in the traditional music industry to connect artists and fans directly. It allows music curators to better monetize their content and produce immutable records of their work on the blockchain.
DApps are also tackling issues that social media platform users face. Centralized social media giants like Twitter and Facebook are often criticized for censoring posts and mishandling user data. With decentralized social DApps like Steemit, the community can interact freely and express their opinions with fewer restrictions and censorship while enjoying greater control of their personal information.
Governance
DApps can empower users to play a greater role in the governance of online organizations by introducing a more community-centric decision-making mechanism. With the help of smart contracts, users that hold governance tokens of a particular blockchain project can create proposals for the community to vote on and cast their votes on others’ proposals anonymously.
One of the decentralized governance models is Decentralized Autonomous Organizations (DAOs). DAOs can be considered fully autonomous DApps that use smart contracts to make decisions without a central authority. They have no hierarchy. Instead, it is economic mechanisms that align the interests of the organization with those of individual DAO members.
How to connect to DApps?
To interact with a DApp, you’ll first need a compatible browser extension wallet like MetaMask, Trust Wallet, or Binance Chain Wallet. They only take a few minutes to set up. Some even offer mobile versions for easy access.
Let’s use Trust Wallet as an example to see how to connect it to PancakeSwap on BNB Smart Chain (BSC). If you don’t have a Trust Wallet yet, check out this Academy article on how to install it on your smartphone.
Depositing BNB to Trust Wallet
To use DApps on BSC, you’ll need some BNB to pay transaction fees. For example, you can withdraw BNB from your Binance Spot Wallet.
Go to your Trust Wallet and tap [BNB Smart Chain]. Do not click [BNB Beacon Chain]. This option is for BEP-2 BNB on the BNB Beacon Chain and cannot be used to pay transaction fees on BSC.
Tap [Receive] to view your BNB deposit address. You can then copy and paste this address into your withdrawing wallet or scan the QR code to make the transfer.
After the transaction is confirmed on the blockchain, you will see the BNB amount on your Trust Wallet homepage.
Adding CAKE to your Trust Wallet list
Trust Wallet's default list of tokens does not include DApp tokens like PancakeSwap (CAKE). To make CAKE visible in your wallet, you need to add it to the list first.
Tap [Add Tokens] and search “PancakeSwap”. You will see CAKE on different blockchains. As we’re using BSC, tap to toggle on the button next to [BEP-20 CAKE].
You should now see CAKE on your Trust Wallet token list.
The next step is connecting your Trust Wallet to PancakeSwap. You can connect through the built-in mobile browser on Trust Wallet or a desktop.
Connecting to PancakeSwap via the Trust Wallet browser
1. Tap [Browser] from the Trust Wallet homepage and go to the PancakeSwap website.
2. You’ll be prompted to connect your Trust Wallet. Tap [Connect].
Connecting to PancakeSwap via a desktop browser
1. Go to the PancakeSwap website and click [Connect Wallet].
2. Click on the [Trust Wallet] icon and you’ll see a QR code on the screen.
3. Open your Trust Wallet app and go to [Settings] - [WalletConnect].
4. Tap [New Connection] and scan the QR code.
5. You’ll be prompted on the app to allow the connection. Tap [Connect].
Closing thoughts
DApps are expanding the functionality of the Web by enhancing conventional applications with blockchain technology. Decentralized applications could bring even more innovative use cases to the market in the future. As DappRadar reported, DApps recorded almost 2.4 million daily active users by Q1 2022, and user interest is expected to grow continuously. However, DApp developers and the blockchain networks they build on are yet to address the current limitations before reaching mass adoption.
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