In my previous post, I discussed the inevitability of a multi-chain world, a perspective that remains relevant. However, recent developments have added nuance to my view.
Hyperliquid validated the app-chain thesis in an unexpected way.
Most of the newly launched blockchains are VC funds in disguise.
Hyperliquid validated the app-chain thesis
Application-specific chains are born from the idea that blockspace is purchased by applications operating on a particular chain or layer. On shared blockchains, applications compete for blockspace and pay gas fees alongside many other applications, leading to significant congestion and high competition. This congestion drives fees up, and the resulting cost is passed on to end-users. In contrast, on an application-specific chain, the application can better manage the fees imposed on end-users and control congestion during volatile periods. (Read this blog for more details)
Blockchain congestion is a serious challenge for perpetual exchanges, which depend on fast and reliable transactions for trade settlement, liquidations, and funding rate updates. Application-specific chains mitigate these issues by offering dedicated blockspace. They also have more control over transaction ordering, which can affect user experience and reduce MEV leakage.
Example: Taylor Swift concert tickets were sold for $20k on Ticketswap (Secondary Market), which means that Taylor Swift left a lot of money on the table by not selling her tickets for a higher price. Who should claim the extra money?
A person who resold the ticket on Ticketswap (searcher)
Ticketswap - resale platform (application)
Taylor Swift (LPs or users that made the trade)
If resellers need to pay high-priority fees to sell their tickets for a higher price then all money goes to Ticketswap, which many see unfair. Maybe Taylor should get that money? What about the person who made the sale?
In the current blockchain architecture, most of the profit earned from the ticket resale is not going to Taylor, reseller, or Ticketswap. All the profit goes to an infrastructure provider (e.g., AWS) hosting Ticketswap because the infrastructure provider (sequencer) decides which user buys the desired ticket. Traditional appplications have control over the transaction ordering, but in most crypto applications, the underlying blockchain or rollup sequencer decides the execution order in the hosted applications. Building on a platform fully controlled by the application makes more sense for gaining control over transaction ordering.
Hyperliquid is a perfect example of an application that controls its infrastructure. Instead of relying on a shared blockchain, Hyperliquid can manage congestion and has ability to apply sequencing rules. Hyperliquid prioritizes, cancels and makers over takers by running cancels and post-only orders first. (0xRainandCoffee talks about more sequencing rules in this post).
Aevo is another decentralized derivatives exchange developed on it's own infrastructure. Aevo's app-chain is built using a more familiar OP-stack technology. According to L2beat, almost 40% of all L2-chains are OP-stack. Aevo validated the app-chain thesis using a more common blockchain technology. In OP-stack chains, a single sequencer orders transactions and produces blocks. Centralized sequencer concentrates control, raising questions about decentralization and trust assumptions. Despite these trade-offs, OP Stack’s approach to rollup construction is accepted as a compelling balance of scalability and speed for developers building application-specific and general-purpose rollups.
Many people point out that Hyperliquid's blockchain is "run by four validators," which makes it less decentralized than other shared blockchains. Hyperliquid is compared to a centralized exchange because of this controversy. But in the end, traders use the product with a superior experience built on an app-chain.
Blockchains are VC funds in disguise
The benefits of managing dedicated infrastructure for blockchain applications are clear. Why, then, aren’t more projects pursuing this path? Instead, we see a large number of general-purpose blockchains launching each month.
The feedback loop for the development of applications is short. Developers can quickly iterate and see if their ideas work; if they don't, they can fail fast. Creating an ecosystem and investing in other applications carries less risk. If one application in your portfolio didn't work, you can still count on others. And if you started as an application-chain, why stop with one application when you can host more and collect fees from them.
If we look at most of the newly launched blockchains from this prism, evaluating them as Venture Funds makes more sense. Similar to Venture Capitalists, blockchains host hackathons, pitch nights, and networking events for founders in their ecosystems. Different blockchains have their own advantages
Technological edge: Monad, MegaEth, Scroll
Geographical edge: Kaia, Ton, Base, Tron
Brand edge: Soneium, ApeChain
Distribution edge: Base, Ink, Ton
According to the Forbes article, ~2% of VCs earn 95% of VC profits, and 10% are truly profitable, while many report phantom profits that don’t benefit their investors. According to the Dune Index the top 6 blockchains account for ~94% of blockchain adoption (as of 29 December 2024).
While direct comparisons between VC funds and blockchains are imperfect, newly launched chains are likely to follow similar rules. Some will succeed with substantial portfolios, while others may fail to raise their next round.
Final remark
Projects like Hyperliquid and Aevo demonstrated the benefits of controlling dedicated blockchains and building application-specific infrastructure. With abundant blockspace and strong capital inflows into blockchain ecosystems, we’re seeing a shift where developers can leverage modular infrastructure for more use cases. This trend creates an ideal environment for developers, who now have more resources and flexibility to build blockchain applications.
