Will decentralized applications be more valuable than blockchain base protocols in the future?

2023.02.10

Value may shift toward application layers closer to consumers, rather than the fat protocol layer.

2023.02.10 - 08:46:45

dapp区块链dYdX

Navigating Web3 tides with focused insights

Value may shift toward application layers closer to consumers, rather than the fat protocol layer.

Author: Revelo Intel

Compiled by: TechFlow

Appchains

Value may accrue closer to the consumer at the appchain layer rather than the fat protocol layer.
Appchains enable product-market fit for blockchain technology, allowing entrepreneurs to vertically integrate the entire user experience.
Most blockchain applications involve two-sided markets, which can be optimized for value flows between participants.
The evolution of the Ethereum ecosystem exemplifies how it began as a fat-protocol-oriented system on which applications could be built.

Successful companies in the internet era such as Facebook and Google optimized around demand ownership—a concept that also partially applies to the cryptocurrency world.
Skepticism exists toward the fat protocol thesis, as demand aggregated at L1 is largely temporary and transitional.
Real demand aggregation will come from end users who are largely unaware of the underlying blockchain and simply use it as a marketplace or computing service.
Long-term user engagement will focus more on applications delivering the services they need.

There are relatively few applications with moats or competitive advantages strong enough to retain users.
Attracting users remains a key challenge for the future success of crypto applications.
As cross-chain bridge technology improves, factors that have historically driven demand concentration—such as the availability of stablecoins like USDC—are beginning to erode. Ultimately, applications will play a decisive role in determining crypto’s success, much as seen throughout the history of consumer computing.
Building moats in crypto is a long-term and creative process, starting with cultivating a user base and strong brand, and potentially involving the creation of liquidity flywheels.

Block space is not a uniform resource.
Ethereum L1 block space holds value due to high transaction volume and extensive integration.
This advantage may weaken as alternative systems become easier to use.
The future value of Ethereum L1 block space remains an open question; currently, Uniswap and OpenSea are the largest consumers of Ethereum block space.
If these systems expand to other chains where Layer 2 transaction costs are far lower than L1 settlement, the value of Ethereum block space could diminish.

The smile curve is a framework used to describe value distribution across a supply chain.
In the early personal computer industry, value was created during R&D through patents and technological innovation; manufacturing in the middle phase was commoditized, while marketing, branding, and services in the final stage held the most value.
This framework can also apply to cryptocurrency, where R&D is typically open-source with limited intellectual property protection, shifting value toward branding, marketing, and distribution.
Layer 2 solutions in crypto may face risks of commoditization.
Compared to traditional tech industries, crypto's overall ethos—open-source and decentralized—leads to unique patterns of value distribution.

dYdX’s successful migration of its high-barrier customer relationships from StarkEx to Cosmos is seen as validation of the appchain thesis.
Since dYdX is building a decentralized derivatives exchange, it has the potential to significantly influence perceptions about the viability of appchains.
However, a single success case is insufficient to prove the theory.

Full-stack appchains offer maximum customization and optimization but require greater resources and expertise.
Alternatively, application-specific L2 or L3 rollups may provide lower costs and higher accessibility but could impose limitations on customizability.
Applications that may benefit most from full-stack control include privacy-focused apps, where required functionality and integration levels remain challenging even on L2s.
In the middle of the spectrum are modular applications like Celestia, offering a compromise between the two extremes—defining boundaries between different utilities while limiting the ability to transcend them.
Ultimately, the choice between full-stack appchains, application-specific rollups, or modular architectures will depend on each application’s specific requirements and goals.