When Do Appchains Actually Make Sense?

As Ethereum continues steadfast in its pursuit of the rollup-centric scaling, one glaring question continues to go unanswered: when do appchains actually make sense?

Uniswap’s recent announcement of the Unichain has reignited debate about when it's appropriate for an application to launch its own chain, and although community consensus has yet to be definitively reached, Unichain appears to be a perfect case study for appchain feasibility.

Today, we’re dissecting two drastically different rollup-based constructs and discussing why not all appchains are created equal 👇

What is an Appchain?

So, "Appchain" is a generalized phrase used to describe any blockchain designed to serve a dedicated transaction environment for a specific use case. While the term is often associated with independent blockchains that operate within larger ecosystems, such as the Osmosis DEX on Cosmos or hit Avalanche gaming success Off The Grid, this term also meshes with the ambitions of many Ethereum Layer 2 solutions.

Compared to a general-purpose blockchain that imposes the same guidelines on all applications, appchains afford immense customizability, allowing developers to alter any core aspects of their chain, be it the security solution, gas fee mechanism, key infrastructure, or smart contract programming language.

The flexible chain structure can be much better suited to meet the needs of an application and its users, but appchains also come with one major drawback: increased fragmentation. Unique programming languages require unique wallets, and while eliminating gas payments is an easy UX simplification, utilizing a native gas token is an easy way to complicate it! Additionally, as appchains require bridging funds, users may find it more costly or less convenient to make transactions.

While no definitive guidelines exist for how to apply appchain terminology with respect to Ethereum’s rollup ecosystem, there are at least two distinct categories: rolldapps and protocol chains.

🌐 Rolldapps

Distinct Features:

Rollup Decentralized Applications, or rolldapps, are purpose-built L2s. This type of appchain does not require interoperability with other networks to function and is instead a destination for users to perform some kind of onchain interaction. Crucially, once a rolldapp is developed, it becomes the primary nexus of underlying protocol activity.

Notable Examples:

Aevo Network will soon be the oldest operating derivatives-focused L2. It is a custom OP Stack-inspired EVM rollup that settles transactions to Ethereum. By utilizing an off-chain order book, Aevo can optimize for the two major needs of traders: fast confirmation times and no gas fee orders.

 dYdX was the very first protocol to experiment with the rolldapp framework in the search for exchange scale. Its custom StarkEx rollup exchange launched in April 2021 and will finally shutter operations next week on October 30. 

Derive (the spiritual successor to options protocol Lyra) also operates on a custom OP Stack rolldapp exchange. Meanwhile, adjacent appchain competitors like dYdX V4, Hyperliquid, and Injective are all developing trader-centric base layer L1s.

Gaming-specific rollups like Arbitrum’s Sanko and Xai L3s also fit the rolldapp classification, as while their designs may be less constrained than DeFi-focused contemporaries, these chains still seek to create novel higher experiences for their niche user base.

Trade-Offs:

Compared to the protocols like GMX and Synthetix that dominate perpetuals trading activity across general-purpose EVM blockchains, the rolldapp exchanges listed above can ease the user experience by eliminating gas fees, a nice-to-have for retail users and a necessity for the sophisticated high-frequency traders making markets.

As rolldapps are only meant to serve a specific application, they may be inherently small in scale and instant liquidity-based bridging solutions, meaning withdrawals must be submitted to the native bridge and can have multi-hour processing periods.

🔗 Protocol Chains

Distinct Features:

The Protocol Chain attempts to live in harmony with its existing deployments. Although they may be heavily promoted by their creators, users are not naturally inclined to transact or custody assets in these isolated execution environments.

Notable Examples:

Unichain is the L2 that inspired this article. Unveiled by Uniswap Labs just under two weeks ago, it will be a permissionless general-purpose EVM-compatible rollup with a Uniswap deployment constructed on the OP Stack.

While Unichain will be extremely similar to alternative OP Stack execution environments (i.e., Optimism and Base), its fourfold reduction in block times and functional staking that will create UNI utility should serve as notable network distinctions.

Swaps facilitated by Unichain that originate from alternative networks will still require time-consuming bridging transactions, but the proposed OP Stack native interoperability promises to reduce intra-OP Stack bridging wait times and transaction costs.

Swell and Frax are two examples of successful Ethereum-based crypto applications that have deployed complementary protocol chains, the primary use case for which appears to be incentivizing increased usage of their actual application via rollup-centric points programs.

Maker/Sky has been considering some form of standalone asset issuance L1 as part of its “Endgame Plan,” meanwhile, Ethena recently began teasing its own network.

Trade-Offs:

Although Uniswap Labs believes its protocol chain has a chance at becoming DeFi’s liquidity hub, the crypto community has been torn about the chain’s prospects since before it was even announced.

Due to user time and cost constraints, onchain swapping transactions predominantly occur through the quickest and lowest cost venue; isolating that swapping venue to its own execution environment decreases the probability that it will be chosen for a given swap, as bridging imposes marginal transaction costs and wait times that result in an objectively suboptimal swapping experience.

Additionally, as its rollup will be more centralized and provide worse security guarantees than the Ethereum L1, Unichain may encounter difficulty in attempting to convince users to migrate.

🧐 Conclusion

Just because an application is free to deploy an L2 does not mean that its users will consider migrating there.

Protocol Chains may compete against general-purpose rollups but will likely find that their implicit fragmentation makes it difficult to achieve adoption as sidecar appchains offering second-class service. While application-specific networks will play a role no matter the blockchain, only actual destinations are likely to succeed, not economically impractical onchain pit stops or points-farming middleware.