TL;DR

1. The development of application chains results from multiple factors, including the maturity of infrastructure, increasing competition for block space, and the growing demand for customized token economic models.
2. Although dApps and application chains share similarities in business models, each has its advantages and limitations. If collaboration with the ecosystem is emphasized, dApps may be more suitable, whereas application chains are preferable when autonomy and independence are prioritized.
3. The development of Cosmos and Polkadot is limited not only by technical challenges but also by economic mechanism design and the high barrier to entry for application chains.
4. The core of application chain development lies in building application barriers, utilizing low-cost transactions to promote high-frequency on-chain activity, and accumulating traffic and users. Technical support and enhancements are important but are auxiliary rather than core factors.
5. In the future, application chains will likely resolve existing liquidity fragmentation and interoperability issues through aggregation layers, superchains, or chain abstraction technologies.
6. While the market capitalization or fully diluted valuation of application chains may increase, the true key remains in the quality of the applications themselves and the user experience.

The Inevitable Trend of Application Chains

In 2023 and 2024, more and more dApps have announced their transformation into application chains. After analyzing the application chain sector, we found that these chains are mainly concentrated in DeFi, gaming, social, and AI. We believe that the development of application chains has become an inevitable trend, driven by the maturity of modular technology, the wide adoption of general rollup Layer 2 networks, the increasing number of RaaS platforms and their improved services, and the competitive pressure on dApps for block space and the need for customized token economics.

However, we believe that dApps upgrading to application chains will not immediately translate into high valuations at the infrastructure level, as dApps and application chains are more of a technical choice rather than a decisive factor for success. The advantage of application chains lies in promoting more high-frequency on-chain transactions through low-cost transactions, leveraging data accumulation to enhance the user experience, and creating user stickiness, thereby achieving network effects. Therefore, the core of application chain development remains in its unique application barriers and traffic.

Exploring the Origins of Application Chains

When discussing the origins of application chains, we must mention the pioneering Cosmos project. Cosmos is known for its modular and pluggable design, separating the virtual machine from the consensus engine, allowing developers to choose a virtual machine framework and customize key consensus engine parameters such as the number of validators and TPS. This design enables various applications to exist as independent chains, showcasing unique advantages in flexibility and sovereignty. These innovative concepts have made Cosmos a significant contributor to the exploration and practice of application chains, laying a solid foundation in the field.

By reviewing Cosmos’ application chain ecosystem on Mintscan, we find that many well-known and mature application chains, such as dYdX, Osmosis, Fetch AI, Band, and Stride, are built on the Cosmos framework. However, the overall growth of Cosmos-based application chains has not continued, and the number of new chains has not significantly increased. We believe this is mainly because Cosmos endows application chains with too much sovereignty, and before Atom 2.0’s ICS solution, high startup and maintenance costs hindered their security.

Typically, building a Cosmos-based application chain requires a team familiar with the Cosmos SDK and the Tendermint consensus engine, posing an additional technical burden on teams focused primarily on application development. Moreover, even if a project team can assemble enough technical personnel, most Cosmos-based chains’ launch logic involves airdropping tokens to attract initial validators and secure the network, while high inflation rates incentivize validators to maintain security. However, this approach accelerates token depreciation and weakens the network’s value, making it harder for application chains to gain a foothold in the market.

With Atom 2.0’s ICS solution, the concept of application chains will evolve into a Permissionless Consumer Chains model, reducing the cost of securing consumer chains. However, this DAO-governed voting model may face similar inefficiencies to Polkadot’s parachain auction mechanism. Additionally, Cosmos’ shortcomings in chain liveness, developer documentation resources, and community culture have weakened its appeal to new application chains. For example, the Cosmos Hub stopped block production earlier this year, and the limited developer documentation during the 2023 inscription boom, along with Interchain Foundation’s “small circle” issue, has negatively impacted new chain participation.

Catalysts for New Application Chains

If early Cosmos application chains are viewed as chain-centric applications, emphasizing chain sovereignty, then new application chains are more application-centric, focusing on their application development. The rise of these new chains is driven by the proliferation of modular blockchain concepts, the maturity and widespread adoption of general rollup Layer 2, the development of interoperability and liquidity aggregation layers, and the rise of RaaS platforms.

Optimism’s successful launch in 2022 marked the realization of modular blockchain theory, showcasing how rollups can efficiently scale Ethereum while also encouraging exploration of Layer 2 solutions. Building on this foundation, Optimism borrowed ideas from Cosmos and introduced the OP Stack concept, which has gained widespread application in projects like Worldcoin and Base, further driving industry attention. Other rollup solutions have introduced similar concepts, such as Arbitrum Orbits, Polygon CDK, StarkWare Appchains, and zkSync Hyperchains. Consequently, application chains have become a new way for dApps to achieve business logic, with the main challenges shifting to technical selection, business design, and operational maintenance.

Implementing rollup solutions often requires selecting an appropriate execution framework, such as OP Stack or Arbitrum Orbits. For instance, OP Stack is a continuously evolving rollup framework that must be upgraded to support new Ethereum features, such as Cancun’s Blob feature, while also supporting emerging functionalities like Alternative Data Availability. To simplify the application chain development process, it typically follows these steps:

1. Technical selection: Evaluate the features and characteristics of different frameworks and choose the most suitable one.
2. Requirement design: Design an application chain according to the framework’s customization capabilities.
3. Operation and maintenance: Complete deployment, testing, launch, and ongoing maintenance.

Choosing and implementing the right rollup framework is not easy, especially since making changes post-launch can be even more complex. This is why the emergence of RaaS platforms like Altlayer, Caldera, and Conduit is so important. These platforms, akin to SaaS, focus on rollup solutions, helping dApps quickly select different frameworks, simplify the complex steps of application chain development, offer customized core features, and support post-launch maintenance and optimization.

At the same time, infrastructure and related functions for application chains are rapidly advancing, with the introduction of attractive protocols and features such as Celestia, EigenDA, and NearDA’s Alternative Data Availability to reduce costs and increase throughput. RaaS platforms have also launched integrated support for features like custom gas tokens and native account abstraction. As rollup-based application chains become more widely adopted, liquidity fragmentation and interoperability issues are becoming more apparent, driving solutions like Optimism’s Superchain, Polygon’s AggLayer, Caldera’s Metalayer, and zkSync’s Elastic Chain, which aim to improve interoperability and liquidity aggregation across application chains.

While these catalysts lower the barriers to entry for application chains, the challenges in primary and secondary markets are intensifying dApps’ exploration of breakthrough paths. Data from CMC and Rootdata shows that among the top 100 projects in the secondary market, aside from meme tokens driven by community and culture, only a few pure applications like Uniswap, LDO, Aave, Ondo, Jupiter, and Ethena are present, with most belonging to infrastructure. This implicitly confirms that infrastructure holds a higher status than applications in the crypto industry. This phenomenon also reflects the primary market, where application fundraising amounts are far lower than infrastructure. We believe part of this is due to Web3 applications’ UI/UX complexity, which is far from Web2’s maturity and ease of use, and the lack of true paradigm innovation in applications. Despite this, we believe the potential of application chains has yet to be fully realized and may become a significant breakthrough for Web3’s development in the future. Currently, well-known application chain projects like IMX, Cyberconnect, Project Galaxy, and Worldcoin are showcasing the immense potential of application chains.

The Pros and Cons of New Application Chains

In the tech and innovation field, a “silver bullet” is often described as a perfect solution to all problems. However, in reality, no technology can solve every issue in one go. Likewise, new application chains are not a universal or flawless solution. Below, we analyze their advantages and disadvantages:

Advantages

• Modular Design: Application chains typically adopt a modular design, allowing developers to customize settlement mechanisms, data availability, and other infrastructure components to meet specific needs.
• Performance Optimization: Many new application chains introduce alternative data availability solutions to reduce costs while increasing throughput.
• Enhanced Value Capture: Features like custom gas tokens and account abstraction enable more flexible application development and support more complex business and token models.

Disadvantages

• Liquidity Fragmentation: New application chains may face liquidity fragmentation issues.
• Interoperability and Composability Issues: Application chains lack the ease of composability and interoperability previously enjoyed by dApps on public chains.
• Increased Complexity: Compared to traditional dApps, new application chains introduce increased complexity, especially in design and implementation, potentially requiring more technical resources and support.

Core Considerations for Deciding on an Application Chain

From the perspective of a project team, when deciding whether to upgrade or iterate to an application chain, the following principles are recommended:

1. Dependence on Existing Public Chain Features: If your application heavily relies on other dApps on the public chain, such as liquidity or product functionality, it is recommended to continue using the existing dApp solution.
2. Need for Custom Features: If the current application is unable to support critical business needs at the protocol level, such as account abstraction or specific onboarding mechanisms (revenue sharing), and these features are essential for business operations, transitioning to an application chain is recommended.
3. Cost Sensitivity: If end users are sensitive to block space resources or want to reduce losses such as MEV, an application chain might be a better choice. Additionally, if the application involves high-frequency interactions, an application chain can offer higher resource efficiency and lower transaction costs.

Building the Moat and Development Path for Application Chains

We believe the moat for application chains will always be their application business. The key to success lies in deeply identifying market pain points and building a product-market fit (PMF). Simply relying on the narrative of chain infrastructure is a mindset akin to “holding a hammer looking for nails,” and is not an effective way to build a moat.

In the current wave of new application chains, the focus should be on building transparent and low-cost applications, identifying market needs, solving product pain points, refining and securing the product, and accumulating a vast amount of user data, alongside developing business models with cash flow. This will form strong user stickiness and network effects.

Taking a high-profile approach may not necessarily suit application chains. At least, until the core product is refined and user growth data is fully established, the focus should be on development first, with marketing as a secondary priority. The accumulation of user data, the cultivation of user habits, and the iteration of product features are not achieved overnight. Therefore, a steady and measured approach is more suitable. Application chains should first establish core features, and even irreplaceable functions. Based on this foundation, new features and product lines can be developed. Even if the new features receive a lukewarm response, a defensive strategy can be adopted to abandon them. Correspondingly, in terms of upgrading and iterating the application chain, multiple deep integrations with the original application functions can be carried out.

For example, the well-known portfolio visualization and asset management platform Debank has long established tracking and observation of assets, transaction history, and dApp positions in ETH and EVM-based wallet addresses, iterating numerous features based on this. Despite Debank’s lesser-known features like notifications, bookmarks, and greetings, they do not detract from its core asset management capabilities. Debank’s paid features also demonstrate its attention to detail, with diverse and granular paid options and integrated package optimization providing thoughtful choices for users. The overall performance of these features is strong, and they synergize well with Debank’s other product line, Rabby Wallet. Even though Debank has promoted the development of Debank Chain based on OP Stack, users do not feel a noticeable difference, which shows how Debank’s application chain has effectively built its core moat and provides valuable insights for other application chains’ development paths.

Designing Token Models for Application Chains

In constructing a token economic model for an application chain, we advocate for an “organic” approach. The core of this strategy is to minimize artificial intervention and avoid relying on short-term incentives. Our hope is to align the circulation and value growth of tokens with the expansion of the application itself and the growth of the user base. This way, the token economy can synchronize with the long-term development of the application and the actual needs of users, achieving sustainable growth.

In the early stages of an application, tokens can serve as a powerful tool to attract users and achieve the so-called “cold start.” However, ensuring that these initial users are not only attracted but also converted into long-term users hinges on designing an efficient and attractive mechanism. This mechanism must be based on a clear positioning of the application product, deep insights into user needs and preferences, and a thorough understanding of the business context. Moreover, the core value of the token must be established to ensure users recognize its long-term potential and benefits. With this strategy, tokens can not only attract users but also encourage their sustained participation and deeper use of the product.

The growth in the number of token holders should align with the expansion of the user base to ensure the healthy development of the token economy. We should avoid adopting overly aggressive token distribution strategies and focus instead on achieving a model of continuous growth. This requires us to fully consider current market liquidity and potential market changes, while also ensuring that the token economic model is closely tied to the application’s vision. Furthermore, NFTs, as a new type of reservoir-like asset, can be innovatively and appropriately combined to provide users with diverse usage scenarios, enhancing the token’s appeal and market competitiveness.

Learning from failed cases is key to avoiding mistakes when designing tokens for application chains.

Take Aevo, for example, a new token listed on Binance within the last six months. It was not affected by a lack of liquidity. After attracting a large number of early users through airdrop expectations, Aevo established itself in the pre-launch trading sector. Unfortunately, Aevo’s overly aggressive and unrestrained token design model ultimately harmed the core growth metrics of the product. Currently, Aevo shows stagnation in key indicators such as the growth of token holders, daily trading activity, and the basic market depth in pre-launch trading. Therefore, to build a token economy model that both attracts users and has long-term sustainability, we advocate for an organic growth strategy, where the core is to drive natural token growth and application expansion based on intrinsic value and user needs.

Overview of Notable Application Chain Projects

Let’s delve into some of the prominent application chain projects in the market and analyze them.

CyberCyber is a Restaked Layer 2 Ethereum network optimized for mass adoption in the social sphere. Its core features include native account abstraction, decentralized storage (CyberDB), and decentralized sequencing supported by CyberGraph and CyberAccount’s Enshrined Social Graph Protocol. The core application product, Link3, allows verified Web3 companies and professionals to create reusable data on-chain, which can be combined and utilized by other applications.

XAIXAI is an EVM-compatible Layer 3 network for gaming developed by Offchain Labs, leveraging Arbitrum technology. XAI allows players to own and trade in-game items without using cryptocurrency wallets, while the network’s node operators participate in governance and receive corresponding rewards, creating an open and authentic economic experience for traditional gamers.

MyShellMyShell AI is an innovative platform for AI agent creators and a Consumer AI Layer connecting users, creators, and open-source AI researchers. Users can leverage MyShell’s proprietary text-to-speech technology and AutoPrompt tools to quickly customize agents with personalized voice styles and functionalities. For agent creators, the platform offers efficient agent creation, monetization options, and the ability to earn from their agents.

GM NetworkGM Network aims to be a leader in the consumer AIoT sector. It uses advanced AltLayer technology combined with EigenDA and OP Stack to create a decentralized DePIN. GM Network’s goal is to build a large incentive and communication platform that bridges the gap between the virtual and real worlds by integrating AI and DePIN/IoT technologies, thus driving the broad application of AI on the consumer end.

Investment Analysis Framework

When conducting investment analysis, we use the following framework to ensure a comprehensive and in-depth evaluation of applications:

1. Industry Understanding and Market Positioning: Deeply understand the mechanisms and practices of the crypto space, identify market pain points, and propose innovative application solutions.
2. Target Customer Base: Applications should target a large and potential user base, as this directly affects their market cap ceiling.
3. Product Delivery and Iteration Speed: Compared to infrastructure, applications need strong product delivery capabilities and rapid iteration speed to ensure continuous optimization and innovation of features.
4. User Retention and Business Model: Applications must build strong user retention capabilities and achieve sustainable growth through GMV growth and matched business models.

By following this framework, we can systematically evaluate a project’s overall strength and market potential, providing a solid basis for investment decisions.

Outlook

We hold an optimistic outlook for the development of application chains. This optimism stems from the potential of application chains to serve as core platforms for user activities, playing a vital role in diversified fields such as social networking and gaming. In the future, these application chains will not only offer rich interaction experiences but also drive innovation and development in related industries through their unique technical advantages.

Side Notes

1. To B-side and To C-side application business models each have their characteristics, but their approach to integrating with application chains is similar. This article does not strictly differentiate between them but focuses on how they use application chain technology to achieve business goals and growth.
2. The main difference between Layer 3 and Layer 2 application chains is that Layer 3 adopts a specific Layer 2 as the settlement and data availability layer, so structurally there is not much difference from Layer 2.
3. Solana has not officially supported Layer 2 development; its focus remains on building a high-performance Solana public chain. For Layer 2s or application chains on Solana, the approach is similar to Ethereum’s, with differences mainly in execution frameworks and data availability layers.
4. The current state of Layer 2 may appear dormant, but the real issue is that some Layer 2s rely too much on the chain’s prosperity created by airdrop expectations without fully operating and maintaining the ecosystem. According to Defillama’s data at https://defillama.com/chains, Layer 2 chains like Arbitrum and Base remain highly active.
5. Revenue-sharing models between application chains and RaaS platforms vary, such as fixed fees or distribution of sequencer income. Different-sized application chains can choose models based on their business circumstances.

References

Cosmos Hub

1. https://x.com/cosmoshub/status/1798512843853271223

Cosmos Hub Forum - CHIPs Discussion Phase: Permissionless ICS

1. https://forum.cosmos.network/t/chips-discussion-phase-permissionless-ics/13955

PANews - Delphi Digital: After Analyzing All L1 Blockchains, Why Did We Ultimately Decide to Develop on Cosmos?

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GeekWeb3 on Twitter / X

1. https://x.com/geeksweb3/status/1737533996601680047

Cosmos Hub Blockchain Experienced Nearly 4 Hours of Downtime Overnight, Now Resumed Block Production

1. https://www.mitrade.com/cn/insights/news/live-news/article-3-199606-20240606

Juno Network Under Attack, Mainnet Block Production Halted! JUNO Token Price Falls Over 5%

1. https://www.btcfans.com/en-us/article/78341

Application-Specific Blockchains | Explore the SDK

1. https://docs.cosmos.network/v0.50/learn/intro/why-app-specific

Superchain Ecosystem | Chains

1. https://www.superchain.eco/chains

Orbit Ecosystem

1. https://portal.arbitrum.io/orbit/ecosystem

Build ZK Powered Blockchains | Polygon CDK

1. https://polygon.technology/polygon-cdk#

L2BEAT - The State of the Layer Two Ecosystem

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DuneAnalytics - DeBank Layer2 Dashboard

1. https://dune.com/stakeridoo/debank

SimilarWeb - DeBank Traffic

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DeBank | The Real User Based Web3 Community

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TokenTerminal - AEVO Overview

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Haotian | CryptoInsight on Twitter

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Delphi | What is Appchain?

1. https://members.delphidigital.io/learn/application-specific-blockchain

The Benefits and Tradeoffs of Application-Specific Blockchains

1. https://www.infura.io/blog/post/the-benefits-and-tradeoffs-of-application-specific-blockchains

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