The blockchain space is rapidly evolving and new approaches to developing and launching blockchain networks are emerging. However, as more and more web3 developers gain experience with blockchain technology, they are beginning to realize the limitations of the architecture of popular blockchains such as Ethereum and Solana. Although Ethereum enables the development of applications through smart contracts, it does not allow for the automatic running of code and has stringent regulations on how consensus and networking operations are revealed. To overcome these pertinent obstacles, some developers have started to explore the use of application-specific blockchains, also known as “appchains”.
This blog will explore the current popularity of modular frameworks among businesses for the development and deployment of blockchain networks, and how this novel technique affects enterprise customers who are looking to construct permissioned consortiums, application-specific chains, or sidechains. Also, we would delve deeper into why you should consider building your decentralized application as an application-specific blockchain?
What are app-chains?
Today, the development of decentralized applications is often done on top of an existing blockchain such as Ethereum, as it is the most convenient and practical way to do so. A substitute approach to creating decentralized applications was suggested, allowing developers to construct decentralized applications as the application of the blockchain itself, as opposed to having the application part of the blockchain be a Virtual-machine and having decentralized applications built on top of it. This is known as an application-specific blockchain or appchain. App-chains are designed to provide developers with a platform that is reliable, expansive, and economical.
Appchains are designed to provide developers with a platform that comes enhanced with security features, facilitate scalability, and also has lower gas fees. They are built on top of a blockchain network, which allows for the development of applications that are secure, immutable, and resistant to censorship. Appchains also provide developers with the ability to create applications that are interoperable with other blockchains and applications.
History of AppChains
For years, web3 developers have been waiting for AppChain infrastructure to be provided by major blockchains. In 2016, Cosmos and Polkadot began working on the mission to bring the benefit of this relevant concept to masses, but it wasn’t until 2021 that their networks were fully launched (with IBC and parachain capabilities). By the end of 2020, there was a growing demand for Ethereum to be made scalable and the transaction fees were too high, thereby prompting several developers to begin their search for alternatives as a way to combat these challenges.
As Ethereum’s scalability solutions continue to be developed during 2020 and 2021, the focus gradually shifted to the implementation of Layer 2s (L2s). Layer 2s are a set of protocols that enable the scaling of Ethereum, allowing for faster and cheaper transactions. Polygon, Skale, zkSync (1.0), StarkWare (StarkEx), Optimism, and Arbitrum are all Layer 2 solutions that have been launched in 2020 and 2021. These Layer 2s facilitate quicker and more economical transactions, as well as enhanced scalability. Additionally, they provide a layer of security, as transactions are secured by the Ethereum mainchain.
The importance of supporting the Ethereum Virtual Machine (EVM) became increasingly increasingly clear as blockchain space evolved and needs for better alternatives grew. In 2020 and 2021, a number of other base layers (“L1s”) launched EVM-compatible chains in order to further their business development efforts. These encompass Avalanche (C-Chain), NEAR (Aurora), Polkadot (Moonbeam), and Cosmos (Evmos).
In 2019, Celestia (formerly known as LazyLedger) presented an innovative modular design that separates the execution, settlement, and data access layers of a conventional monolithic blockchain. This pioneering design allows for the formation of application specific blockchains without having to reconstruct the other components of the stack. This flexible and customizable design allows developers to create on the application specific blockchains without having the need to reconstruct other components of the stack. By separating and running these components in parallel, Celestia has opened up a new world of possibilities for blockchain applications.
How does an appchain work?
Appchains are built upon existing blockchains and have similar functions, yet their operations may vary depending on the blockchain they are based on. Appchains employ their own token for staking by validators or as a representation of ownership within the app. These tokens can be used as an internal currency, a token of ownership, or even as a voting system within the app.
Validators from the main blockchain who opt to validate for a particular appchain can stake the appchain’s token. This ensures that appchains do not compete with other applications for transaction capacity.
Current market overview of appchains
At present, developers have a range of options when it comes to AppChain infrastructure.
In recent years, the use of AppChains has been gaining traction among developers and users alike. Axie initiated the release of their Ethereum sidechain, Ronin, while DeFi Kingdoms declared their relocation from Harmony to an Avalanche L1 (Formerly known as Subnets) at the end of 2021. In the middle of 2022, almost half of the Apecoin community voted in favor of ApeChain, and dYdX declared that their V4 will be constructed on a self-governing L1 using the Cosmos SDK. Nowadays, AppChains are being employed to create a broad range of applications on different platforms. With the increasing popularity of AppChains, developers and users are now able to launch and interact with them more easily than ever before.
Many platforms provide shared blockspace layers, such as Optimism and zkSync, while others are likely to offer dedicated execution layers if there is enough demand from developers. With the increasing popularity of blockchain technology, it is likely that more platforms will be available in the near future, giving developers even more options for creating and deploying their applications. No matter what platform developers choose, they can be sure that their applications will be secure and reliable.
Why AppChains For Enterprises?
In recent years, developers have been turning to appchains as a better alternative to launching smart contracts on shared blockspace and this can be attributed largely to following advantages:
Performance: Performance is improved because AppChains allow projects to keep transaction costs and latency low and predictable, resulting in a better user experience. This is in contrast to shared blockspace, where one popular dApp can consume a disproportionate amount of resources, resulting in higher costs and slower transaction times for other dApps.
Customizability: Customizability is an important factor when it comes to dApp development as this feature allows developers to be able to tailor their applications to the specific needs of their users. This includes the ability to modify the underlying blockchain protocol, customize the consensus algorithm, permissioning, the development process and other features. This could include features such as customizing the wallet, the smart contracts, setting up a testing environment, creating custom tokens, and more.
Also, developers building their applications on Virtual-machine blockchains have to face the restricting development environment of the blockchain. Ethereum developers are restricted to a few programming languages, including Solidity and Serpent. Additionally, they are bound by the rules set by the Virtual-machine. For instance, most Virtual-machine blockchains do not enable automatic state transitions. Every state transition must be activated by a user sending a transaction.This approach is logical when constructing a blockchain on a Virtual-machine, however it can be a source of problem for developers, causing them to encounter severe challenges.
When developing larger applications, developers need to focus on certain crucial design elements such as throughput, finality, security level, permissioning, composability, and compatibility with the existing ecosystem. For instance, validators may need high-performance hardware, such as SGX or FPGAs for creating zero-knowledge proofs. AppChains provide traditional organizations with an opportunity to explore Web3 solutions without having to be fully permissionless from the start. Organizations can mandate KYC-confirmed validators, vet coders who wish to construct on their network, and select which blockchains they wish to link their assets to and from.
Autonomy: When constructing an application specific blockchain, you have absolute autonomy over the governance of the chain – you can either opt to deploy it as a public (Proof-Of-Stake) or private (Proof-Of-Authority) chain. This means that you can make decisions that are tailored to the needs of your application, without having to worry about the consensus of other applications in the ecosystem. Governance of your application is isolated from other applications, so if there is an issue it can be addressed without affecting any other applications in the system.
In the event of a decentralized application running on a Virtual-machine being hacked, there is no way to rectify the situation if the governing body of the blockchain does not give its consent. This was the case with the Parity multisig hack, where the Ethereum community was unable to repair the damage.
Earning through monetization of apps: AppChains offer developers a unique opportunity to monetize their applications and this feature makes for a strong business use case for appchains. By forking existing protocols, developers can create their own ecosystems and generate revenue from trading fees, staking tokens, and other token sinks. Furthermore, coders can utilize MEV by running their own sequencers or validators, enabling them to develop new cryptonative business models. For instance, dYdX validators can provide users with low or no charges while giving them slightly worse execution costs. Moreover, AppChains can provide a platform for modders to monetize their creations. By extending existing IP on a rollup, modders can generate revenue through the use of blockspace. This presents a fresh chance for hobbyists to generate revenues from their work. Numerous successful video games have a plethora of modifications, add-ons, skins, etc., and are designed to be as modifiable as possible. Nevertheless, modding is generally done by gamers who don’t have the means to capitalize on their labor. This gives them the chance to monetize their efforts and generate a new source of revenue. If such games were AppChains, mods could extend the IP on a rollup and monetize through the use of the blockspace.
Scalability: Scalability is also improved with AppChains, as projects can increase the capacity of their own chain without having to compete for blockspace on the same network. This allows projects to scale up their operations without having to worry about being outcompeted by other dApps. Finally, AppChains offer improved security. By running on their own dedicated chain, projects can benefit from the security of their own network and avoid the risk of being affected by security issues on the shared blockspace.
Areas of improvement for AppChains
AppChains provide a layer of isolation to infrastructure and users within different ecosystems. This does not prevent applications from being composed together, but it does prevent transactions from being atomic. While atomicity is an important property for some applications, it is not necessary for others, such as P2E games.
Also, AppChains allow for the transfer of assets and liquidity between different layers or chains, but this process requires bridging infrastructure, which can be inconvenient for end-users. In comparison to appchains, the advantages of developing apps on the L1 and L2 protocols are still greater as they make more resources and tools available for developers. With the required support and larger developer ecosystems, LI makes it easy to port code to a compatible blockchain. Layer 2 (L2) solutions offer a more expansive framework for app developers, allowing them to expand their operations without having to undertake extensive modifications to their existing code. Additionally, L2s offer lower gas fees and higher throughput, without compromising on security.
Emerging AppChain Market Structure
The AppChain market structure is also evolving to include more specialized services such as decentralized exchanges, smart contract platforms, and other services. These services are designed to make it easier for developers to create and deploy dApps, as well as to provide additional security and scalability.
Applications that have achieved a certain degree of growth (e.g. user base, protocol revenue, TVL) and have proven their product-market fit are ideal for AppChains. These applications can benefit from the dedicated blockspace and have fewer security and atomicity requirements (e.g. P2E games, NFT collections, cryptosocial). For other programs, the most suitable option is to initiate on generalized L2s, and if they generate a sufficiently extensive ecosystem, they can migrate to app-specific L3s or app-specific L1s. It is probable that the majority of applications will remain on Layer 1 (L1) and Layer 2 (L2) blockchains with shared blockspace. Due to the fragmented nature of the L2 landscape, teams, especially those in the DeFi space, will likely opt for L1s due to their security, liquidity, and atomicity properties, the latter of which is especially important for flash loans that provide virtually infinite capital efficiency with no balance sheet risk. Non-DeFi applications can initiate on generalized Layer 2s and migrate to application-specific Layer 3s or Layer 1s if they acquire a considerable user base and network effects. This order of operations can be visualized as follows
Developers using the AppChains to launch their apps are likely to opt for modular execution layers (especially roll-ups) instead of monolithic chains due to the lack of capital needed to initiate a large validator set. Moreover, it is improbable that top-notch validators will assign their resources to an AppChain whose token has a low and unsteady market value.
App-design space
When selecting an AppChain infrastructure, there are a few design tradeoffs to consider in terms of security. These include shared security, which includes the consideration that whether it is secured by multiple independent validators, isolated security, which is provided by the application itself and its own validators or sequencers, and inherited security, which is provided by an underlying settlement or consensus layer. Critically analyzing pros and cons of each option is essential before settling on a choice. It is important to think through the advantages and drawbacks of different solutions available to make the best choice.
It is important to consider the security source and security settlement when choosing the AppChains. Cryptography is the most common form of protection, but other measures such as consensus protocols, smart contracts, and distributed ledgers also play a role. Cryptography is used to encrypt data, while consensus protocols are used to ensure the integrity of the data. Smart contracts are used to automate certain processes, and distributed ledgers are used to store and share data securely. Coming together of these components can facilitate a secure environment for blockchain applications.On Ethereum, security is provided by a combination of the Ethereum network and fraud proofs, validity proofs, and double spend protection. Non-Ethereum Layer 1 networks may use different consensus models to provide security. Finally, some applications use their own token as crypto economic security. Settlement of transactions typically occurs on the same layer that provides security.
When choosing an AppChain infrastructure, there are certain design decisions to make regarding the consensus – whether it is permissionless or permissioned model. Permissionless networks, such as Optimism and StarkNet, allow anyone to read, write, and validate state transitions. On the other hand, permissioned-by-choice networks, such as Polygon Supernets and Avalanche L1s (Formerly known as Subnets), only allow whitelisted validators and developers to read, write, and validate the chain.
It is essential to select a platform that allows for the smooth and secure transfer of both liquidity and data between different applications. This will ensure that users can access the services they need without having to worry about the security of their assets. Infrastructure with full moves to any application with minimum latency and maximum security, such as Polkadot XCMP and Cosmos IBC, should be preferred over those with limited connectivity, latency, and/or security.
Other factors such as gas fees, required stakes, transactions-per-second (TPS), transaction finality and EVM support are also important considerations when choosing the appchains infrastructure to build on.
Final thoughts
Blockchain developers looking to create fully-optimized web3 applications can fall back on AppChains. However, developers should carefully consider their application’s needs and the trade-offs before dedicating resources to launching an AppChain.
It will be intriguing to observe the financial model, revenue plans, system immunity, value accrual across the stack, and consequent impacts on the crypto market structure in the upcoming years. If you are involved in the development of AppChain-focused infrastructure or applications, please get in touch!
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