Exploration of the Origin, Development, and Prospects of AppChain

The development of AppChain is the result of multiple factors working together, including the maturity of infrastructure, intensified competition for block space, and an increase in demand for customized token economic models.

Although dApps and AppChain have similarities in business forms, each has its own advantages and limitations. If the emphasis is on the synergy with the ecosystem, dApps may be more suitable, while if the pursuit is for autonomy and independence, AppChain is a better choice.

The development of Cosmos and Polkadot is constrained not only by technical challenges but also more so by the design of economic mechanisms and the high thresholds of AppChain.

The core of AppChain development lies in building its own application barriers, fully utilizing low-cost transactions to promote high-frequency on-chain transactions, thereby acquiring traffic and accumulating users. While technical support and enhancement are important, they are merely auxiliary factors, not core elements.

The future AppChain will be able to solve the existing liquidity fragmentation and interoperability issues through technologies such as aggregation layers, superchains, or chain abstraction.

Although the market capitalization or fully diluted valuation of the AppChain has received a certain boost, the real key is still the product quality and user experience of the application itself.

The Inevitability of AppChain Development Trends

In 2023 and 2024, an increasing number of dApps announced their transformation into AppChains. In response to this phenomenon, we compiled statistics across the entire AppChain track and found that these AppChains are mainly concentrated in areas such as DeFi, gaming, social, and AI. We believe that the development of AppChains has become an inevitable trend due to the maturity of modular technology, the widespread validation of general Rollup layer two networks, the increase in RaaS platforms and the improvement of services, as well as the competition for public chain block space resources, optimization of end-user transaction costs, and the customization demand of token economics driven by dApps.

Regarding this trend, we believe that the upgrade of dApps to AppChain will not immediately transform into a highly valued infrastructure layer, as dApps and AppChain are more of a technical choice rather than a decisive factor for success. The advantage of AppChain lies in promoting more high-frequency on-chain transactions through low-cost transactions, utilizing data accumulation to enhance user product experience, forming user stickiness, and thus achieving network effects. Therefore, the core of AppChain development still lies in its unique application barriers and traffic.

Exploring the Origins of AppChain

When it comes to the origin of AppChain, we must mention a groundbreaking project, Cosmos. Cosmos is known for its modular and pluggable design philosophy, which separates the virtual machine from the consensus engine, allowing developers to freely choose the framework for building the virtual machine and customize key parameters of the consensus engine, such as the number of validators and TPS. This design enables various applications to exist in the form of independent chains, showcasing unique advantages in flexibility and sovereignty. These innovative ideas have made significant contributions to the exploration and practice of AppChain, laying a solid foundation for this field.

Looking through the development status of the Cosmos AppChain ecosystem on Mintscan, we find that many well-known and mature AppChains are built on the Cosmos framework, such as dYdX, Osmosis, Fetch AI, Band, and Stride. However, the overall growth trend of AppChains in Cosmos has not continued, and the number of new AppChains has not significantly increased. We believe this is mainly because the sovereignty granted to AppChains by Cosmos is too strong, and before the launch of the ICS solution in Atom 2.0, the high cost of security, as well as the startup and maintenance costs, are the main reasons.

In general, building a Cosmos AppChain requires the project team to have a development team familiar with the Cosmos SDK and the Tendermint consensus engine, which is an additional technical burden for technology teams focused on application development. Furthermore, even if a Cosmos AppChain can be staffed with enough technical personnel, the startup logic for most AppChains involves airdropping tokens to Cosmos validators to attract early validators to participate and secure the network, while incentivizing validators to continuously maintain network security through high inflation rates. However, the side effect of this practice is that it accelerates token depreciation, leading to a rapid decline in network value. This situation makes it more difficult for AppChains to establish a foothold in the market.

Under the ICS scheme advocated by Atom 2.0, the concept of AppChain will be upgraded to the Permissionless Consumer Chains model. Although it allows for permissionless joining of consumer chains, reducing the cost of obtaining security for consumer chains, this DAO-based voting governance form is somewhat similar to the Polkadot slot auction mechanism launched at the same time, and may face similar inefficiency development issues as the slot auction mechanism.

In addition, we found that Cosmos has some shortcomings in attracting AppChains in terms of chain Liveness features, developer documentation resources, and community culture. For example, the block halting event that occurred this year on Cosmos Hub, the incomplete developer documentation resources during the booming period of inscriptions at the end of 2023, and the small circle issue pointed out by Delphi co-founder José Maria Macedo have all had a negative impact on the addition of new AppChains.

Catalyst for New AppChain

If we consider the early AppChains of Cosmos as chain-oriented applications, emphasizing the sovereignty design of the chain, then the new type of AppChain is more application-oriented, focusing on its own application development. The rise of this new type of AppChain is mainly attributed to the popularization of the modular blockchain concept, the maturity and widespread validation of general-purpose Rollup Layer2, the development of interoperability and liquidity aggregation layers, as well as the rise and improvement of RaaS platforms.

As the first Rollup Layer 2 to launch its mainnet, Optimism's successful launch in 2022 marked the practical realization of the modular blockchain theory. Optimism not only inherits the security of Ethereum but also fully supports the development tech stack of the Ethereum ecosystem. Optimism demonstrated to the industry how Rollups can efficiently scale Ethereum, while also promoting a deeper exploration of Layer 2 solutions within the industry. Building on its own development, Optimism drew on the concepts and framework of Cosmos, innovatively proposing the OP Stack concept. This concept has been widely applied in well-known projects such as Worldcoin and Base, further attracting widespread attention in the industry. Subsequently, other Rollup solutions also launched similar concepts, such as Arbitrum Orbits, Polygon CDK, StarkWare Appchain, and zkSync Hyperchains. As a result, for dApps, AppChain has become a new way to implement business logic, and upgrading existing dApps is no longer a challenge; the main challenges have shifted to technology selection, business design, and operation maintenance.

When implementing a Rollup solution, it is usually necessary to choose a suitable execution layer framework, such as OP Stack or Arbitrum Orbits. Taking OP Stack as an example, it is an evolving Rollup framework that must be upgraded in accordance with Ethereum updates and will also support emerging functionalities. For ease of understanding, we simplify the development process of the AppChain, generally following the steps below:

1. Technical Selection: Evaluate the functions and characteristics of different frameworks, and choose the most suitable framework.

2. Demand Design: Design an AppChain that meets the requirements based on the customization capabilities of the corresponding framework.

3. Operation and Maintenance: Complete deployment, testing, launch, and subsequent maintenance.

Although the Rollup framework provides powerful scalability for applications, choosing and implementing the right framework is not easy, especially since making changes after the AppChain is launched becomes more complex. Therefore, the emergence of RaaS platforms like Altlayer, Caldera, and Conduit is particularly important. These platforms are similar to SaaS but focus on Rollup solutions, helping dApps quickly select different Rollup frameworks, simplifying the complex steps in the AppChain development process, providing customized core features, and supporting maintenance and optimization after the application is launched.

At the same time, the infrastructure and related features surrounding AppChain are also advancing rapidly, with the industry continuously launching highly attractive protocols and functionalities. For example, projects like Celestia, EigenDA, and NearDA have introduced Alternative Data Availability that reduces costs and enhances throughput, while RaaS platforms have successively launched integrated support for custom Gas tokens and native account abstraction functionalities. With the widespread application of Rollup AppChains, issues of liquidity fragmentation and interoperability have gradually emerged, prompting solutions for aggregation and unification, such as Optimism's Superchain, Polygon's AggLayer, Caldera's Metalayer, and zkSync's Elastic Chain, which aim to improve interoperability and liquidity aggregation among AppChains.

If the aforementioned catalysts have lowered the entry barrier for AppChain, then the current application dilemmas in the primary and secondary markets are intensifying dApps' exploration for breakthroughs. Data from CMC and Rootdata shows that among the top 100 projects in the secondary market, aside from community-driven and culturally supported Meme categories, only a few pure application projects such as Uniswap, LDO, Aave, Ondo, Jupiter, and Ethena exist, while most others belong to infrastructure. This indirectly confirms that infrastructure holds a higher status than applications in the entire Crypto industry. Correspondingly, in the primary market, the financing amounts for application categories are also far below those for infrastructure categories. We believe that part of the reason for this phenomenon is that the UI/UX of Web3 applications is relatively complex and far from the maturity and ease of use of Web2, while related innovative application paradigms have not truly broken through. Nevertheless, we believe that the potential of AppChain has not been fully unleashed and may become an important breakthrough for driving Web3 development in the future. Currently, there are some well-known AppChain projects, such as IMX, Cyberconnect, Project Galaxy, and Worldcoin, that are showcasing the tremendous potential of AppChain.

Advantages and Disadvantages of New AppChains

In the fields of technology and innovation, the term "silver bullet" is often used to describe a perfect solution that can solve all problems. However, in reality, there is hardly any technology that can instantly solve all issues. Similarly, new AppChains are not a panacea and are not without flaws. Below, we analyze their pros and cons:

advantages

Modular Design: AppChains typically adopt a modular design, allowing developers to customize infrastructure components such as settlement mechanisms and data availability to meet specific needs.

Performance Optimization: Many new AppChains can achieve cost reduction while improving throughput by introducing other data availability layer solutions.

Enhanced value capture: Features such as custom Gas tokens, account abstraction, etc., can support more flexible application development and enable more complex business models and token models.

Disadvantages

Liquidity fragmentation: New AppChains may face the issue of liquidity fragmentation.

Interoperability and composability issues: AppChains cannot easily combine and interoperate like dApps on public chains in the past.

Increased complexity: Compared to traditional dApps, the complexity of new AppChains has increased, especially during design and implementation, which may require more technical resources and support.

Core Considerations for AppChain

From the perspective of the project party, when deciding whether to upgrade or iterate on the AppChain, it is recommended to follow the principles below:

1. Relying on the characteristics of existing public chains: If your application heavily depends on other dApps on the public chain, such as liquidity or product functionality, it is recommended to continue using existing dApp solutions.

2. Custom features are required: If the current application struggles to support business needs such as account abstraction and specific onboarding mechanisms at the protocol level, and these features are critical for business operations, it is recommended to choose or migrate to an AppChain.

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