Re-examining the application chain argument

Author: Jiawei @IOSG
Three years ago, we wrote an article about Appchain, triggered by dYdX's announcement to migrate 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 was a relatively fringe technical option. As we move into 2025, with the launch of more Appchains, particularly Unichain and HyperEVM, the competitive landscape of the market is quietly changing, forming trends around Appchains. This article will start from this point to discuss our Appchain Thesis.

Choices of Uniswap and Hyperliquid

▲ Source: Unichain
The concept of Unichain emerged early, with Nascent founder Dan Elitzer publishing "The Inevitability of UNIchain" in 2022, pointing to the necessity of Uniswap launching Unichain due to its size, brand, liquidity structure, and demand for performance and value capture. 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, ranking among the top five of many L2s. In the future, Flashblocks with 200ms block times and the Unichain validation network will be launched.
▲ Source: DeFiLlama
As a perp, Hyperliquid clearly had a demand for Appchain and deep customization from day one. Beyond its core product, Hyperliquid also launched HyperEVM, which, like HyperCore, is protected by the HyperBFT consensus mechanism.

In other words, beyond its powerful perp product, Hyperliquid is also exploring the possibility of building an ecosystem. Currently, the HyperEVM ecosystem has over $2 billion in TVL, and ecosystem projects are beginning to emerge.
From the development of Unichain and HyperEVM, we can intuitively see two points:

1. The competitive landscape of L1/L2 is beginning to differentiate. The combined TVL of Unichain and HyperEVM ecosystems exceeds $3 billion. These assets, in the past, should have been settled in general-purpose L1/L2s like Ethereum and Arbitrum. The independence of top applications has directly led to the loss of core value sources such as TVL, transaction volume, transaction fees, and MEV from these platforms.

   In the past, L1/L2 and applications like Uniswap and Hyperliquid had a symbiotic relationship, where applications brought activity and users to the platform, and the platform provided security and infrastructure for 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 starting to compete for developers, inviting other projects to build on their chains, which significantly changes the competitive landscape.

2. The expansion paths of Unichain and HyperEVM are distinctly different from current L1/L2s. 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 market-validated core product with a large user base and brand recognition, and then build ecosystems and network effects around that product.

   This path is more efficient and sustainable. They do not need to "buy" ecosystems through high developer incentives but instead "attract" ecosystems through the network effects and technical advantages of their core products. Developers choose to build on HyperEVM because there are high-frequency trading users and real demand scenarios, not because of nebulous 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 the tech stack and the improvement of third-party service providers. Three years ago, building an Appchain required teams to master full-stack blockchain technology. However, with the development and maturity of RaaS services like OP Stack, Arbitrum Orbit, and AltLayer, developers can now modularly combine various components on demand, greatly reducing the engineering complexity and upfront capital investment required to build an Appchain. The operational model has shifted from building infrastructure in-house to purchasing services, providing flexibility and feasibility for application layer innovation.

Secondly, there is brand and user mindset. We all know that attention is a scarce resource. Users are often loyal to the brand of the application rather than the 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 first the wallet and the application. When applications build their own chains, users' assets, identities, and usage habits are all embedded within the application ecosystem, forming a strong network effect.
▲ Source: Token Terminal
Most importantly, the pursuit of economic sovereignty by applications is gradually becoming prominent. In traditional L1/L2 architectures, we can see a clear "top-down" trend in value flow:

1. The application layer creates value (Uniswap's trading, Aave's lending)

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

3. The gas fees flow 100% to L1 validators or L2 sequencers

4. MEV is divided among searchers, builders, and validators in varying proportions

5. Ultimately, L1 tokens capture other value beyond app fees through staking

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

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

So what would happen if applications had their own chains?

They could retain gas fees for themselves, using their own tokens as gas tokens; internalize MEV by controlling sequencers to minimize malicious MEV and return benign MEV to users; or customize fee models to implement more complex fee structures, etc.

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

Conclusion

▲ Source: Dune@reallario

1. The above chart roughly compares the revenues 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 mainly been centered around "technical breakthroughs" and the driving force of underlying infrastructure. In the future, it will gradually shift to 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 "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 weakening the monopoly position of L1.

   In the future, the market capitalization of leading applications will undoubtedly exceed that of most L1s. The valuation logic of L1 will shift from "capturing total ecological value" to being a stable, secure decentralized "infrastructure service provider," with its valuation logic being closer to that of public goods generating stable cash flows, rather than "monopolistic" giants that can capture most ecological value. Its valuation bubble will be somewhat squeezed. L1 will also need to rethink its positioning.

2. Regarding Appchain, our view is that due to its brand, user mindset, and highly customizable on-chain capabilities, Appchain can better embed long-term user value. In the "fat application" era, these applications can not only capture the direct value they create but also build blockchains around themselves, further externalizing and capturing the value of infrastructure—they are both products and platforms; serving end users as well as other developers. Beyond economic sovereignty, top applications will also seek other forms of sovereignty: decision-making power over protocol upgrades, transaction ordering, censorship resistance, and ownership of user data, etc.

3. Of course, this article mainly discusses top applications like Uniswap and Hyperliquid that have already launched Appchains. The development of Appchain is still in its early stages (Uniswap's TVL on Ethereum still accounts for 71.4%). Protocols like Aave, which involve packaged assets and collateral and highly depend on composability on a single chain, are also not well-suited for Appchain. Relatively speaking, perp protocols that only require oracles for external demand are more suitable for Appchain. Furthermore, Appchain is not necessarily the best choice for mid-tier applications; it requires specific analysis based on the situation. This will not be elaborated further.

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