Why Navarre said: ZCash is insurance for Bitcoin privacy

Author: Max Wong @IOSG

Three years ago, we wrote an article about Appchain, prompted by dYdX's announcement of migrating 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 perhaps a relatively marginal technology option. Moving into 2025, with the launch of more and more Appchains, especially Unichain and HyperEVM, the competitive landscape of the market is quietly changing, and a trend is emerging around Appchain. This article will start from this point and discuss our Appchain Thesis.

The Choice Between Uniswap and Hyperliquid The concept of Unichain emerged quite early. In 2022, Nascent founder Dan Elitzer published "The Inevitability of UNIchain," highlighting Uniswap's size, brand, liquidity structure, and need for performance and value capture, pointing to the inevitability of launching Unichain. Discussions about Unichain have continued since then. Unichain officially launched in February, and over 100 applications and infrastructure providers have already built on it. Currently, its TVL is approximately $1 billion, ranking among the top five L2 blockchains. Future plans include Flashblocks with a 200ms block time and the Unichain verification network. [Image of a pursuant to an image] ▲ Source: DeFiLlama Beyond its core products, Hyperliquid has also launched HyperEVM, which, like HyperCore, is protected by the HyperBFT consensus mechanism. In other words, in addition to its powerful perp products, Hyperliquid is exploring the possibility of building an ecosystem. Currently, the HyperEVM ecosystem has a TVL exceeding $2 billion, and ecosystem projects are beginning to emerge. From the development of Unichain and HyperEVM, we can clearly see two points: The L1/L2 competitive landscape is beginning to differentiate. The combined TVL of the Unichain and HyperEVM ecosystems exceeds $3 billion. These assets should have been deposited on general-purpose L1/L2 platforms like Ethereum and Arbitrum in the past. The departure of top-tier applications has directly led to the loss of these platforms' core value drivers, such as TVL, trading volume, transaction fees, and MEV. Previously, L1/L2 and applications like Uniswap and Hyperliquid had a symbiotic relationship; the applications brought activity and users to the platform, while the platform provided security and infrastructure for the applications. Now, Unichain and HyperEVM have become platform layers themselves, directly competing with other L1/L2 platforms. They are not only vying for users and liquidity but also 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 drastically different from those of current L1/L2 platforms, which typically build infrastructure first and then attract developers with incentives. Unichain and HyperEVM, on the other hand, follow a "product-first" model—they first possess a core product that has been market-proven, boasts a large user base, and enjoys brand recognition, and then build an ecosystem and network effects around that product. This path is more efficient and sustainable. They don't need to "buy" an ecosystem through high developer incentives; instead, they "attract" the ecosystem through the network effects and technological advantages of their core products. Developers choose to build on HyperEVM because of the high-frequency trading users and real-world demand scenarios there, not 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

Firstly, there's the maturity of the technology stack and the improvement of third-party service providers. Three years ago, building an Appchain required the team to master the full stack of blockchain technology. However, with the development and maturity of RaaS services such as OP Stack, Arbitrum Orbit, and AltLayer, developers can combine various modules on demand, just like choosing cloud services, greatly reducing the engineering complexity and initial capital investment required to build an Appchain. The operating model has shifted from self-built infrastructure to purchasing services, providing flexibility and feasibility for application-layer innovation.

Secondly, there's brand and user mindshare.

We all know that attention is a scarce resource. Users tend to be loyal to an application's brand, not the underlying technology: 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 of the differences between chains—their touchpoints are often primarily the wallet and the application. When applications build their own chains, users' assets, identities, and usage habits are all embedded within the application's ecosystem, creating a powerful network effect. Most importantly, applications' pursuit of economic sovereignty is gradually becoming more prominent. In traditional L1/L2 architectures, we can see a clear "top-down" trend in value flow: Application layer creates value (Uniswap transactions, Aave lending) Users pay for using the application (application fees + gas fee), part of which goes to the protocol, and part to LPs or other participants. Of this, 100% of the gas fee flows to L1 validators or L2 sorters. MEVs are shared proportionally among searchers, builders, and validators. Ultimately, L1 tokens capture value other than app fees through staking. In this chain, the application layer, which creates the most value, captures the least. According to Token Terminal statistics, of Uniswap's total value creation of $6.4 billion (including LP rewards, gas fees, etc.), protocols/developers, equity investors, and token holders receive less than 1%. Since its launch, Uniswap has generated $2.7 billion in gas revenue for Ethereum, which is approximately 20% of Ethereum's settlement fees. But what if applications had their own chains? They can collect gas fees for themselves, using their own token as the gas token; and internalize MEVs, minimizing malicious MEVs by controlling the sorter and returning beneficial MEVs to users; or customize fee models to achieve more complex fee structures, etc. Thus, seeking value internalization becomes an ideal choice for applications. When an application has sufficient bargaining power, it 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. Summary ▲ Source: Dune@reallario The above chart roughly compares the revenue of protocols (red) and applications (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 centered on "technical breakthroughs" and the development of underlying infrastructure. In the future, it will gradually shift towards pricing methods anchored by brand, traffic, and value capture capabilities. If applications can easily build their own chains based on modular services, the traditional "rent-collecting" model of L1 will be challenged. Just as the rise of SaaS reduced the bargaining power of traditional software giants, the maturity of modular infrastructure is also weakening the monopoly position of L1. The market capitalization of leading applications will undoubtedly exceed that of most L1s in the future. The valuation logic of L1 will shift from the previous "capturing the total value of the ecosystem" to a stable, secure, decentralized "infrastructure service provider." Its valuation logic will be closer to that of public goods that generate stable cash flow, rather than "monopolistic" giants capable of capturing most of the ecosystem's value. Its valuation bubble will be squeezed to some extent. L1 also needs to rethink its positioning. Regarding Appchain, our view is that, due to its brand, user mindshare, and highly customizable on-chain capabilities, Appchain can better accumulate long-term user value. In the era of "fat applications," 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 both end users and other developers. Besides economic sovereignty, top-tier applications will also seek other forms of sovereignty: the right to decide on protocol upgrades, transaction ordering and censorship resistance, and ownership of user data, etc. Of course, this article primarily discusses this within the context of top-tier applications such as Uniswap and Hyperliquid, which have already launched Appchains. Appchain development 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 heavily rely on composability on a single chain, are not well-suited for Appchain. In contrast, perp, which only requires oracles for external access, is a better fit for Appchain. Furthermore, Appchain is not the optimal choice for mid-tier applications and requires case-by-case analysis. This will not be elaborated further here.