Historically, appchains have been defined as single-use blockchains, as opposed to their general use, multi-app cousins, “fat protocols” like Ethereum.
These definitions are somewhat fluid, with monolithic (fat) chains able to move towards modularity with rollups, data availability layers, and the like, and with appchains able to support many composable smart contracts since a single app can have many different parts. We see this in the converging roadmaps of the primary monolithic and appchain ecosystems, Ethereum and Cosmos.
Benefits of running an Appchain
The classic benefits of a monolithic structure like Ethereum’s are shared security and composable smart contracts, whose ability to settle transactions synchronously created the necessary conditions for the first DeFi ecosystem. The classic problems are 1) the difficulty of scaling a world computer to handle the world’s finances and 2) the centralization and lack of developer freedom that comes from such an architecture.
This creativity has not come without its own set of challenges, particularly around scalability, sovereignty of each application, and the ability to capture MEV revenue.
Appchains, in contrast, run their own sovereign blockchain instead of a smart contract deployed on another chain. This means applications that build appchains enjoy greater customization of their ecosystem, such as:
- Sovereignty
- Tokenomics
Sovereignty
Sovereignty refers to the ability of an entity to govern itself. In a monolithic chain, all dApps must abide by the host chain’s rules. Rules, in this case, refer to the code behind the chain.
Transaction Fees
An example of these rules is the way transaction fees are priced. Fees are unpredictable on Ethereum. dApps find themselves charging $1.00 for a product that has $20.00 in transaction fees on a busy day (busy day for Ethereum, not even for the dApp itself). Two days later, the same product comes w/ a $5.00 transaction fee. On an Appchain, dApps can choose and adjust transaction fees as needed. For example, aiming to cap transaction fees at 10% of the purchase price. This is in line with most users’ expectations that fees are significantly cheaper than a product. Meeting those expectations is part of providing a strong UX.
Ethereum Gas Price over 6 months
One might suppose that a fix to Ethereum fees resolves this issue. For example, rollups can be used to reduce transaction costs. While true, individual dApps can not fix Ethereum fees. dApps on a monolithic chain are incapable of addressing issues that hinder their UX. They can merely complain and wait/hope for a fix. On an Appchain, the dApp developers can simply work with/ validators and change the expected transaction fees.
Additionally, rollups are a solution created around Ethereum’s existing code. Since dApps cannot change Ethereum’s code, they have to work around it. On an Appchain, the dApp owns and can modify every piece of code it uses.
Blockspace
In a monolithic chain, all applications share and compete for the same block space. An NFT mint on Opensea bids against trades on Uniswap for space in Ethereum blocks. This leads to popular applications using a significant amount of block space, increasing gas fees and transaction wait times for all applications. We saw this during the NFT mania of 2021, where Opensea volumes spiked, causing gas fees to rise due to heavy demands on the network.
Ethereum Gas Usage throughout 2021 by glassnode
It should also be noted that neither Opensea nor Uniswap benefits from increased gas fees in Ethereum because the fees are paid in Ethereum. There is no transaction fee-based value accrual for the Uniswap token.
If Uniswap was an Appchain, it could set its own gas fees and allow users to pay gas fees in its native token. Opensea volume would not negatively impact Uniswap users. Instead, Uniswap could enjoy any increase of volume is receives due to NFT trading on Opensea without worrying about the increase of gas fees. The shared benefit, economic activity on Opensea, can lead to increased trading on Uniswap, is retained while the resource constraint is removed. As separate appchains, they can work and grow together while maintaining a healthy level of sovereignty.
Tokenomics
Most dApps create their own native token for utility and governance purposes. In an Appchain, the token can be used for any purpose.
Transaction Fees
As an appchain, Osmosis allows users to pay transaction fees using its native OSMO token. This is in contrast to Uniswap which can only accept Ether for transaction fees. ETH accrues value from Uniswap usage without directly providing value to the UNI token. On the other hand, Osmosis usage pays its stakers, who in turn secure the chain.
Blockspace
Since Appchains have sovereignty over their codebase, they can decide how to handle transaction ordering and selection. This leads to the ability to generate and control MEV revenue. For example, Skip Protocol’s Proto-Rev module allows Osmosis to extract arb revenue for itself and its token holders. To date, ~$7,000,000 of MEV was available for extracting.
MEV Satellite for Osmosis from Skip Satellite
With the sovereignty of running an Appchain, Osmosis can claim this MEV for its token holders, increasing the value of the OSMO. If it were on a Monolithic chain, the native chain’s validators/miners would claim the MEV for themselves.
While in the past, developers faced a stark choice about whether to build their own appchain or launch on a monolithic protocol, it has become increasingly easy to switch between the two or even – with the outpost model – to live on multiple chains at once.
Building an appchain has become increasingly easier over time, with the implementation of IBC and the ease of the Cosmos SDK, which have created an enticing proposition for those who seek to have more customization, sovereignty, and deeper control of the economics surrounding their ecosystem. Ultimately, the battle to win the hearts of users will come down to which model can best provide a high degree of customization, sovereignty and predictability for users and developers alike.