Original Article Title: "IOSG Weekly Brief | Apostasy and Independence: Revisiting the Appchain Thesis #288"

Original Article Author: Jiawei, IOSG Ventures

Three years ago, we wrote an article about Appchains when dYdX announced the migration of its decentralized derivatives protocol from StarkEx L2 to the Cosmos chain, launching its v4 version as a standalone blockchain based on the Cosmos SDK and Tendermint consensus.

In 2022, the Appchain may be a relatively niche technical option. By 2025, with the launch of more Appchains, especially Unichain and HyperEVM, the market's competitive landscape is quietly changing, forming a trend around the Appchain. This article will start from here to discuss our Appchain Thesis.

Uniswap and Hyperliquid's Choice

Source: Unichain

The conception of Unichain appeared very early, with Nascent founder Dan Elitzer publishing "The Inevitability of UNIchain" in 2022, proposing the inevitability of Uniswap's volume, brand, liquidity structure, and the demand for performance and value capture, pointing to the launch of Unichain. Discussions about Unichain have been ongoing since then.

Unichain was officially launched in February today, with over 100 applications and infrastructure providers building on Unichain. The current TVL is around $1 billion, ranking in the top five among many L2 solutions. Future plans include the introduction of Flashblocks with 200ms block time and the Unichain validation network.

Source: DeFiLlama

As a perp, Hyperliquid clearly had the need for an Appchain and deep customization from day 1. Beyond its core product, Hyperliquid also introduced HyperEVM, which, like HyperCore, is secured by the HyperBFT consensus mechanism.

In other words, in addition to its inherently powerful perp product, Hyperliquid is also exploring the possibility of building an ecosystem. Currently, the HyperEVM ecosystem has attracted over $2 billion TVL, and ecosystem projects are beginning to emerge.

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

The L1/L2 competitive landscape is beginning to differentiate. The TVL of the Unichain and HyperEVM ecosystems combined exceeds $3 billion. These assets should have traditionally been settled on general-purpose L1/L2 networks such as Ethereum and Arbitrum. The emergence of top applications as standalone ecosystems has directly resulted in the migration of TVL, transaction volume, transaction fees, MEV, and other core value sources from these platforms.

In the past, the relationship between L1/L2 and applications like Uniswap and Hyperliquid was symbiotic, with applications bringing activity and users to the platform, while the platform provided security and infrastructure to the applications. Now, Unichain and HyperEVM have become platforms themselves, entering into direct competition with other L1/L2 networks. They are not only competing for users and liquidity but also starting to compete for developers, inviting other projects to build on their chains, which has significantly altered the competitive landscape.

The expansion paths of Unichain and HyperEVM are fundamentally different from the current L1/L2 networks. The latter often start by building infrastructure and then use incentives to attract developers. The model of Unichain and HyperEVM is "product-first" — they first have a core product that has been market-validated, has a large user base, and brand recognition, then they build an ecosystem and network effects around this product.

This path is more efficient and sustainable. They do not need to "buy" an ecosystem through high developer incentives; instead, they "attract" the ecosystem through the network effects of their core product and technological advantages. Developers choose to build on HyperEVM because there are high-frequency trading users and real-world use cases, not just 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 is the maturity of technology stacks and the enhancement of third-party service providers. Three years ago, building an Appchain required teams 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 modularize and assemble various modules on demand from execution and data availability to settlement and interoperability, greatly reducing the engineering complexity and upfront capital investment of building an Appchain. The operational model has shifted from self-built infrastructure to purchasing services, providing flexibility and feasibility for application layer innovation.

Second is branding and user mindset. We all know that attention is a scarce resource. Users are often loyal to an application's brand rather than its underlying technical 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 wallets and applications. When applications build their own chain, users' assets, identities, and usage habits are entrenched in the application's ecosystem, creating a strong network effect.

Source: Token Terminal

Most importantly, the application's pursuit of economic sovereignty is gradually becoming apparent. In the traditional L1/L2 architecture, we can see a clear "top-down" trend in value flow:

· The application layer creates value (Uniswap's trades, Aave's lending)

· Users pay fees to use the application (application fees + gas fees), with a portion of these fees going to the protocol and part to LPs or other participants

· 100% of the gas fee goes to L1 validators or L2 sequencers

· MEV is distributed among searchers, builders, and validators in varying proportions

· Ultimately, the L1 token captures all value except the app fee through staking

In this chain, the application layer that creates the most value ends up capturing the least.

According to Token Terminal statistics, in Uniswap's $64 billion total value created (including LP rewards, gas fees, etc.), the allocation received by the protocol/developers, equity investors, and token holders is less than 1%. Since its launch, Uniswap has generated $2.7 billion in Ethereum gas fees, roughly 20% of Ethereum's settlement fee.

But what if applications have their own chain?

They can collect gas fees for themselves, using their own token as a gas token; internalize MEV, minimize malicious MEV by controlling the sequencer to return benign MEV to users; or customize fee models to implement more complex fee structures, and so on.

In this light, the pursuit of value internalization becomes an ideal choice for applications. When an application's bargaining power is significant, naturally, it will demand more economic benefits. Therefore, high-quality applications have a weak attachment to the underlying chain, while the underlying chain has a strong attachment to high-quality applications.

Summary

Source: Dune@reallario

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, to some extent, 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 was primarily based on technological breakthroughs and the advancement of foundational infrastructure. In the future, it will gradually shift towards pricing methods anchored in branding, traffic, and value-capture capability. If applications can easily build their own chain based on modular services, the traditional "rent-seeking" 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 undermining the monopoly position of L1.

The future market capitalization of leading applications will undoubtedly surpass that of most L1s, and the valuation logic of L1 will transition from the previous "capturing total ecosystem value" to a stable, secure decentralized "infrastructure service provider." Its valuation logic will be more akin to a public product generating stable cash flows, rather than a "monopolistic" giant capable of capturing most of the ecosystem value. Its valuation bubble will be somewhat squeezed. L1 also needs to rethink its positioning.

Regarding Appchain, our view is: Due to its brand, user mindshare, and highly customized on-chain capability, Appchain can better retain long-term user value. In the era of "Fat Apps," these applications can not only capture the direct value they create but also build a blockchain around the application itself, further externalizing it and capturing the value of the infrastructure—they are both a product and a platform; they serve end users and other developers. In addition to economic sovereignty, top applications will also seek other sovereignties: decision-making power for protocol upgrades, resistance to transaction sequencing and censorship, and ownership of user data, and so on.

Of course, this article mainly discusses the context of top applications such as Uniswap and Hyperliquid that have already launched Appchain. The development of Appchain is still in its early stages (Uniswap's TVL still accounts for 71.4% on Ethereum). Protocols like Aave, which involve wrapped assets and collateral, and heavily rely on on-chain composability, are also not very suitable for Appchain. In comparison, protocols with only an external demand like a perp oracle are more suitable for Appchain. Additionally, Appchain is not the best choice for mid-tier applications, as it requires a case-by-case analysis. I will not delve into this further here.

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