ArkStream Capital: Application chain has become a trend, and we need to fully understand the design methods and projects worth paying attention to

author:ArkStream Capital

Compiled by: Xiaobai Navigation coderworld

Summary of key points

1. The development of application chains is affected by many factors, including the maturity of infrastructure, the intensification of competition in block space, and the demand for customization.TokenThe need for economic models is growing.

2. Although decentralized applications (dApps) and application chains have similarities in business models, their respective advantages and limitations are also obvious. If more emphasis is placed on cooperation with the ecosystem, dApps may be more suitable; while when autonomy and independence are prioritized, application chains have more advantages.

3. The development of Cosmos and Polkadot is constrained by technical challenges, economic mechanism design, and high barriers to entry for application chains.

4. The core of application chain development is to establish application barriers, use low-cost transactions to promote high-frequency chain activities, and accumulate traffic and users. Although technical support and enhancement are very important, they are more like auxiliary factors rather than core elements.

5. In the future, application chains may solve existing liquidity fragmentation and interoperability problems through aggregation layers, super chains or chain abstraction technologies.

6. While the market capitalization or fully diluted valuation of the application chain may increase, the real key lies in the quality of the application itself and the user experience.

The inevitable trend of application chain

In 2023 and 2024, more and more dApps announced their transformation into application chains. After analyzing the application chain field, we found that these chains are mainly concentrated in DeFi, games, social networking, and artificial intelligence. We believe that the development of application chains has become an inevitable trend, driven by the maturity of modular technology, the widespread adoption of general Rollup Layer 2 networks, the increase in the number of RaaS platforms and the improvement of their services, as well as the competitive pressure of dApps on block space and the need for customization.TokenDriven by economic needs.

However, we believe that the upgrade of dApps to application chains will not immediately translate into high valuations at the infrastructure level, because dApps and application chains are more of a technical choice rather than a decisive factor for success. The advantage of application chains is that they promote higher-frequency on-chain transactions through low-cost transactions, improve user experience through data accumulation, and enhance user stickiness, thereby achieving network effects. Therefore, the core of the development of application chains still lies in their unique application barriers and traffic.

Exploring the Origin of Application Chain

When discussing the origins of application chains, we cannot fail to mention the groundbreaking Cosmos project. Cosmos is known for its modular and pluggable design, which separates the virtual machine from the consensus engine, allowing developers to choose the 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, showing the unique advantages of flexibility and sovereignty. These innovative concepts make Cosmos an important contributor to the exploration and practice of application chains, laying a solid foundation for this field.

By reviewing the Cosmos application chain ecosystem on Mintscan, we found many well-known and mature application chains, such as dYdX, Osmosis, Fetch, AI, Band, and Stride, are all built on the Cosmos framework. However, the overall growth of application chains based on Cosmos has not been sustained, and the number of new chains has not increased significantly. We believe this is mainly because Cosmos gives too much sovereignty to application chains, and before the launch of Atom 2.0's ICS solution, high startup and maintenance costs hindered theirSafetysex.

通常，构建基于 Cosmos 的应用链需要一个熟悉 Cosmos SDK 和 Tendermint 共识引擎的团队，这给主要专注于应用开发的团队增加了额外的技术负担。此外，即使一个项目团队能够组建足够的技术人员，大多数基于 Cosmos 的链的启动逻辑都涉及空投Token以吸引初始验证者并确保网络Safety, while high inflation rates incentivize validators to maintainSafetyHowever, this approach accelerates the depreciation of tokens, weakens the value of the network, and makes it more difficult for application chains to gain a foothold in the market.

With the introduction of the ICS solution for Atom 2.0, the concept of application chains will evolve into a permissionless consumer chain model, thereby reducing the cost of protecting consumer chains. DAO The governance voting model may face similar inefficiencies as Polkadot’s parachain auction mechanism. In addition, Cosmos has limited on-chain activity, developer documentation resources, andCommunityCultural deficiencies have weakened its appeal to new application chains. For example, the Cosmos Hub stopped block production earlier this year, and limited developer documentation during the 2023 inscription boom also affected its appeal, and the "small circle" policy of the cross-chain foundation made it more difficult for new projects to join.

Catalyst for new application chains

Early Cosmos application chains can be seen as chain-centric applications that emphasize chain sovereignty, while new application chains are more application-centric and focus on application development. The rise of these new chains is driven by multiple factors, including modularity.BlockchainThe popularization of the concept, the maturity and widespread application of general Rollup Layer 2, the development of interoperability and liquidity aggregation layer, and the rise of RaaS platform.

Optimism was successfully launched in 2022, marking the beginning of modularBlockchainThe realization of the theory shows how Rollup can efficiently scale Ethereum and encourages the exploration of Layer 2 solutions. On this basis, Optimism borrowed the concept of Cosmos and introduced the concept of OP Stack, which has been widely used in projects such as Worldcoin and Base, further attracting the attention of the industry. Other Rollup solutions have also introduced similar concepts, such as Arbitrum Orbits, Polygon CDK, StarkWare Appchains, and zkSync Hyperchains. Therefore, the application chain has become a new way for dApps to implement business logic, and the main challenges have shifted to technology selection, business design, and operation and maintenance.

Implementing a Rollup solution usually requires choosing a suitable execution framework, such as OP Stack or Arbitrum Orbits. OP Stack is an evolving Rollup framework that needs to be continuously upgraded to support new features of Ethereum, such as Cancun's Blob feature, while also supporting emerging features such as alternative data availability. In order to simplify the development process of the application chain, the following steps are usually followed:

1. Technology selection:Evaluate the features and benefits of different frameworks and choose the most appropriate one.

2. Demand design:Design application chains based on the customization capabilities of the framework.

3. Operation and maintenance:Complete deployment, testing, launch and ongoing maintenance.

It is not easy to choose and implement a suitable Rollup framework, especially since changes after going online may be more complicated. This is an important reason why RaaS platforms such as Altlayer, Caldera, and Conduit have emerged. These platforms are similar to SaaS, focusing on Rollup solutions, helping dApps quickly choose different frameworks, simplifying the complex steps of application chain development, providing customized core functions, and supporting maintenance and optimization after going online.

At the same time, the infrastructure and related functions of application chains are also progressing rapidly, with new protocols and features such as Celestia, EigenDA, and NearDA's alternative data availability introduced to reduce costs and increase throughput. The RaaS platform has also launched integrated support for features such as custom gas tokens and native account abstraction. As Rollup-based application chains become more and more popular, liquidity fragmentation and interoperability issues have become more and more obvious, driving the emergence of solutions such as Optimism's Super Chain, Polygon's AggLayer, Caldera's Metalayer, and zkSync's Elastic Chain, which aim to improve interoperability and liquidity aggregation between application chains.

Although these catalysts lower the entry barriers of application chains,But challenges in primary and secondary markets are intensifying dApps’ exploration of breakthrough paths.According to data from CMC and Rootdata, among the top 100 projects in the secondary market,CommunityApart from the meme tokens driven by the blockchain and culture, there are only a few pure application projects, such as Uniswap, LDO, Aave, Ondo, Jupiter and Ethena, and most projects are still infrastructure. This phenomenon implicitly indicates thatInfrastructure takes precedence over applications in the crypto industry.

In the primary market, the amount of application financing is also much lower than that of infrastructure.We believe that this is partly due to the fact that the UI/UX design complexity of Web3 applications is far less mature and easy to use than Web2, and the lack of real paradigm innovation in applications. Nevertheless, we believe that the potential of application chains has not yet been fully tapped and may become an important breakthrough in the development of Web3 in the future. Currently, well-known application chain projects such as IMX, Cyberconnect, Project Galaxy and Worldcoin are demonstrating the huge potential of application chains.

The pros and cons of new application chains

In the world of technology and innovation, “silver bullets” are often described as perfect solutions to all problems. However, in reality, no technology can solve all problems at once. Similarly, new application chains are not a universal or perfect solution. Here is our analysis of its advantages and disadvantages:

advantage

• Modular design：Application chains usually adopt a modular design, allowing developers to customize settlement mechanisms, data availability and other infrastructure components according to specific needs.

• Performance Optimization: Many new application chains introduce alternative data availability solutions to reduce costs and increase throughput.

• Enhanced value capture: Features such as custom gas tokens and account abstraction make application development more flexible and support more complex business and token models.

shortcoming

• fluidityFragmentation：New application chains may face the problem of liquidity fragmentation, resulting in uneven resource allocation.

• Interoperabilityand the problem of compositionality：Application chains lack the composability and interoperability convenience previously enjoyed on public chains, limiting their development potential.

• Increased complexity：Compared to traditional dApps, new application chains introduce higher complexity, especially in design and implementation, and may require more technical resources and support.

Key considerations for determining application chains

From the perspective of the project team, it is recommended to follow the following principles when deciding whether to upgrade or iterate to the application chain:

1. Dependence on existing public chain features：If your application is heavily dependent on other dApps on the public chain, such as liquidity or product features, it is recommended to continue using existing dApp solutions.

2. Request for custom functionality：If the current application cannot support key business requirements at the protocol level, such as account abstraction or specific onboarding mechanisms (such as revenue sharing), and these functions are critical to business operations, it is recommended to consider turning to application chains.

3. Cost Sensitivity:If the end user is very sensitive to block space resources, or wants to reduce losses such as MEV, then the application chain may be a better choice. In addition, if the application involves high-frequency trading, the application chain can provide higher resource efficiency and lower transaction costs.

Building a moat and development path for application chains

We believe that the moat of the application chain always lies in its application business. The key to success lies in deeply identifying market pain points and establishing product market fit (PMF). The narrative of relying solely on chain infrastructure is similar to "looking for nails everywhere with a hammer", which is not an effective strategy for building 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, improving and securing products, while accumulating a large amount of user data and developing a business model with cash flow. This will form strong user stickiness and network effects.

Taking an overly high-profile approach may not be suitable for application chains. At least before the core product is perfected and user growth data is fully established,The focus should be on product development, with marketing being a secondary priority.The accumulation of user data, the cultivation of user habits, and the iteration of product functions are not achieved overnight, so a robust and prudent approach is more appropriate. The application chain should first establish core functions, even irreplaceable functions. On this basis, new functions and product lines can be developed. Even if the new functions are not well received, a defensive strategy can be adopted to abandon them. When upgrading and iterating the application chain, multiple deep integrations with the original application functions can be carried out.

For example, Debank, a well-known portfolio visualization and asset management platform, has long been based on ETH and EVM.walletThe tracking and observation of assets, transaction history, and dApp location in Debank's addresses are established, and many features are iterated based on this. Although some of Debank's less well-known features, such as notifications, bookmarks, and greetings, do not weaken its core asset management capabilities, they still exist. Debank's payment functions also reflect its attention to detail, providing diversified and refined payment options and integrated package optimization, providing users with thoughtful choices. The overall performance of these features is strong, forming a good synergy with Debank's other product line Rabby Wallet. Although Debank is promoting the development of Debank Chain based on OP Stack, users have not felt a significant difference, which shows that Debank's application chain has effectively established its core moat and provided valuable insights for the development path of other application chains.

Designing a token model for application chains

When building the token economic model of the application chain, we advocate an "organic" approach. The core of this strategy is to minimize human intervention and avoid relying on short-term incentives. Our goal is to make the circulation and value growth of tokens coincide with the expansion of the application itself and the growth of the user base. In this way, the token economy can be synchronized with the long-term development of the application and the actual needs of users, thereby achieving sustainable growth.

In the early stages of an application, tokens can be an effective tool to attract users and achieve a “cold start”. However, the key to ensuring that these initial users are not only attracted but also converted into long-term users is to design an efficient and attractive mechanism. This mechanism should be based on a clear positioning of the application product, a deep insight into user needs and preferences, and a comprehensive understanding of the business context. In addition, the core value of the token must be clear to ensure that users can recognize its long-term potential and benefits. Through such a strategy, the token can not onlyXiaobai NavigationIt not only attracts users, but also encourages them to continue to participate and use the product in depth.

The growth of the number of token holders should be consistent with the expansion of the user base to ensure the healthy development of the token economy. We should avoid taking overly aggressive token distribution strategies and focus on models that achieve sustained growth. This requires us to fully consider the current market liquidity and potential changes, while ensuring that the token economic model is closely linked to the vision of the application. In addition, NFT, as a new type of reserve asset, can be innovatively combined to provide users with a variety of usage scenarios, thereby enhancing the attractiveness and market competitiveness of tokens.

Learning from failures is key to avoiding mistakes when designing Lisk tokens.

For example, Aevo is a new token listed on Binance in the past six months. It has not suffered from lack of liquidity. After attracting a large number of early users through airdrops, Aevo has gained a certain foothold in the pre-launch trading field. Unfortunately, Aevo's overly aggressive and unrestricted token design ultimately harmed the product's core growth metrics. Currently, Aevo shows stagnation in key metrics such as token holder growth, daily trading activity, and basic market depth for pre-launch trading. Therefore, in order to build a token economic model that is both attractive to users and sustainable in the long term, we advocate an organic growth strategy that drives the natural growth of tokens and the expansion of applications based on intrinsic value and user demand.

Overview of well-known application chain projects

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

Cyber It is a heavily staked Ethereum Layer 2 network designed to achieve mass adoption in the social space. Its core features include native account abstraction, decentralized storage (CyberDB), and decentralized ordering supported by CyberGraph and CyberAccount's Enshrined Social Graph Protocol. Its core application product Link3 allows verified Web3 companies and professionals to create reusable data on the chain that can be integrated and utilized by other applications.

XAI 是一个兼容 EVM 的 Layer 3 网络，专为游戏开发，由 Offchain Labs 开发，利用 Arbitrum 技术。XAI 允许玩家在不使用cryptocurrencywalletIn-game items can be owned and traded without any conflicts, while the network's node operators participate in governance and receive corresponding rewards, creating an open and real economic experience for traditional players.

MyShell AI It is an innovative platform for AI agent creators and a consumer AI layer that connects users, creators, and open source AI researchers. Users can use MyShell's proprietary text-to-speech technology and AutoPrompt tool to quickly customize agents with personalized voice styles and functions. For agent creators, the platform provides efficient agent creation, monetization options, and the ability to profit from their agents.

GM Network Aims to become a leader in the consumer AIoT space. It combines advanced AltLayer technology, EigenDA, and OP Stack to create decentralized DePIN. GM Network aims to build a large incentive and communication platform that integrates AI and DePIN/IoT technology to bridge the gap between the virtual and real worlds, thereby promoting the widespread application of AI on the consumer side.

Investment Analysis Framework

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

1. Industry understanding and market positioning:Gain in-depth understanding of the mechanisms and practices in the crypto field, identify market pain points, and propose innovative application solutions.

2. Target customer groups:Apps should target a large and potential user base as this directly affects their market capitalization cap.

3. Product delivery and iteration speed:Compared with infrastructure, applications require strong product delivery capabilities and fast iteration speed to ensure continuous optimization and innovation of functions.

4. User retention andbusiness model:Apps must establish strong user retention capabilities and achieve sustainable growth through GMV growth and a matching business model.

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

Outlook

We are optimistic about the development of application chains. This optimism stems from the potential of application chains as core platforms for user activities, playing an important role in diversified fields such as social networks and games. In the future, these application chains will not only provide rich interactive experiences, but also promote innovation and development in related industries through their unique technological advantages.

Notes

1. The B-end and C-end application business models have their own characteristics, but their integration with the application chain is similar. This article does not strictly distinguish between the two, but focuses on how they use the 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 a settlement and data availability layer, so it is not much different from Layer 2 in structure.

3. Solana has not officially supported Layer 2 development, and its focus remains on building a high-performance Solana public chain. For Layer 2 or application chains on Solana, the integration method is similar to Ethereum, with the main differences being the execution framework and data availability layer.

4. Although the current state of Layer 2 seems to be relatively quiet, the real problem is that some Layer 2s are too dependent on the on-chain prosperity brought by the expectation of airdrops, and do not fully operate and maintain the ecosystem.data, Layer 2 chains like Arbitrum and Base remain highly active.

5. The revenue sharing models between application chains and RaaS platforms vary, such as fixed fees or the distribution of sorter revenue. Application chains of different sizes can choose the appropriate revenue sharing model based on their business situation.

The article comes from the Internet:ArkStream Capital: Application chain has become a trend, and we need to fully understand the design methods and projects worth paying attention to

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