Betrayal and Independence: Re-examining the AppChain Argument

Author: Jiawei @IOSG

Three years ago, we wrote an article about Appchain, triggered by dYdX announcing the migration of its decentralized derivatives protocol from StarkEx L2 to the Cosmos chain, launching its v4 version as an independent blockchain based on the Cosmos SDK and Tendermint consensus.

In 2022, Appchain may have been a relatively niche technology option. As we move into 2025, with the introduction of more Appchains, particularly Unichain and HyperEVM, the competitive landscape of the market is quietly changing, and a trend around Appchain is forming. This article will start from this point to discuss our Appchain Thesis.

Choice Between Uniswap and Hyperliquid

▲ Source: Unichain

The concept of Unichain emerged early, with Nascent founder Dan Elitzer publishing "The Inevitability of UNIchain" in 2022. He pointed to the scale, brand, liquidity structure of Uniswap, and the demand for performance and value capture, indicating the inevitability of its launch of Unichain. Since then, there has been ongoing discussion about Unichain.

Unichain officially launched in February today, with over 100 applications and infrastructure providers building on Unichain. The current TVL is approximately 1 billion USD, ranking in the top five among many L2s. In the future, Flashblocks with 200ms block time and the Unichain validation network will also be introduced.

▲ Source: DeFiLlama

As a perp, Hyperliquid has clearly had a demand for Appchain and deep customization since day 1. In addition to its core products, Hyperliquid also launched HyperEVM, which, like HyperCore, is protected by the HyperBFT consensus mechanism.

In other words, beyond its powerful perp products, Hyperliquid is also exploring the possibilities of building an ecosystem. Currently, the HyperEVM ecosystem has over $2 billion in TVL, and ecosystem projects are starting to emerge.

From the development of Unichain and HyperEVM, we can intuitively see two points:

1. The competitive landscape of L1/L2 begins to differentiate. The combined TVL of Unichain and HyperEVM ecosystems exceeds $3 billion. These assets should have been deposited on general-purpose L1/L2 platforms like Ethereum and Arbitrum in the past. The top applications establishing their own portals directly led to the loss of core value sources such as TVL, transaction volume, transaction fees, and MEV on these platforms.

In the past, L1/L2 coexisted with applications like Uniswap and Hyperliquid, where applications brought activity and users to the platform, while the platform provided security and infrastructure for the applications. Now, Unichain and HyperEVM have become platform layers themselves, forming direct competition with other L1/L2s. They are not only competing for users and liquidity but also beginning to compete for developers, inviting other projects to build on their chains, which has significantly changed the competitive landscape. 2. The expansion paths of Unichain and HyperEVM are vastly different from the current L1/L2. The latter often builds infrastructure first and then attracts developers with incentives. In contrast, the model of Unichain and HyperEVM is "product-first"—they first have a core product that is market-validated, has a large user base, and brand recognition, and then build the ecosystem and network effects around this product.

The efficiency and sustainability of this path are higher. They do not need to "purchase" the ecosystem through high developer incentives, but instead "attract" the ecosystem through the network effects and technological advantages of core products. Developers choose to build on HyperEVM because there are high-frequency trading users and real demand scenarios, rather than because of vague incentive promises. Clearly, this is a more organic and sustainable growth model.

What has changed in the past three years?

▲ Source: zeeve

First, it is the maturity of the tech stack and the improvement of third-party service providers. Three years ago, building an Appchain required the team to master full-stack blockchain technology. However, with the development and maturation of RaaS services like OP Stack, Arbitrum Orbit, and AltLayer, developers can now modularly combine various components on demand, similar to choosing cloud services, greatly reducing the engineering complexity and initial capital investment of building an Appchain. The operation model has shifted from self-built infrastructure to purchasing services, providing flexibility and feasibility for innovation at the application layer.

Secondly, there are the brand and user perception. We all know that attention is a scarce resource. Users tend to be loyal to the brand of the application rather than the underlying technological infrastructure: users use Uniswap because of its product experience, not because it runs on Ethereum. With the widespread adoption of multi-chain wallets and further improvements in UX, users are almost unaware when using different chains — their touchpoints are often primarily the wallet and the application. When applications build their own chains, users' assets, identities, and usage habits become ingrained within the application ecosystem, creating a powerful network effect.

▲ Source: Token Terminal

The most important thing is that the pursuit of economic sovereignty is slowly becoming apparent. In traditional L1/L2 architectures, we can see that the flow of value shows a clear "top-down" trend:

1. Value creation at the application layer (Uniswap's trading, Aave's lending)
2. Users pay fees to use the application (application fees + gas fee), part of these fees goes to the protocol, and part goes to LP or other participants.
3. The gas fees are 100% directed to L1 validators or L2 sequencers.
4. MEV is divided among searchers, builders, and validators in different proportions.
5. Finally, the L1 tokens capture other value apart from the app fee through staking.

In this chain, the application layer that creates the most value captures the least.

According to Token Terminal statistics, in the total value creation of 6.4 billion dollars on Uniswap (including LP earnings, gas fees, etc.), the allocation received by protocols/developers, equity investors, and token holders is less than 1%. Since its launch, Uniswap has generated 2.7 billion dollars in gas revenue for Ethereum, which accounts for about 20% of the settlement fees charged by Ethereum.

What if the application has its own chain?

They can appropriate gas fees, using their own tokens as gas tokens; and internalize MEV by controlling the orderers to minimize malicious MEV, returning benign MEV to users; or customize fee models to achieve more complex fee structures, etc.

In this way, seeking the internalization of value becomes the ideal choice for applications. When the bargaining power of the application is large enough, it will naturally demand more economic benefits. Therefore, high-quality applications have a weak dependence on the underlying chain, while the underlying chain has a strong dependence on high-quality applications.

Summary

▲ Source: Dune@reallario

1. The above chart roughly compares the revenue of protocols (in red) and applications (in green) from 2020 to the present. We can clearly see that the value captured by applications is gradually increasing, reaching about 80% this year. This may somewhat overturn Joel Monegro's famous theory of "fat protocols, thin applications."

We are witnessing a paradigm shift from the "Fat Protocol" theory to the "Fat Application" theory. Looking back at the pricing logic of projects in the crypto space, it has primarily been centered around "technical breakthroughs" and the push of underlying infrastructure. In the future, it will gradually shift towards a pricing method anchored by brand, traffic, and value capture ability. If applications can easily build their own chains based on modular services, the traditional "rental" model of L1 will be challenged. Just as the rise of SaaS has reduced the bargaining power of traditional software giants, the maturity of modular infrastructure is also weakening the monopoly status of L1.

The market value of leading applications in the future will undoubtedly exceed that of most L1s. The valuation logic of L1s will shift from the previous model of "capturing total ecosystem value" to a stable, secure decentralized "infrastructure service provider." Its valuation logic will be closer to that of public goods that generate stable cash flows, rather than "monopolistic" giants that can capture most of the ecosystem value. Its valuation bubble will be squeezed to a certain extent. L1s also need to rethink their positioning. 2. Regarding Appchain, our view is: due to its brand, user perception, and highly customized on-chain capabilities, Appchain can better consolidate long-term user value. In the era of "fat applications", these applications can not only capture the direct value they create but also build a blockchain around themselves, further externalizing it and capturing the value of the infrastructure - they are both products and platforms; serving end users as well as other developers. Apart from economic sovereignty, top applications will also seek other sovereignties: the right to decide on protocol upgrades, transaction ordering, resistance to censorship, and ownership of user data, etc. 3. Of course, this article mainly discusses in the context of top applications like Uniswap and Hyperliquid that have already launched Appchains. The development of Appchains is still in the early stages (Uniswap's TVL still accounts for 71.4% on Ethereum). Protocols like Aave that involve wrapped assets and collateral, which highly rely on composability on a single chain, are less suitable for Appchains. In contrast, perp that only requires oracles for external demand is more suitable for Appchains. Moreover, Appchains are not the best choice for mid-level applications; specific situations need to be analyzed on a case-by-case basis. Further elaboration will not be provided here.