Dora Ventures: Why We Bet on Application Chains

Author: Dora Ventures

Introduction

Dora Ventures, a fund under DoraHacks, recently announced the closing of its first phase. Regarding this fund, the Dora Ventures team stated that it will primarily focus on next-generation application chains and related infrastructure, and has already participated in investments in several early-stage projects, including Nolus, FairBlock, Side Protocol, AbstractOS, FortyTwo, and Helius.

As a leading global developer incentive platform and open-source geek community, DoraHacks has been active in the fields of decentralization, governance, and the open-source geek movement. Why is Dora Ventures focusing on application chains and actively participating in building and investing in projects in this field? Let’s explore.

Part One: What is an Application Chain

The last cryptocurrency bull market cycle was primarily dominated by single-chain solutions.

Although hot topics like Bitcoin halving and meme coins always attract a lot of attention, the real narrative focus of the 2020 to 2022 cycle was the rise of single-chain solutions dubbed "Ethereum killers." These single chains can provide cheaper block space, better performance, and greater application potential, and their ecosystems have seen tremendous growth as the industry has recognized them.

While when the next cycle will begin remains uncertain, one thing is for sure: this time, the narrative of monolithic blockchains will no longer dominate the market narrative. Correspondingly, the modular concept and application chain framework will become an undeniable presence.

Application chains can no longer be ignored. For those unfamiliar with it, the definition of an application chain is very simple—blockchains designed specifically for certain applications. Although the concept of application chains is not new, this field has achieved remarkable results in recent months. This article aims to analyze the foundational conditions required for the argument of application chain ecosystem prosperity and provide some facts and progress that can support this argument.

To better understand the following article, it is necessary to have a brief understanding of the current industry background regarding single chains and modular application chains. An application chain is a streamlined blockchain built to support specific application scenarios, and this architecture is completely different from the design of monolithic chains. Monolithic chains refer to a foundational layer with underlying currency premiums as the ultimate settlement or execution layer for decentralized applications. Examples of traditional single chains with various decentralized applications include Ethereum 1.0, Solana, Bitcoin, BNB Chain, and Algorand.

In contrast, application chains represent the vertical integration of settlement and execution layers (or infrastructure and application layers), providing developers with three key advantages:

1. Empowering Application Sovereignty:

In the design of application chains, token holders of the application can directly participate in governance decisions at the infrastructure level. For example, UNI holders on Ethereum can vote on specific proposals for Uniswap, but these UNI token holders do not have voting rights at the Ethereum protocol layer governance level. In contrast, token holders of Osmosis (the largest DEX on Cosmos, which is also an application chain) can participate in governance voting at both the application layer and the blockchain layer. Relatively speaking, application chains allow users to engage more actively in the future development of the application and better balance the vision and interests of the protocol with those of the users.

2. Enhancing Token Value:

Taking Uniswap as an example, the utility of the UNI token outside of governance is quite limited. Dan Elitzer from Nascent pointed out in an article titled "Application Chains are Inevitable" that Uniswap traders incur three types of costs: token trading fees, network transaction fees, and MEV (Miner Extractable Value), but these costs (which are revenue for Uniswap itself) do not benefit UNI token holders. Currently, these fees flow to Ethereum validators, who may not align with the views and interests of the Uniswap community in certain cases, and may even directly conflict. Additionally, users do not need to hold UNI tokens; they can simply hold ETH to capture the value generated by these fees. Therefore, demand for UNI tokens is low, as almost all benefits accrue to ETH holders. If Uniswap were to launch its application chain, UNI token holders would become validators of the UNI chain, and the UNI token itself would gain more utility.

3. High Customizability:

Compared to directly deploying on a monolithic chain, application chains provide application developers with a more open and customizable environment. Developers can customize every aspect of the blockchain according to their needs. For example, for decentralized finance applications, faster block times, smaller blocks, and parallel transactions are crucial. Developers can design the underlying network based on actual needs and better optimize the application and network itself through adjustments in virtual machine environments and software development tool frameworks.

Part Two: Application Chain Examples

Leading application chains in the market are not unfamiliar to many, such as dYdX and Injective.

Injective was initially launched as an advanced decentralized exchange on Ethereum. However, on November 8, 2021, it underwent a significant transformation, and when it reappeared in the public eye, it had become an independent application chain adopting Cosmos-SDK. The new Injective application chain has demonstrated outstanding performance over the past year and has gradually grown into one of the most prosperous DeFi ecosystems. Recently, Injective attracted over 100 development teams to join its ecosystem through events like hackathons, further highlighting its rapid growth since becoming an application chain.

The evolution of dYdX has been more prolonged. Initially, it defined itself as the first perpetual contract exchange on Ethereum, then migrated to the StarkNet rollup, and finally decided to develop and deploy its own Cosmos-SDK application chain, known as dYdX v4, which was officially launched on October 26, 2023. In a recent Medium article, Saurabh emphasized the advantages brought by this strategic shift, which can be categorized into three aspects:

1. Enhanced governance sovereignty: The dYdX token will serve as the governance token for dYdX v4, rather than just for the application itself.
2. Excellent tokenomics: dYdX will become a gas token as a necessary token for trading fees.
3. Effective value capture: The dYdX token will take on the role of the staking token for dYdX v4, allowing token stakers to earn staking rewards. Additionally, the USDC fees generated at the dYdX application layer will also be distributed to stakers.

Does this sound familiar? Indeed, the theory mentioned earlier about the "UNI chain" is perfectly embodied in dYdX. In the cases of Injective and dYdX, we observe the natural development pattern of leading decentralized applications: when a new software or application reaches a sufficient scale, they choose to pursue a vertical integration strategy, customizing infrastructure for themselves, creating scalable solutions, and actively promoting user adoption. Such decisions for vertical integration are not uncommon in Web2: Tech giants like Amazon have long utilized vertical integration to achieve technological scalability and have reaped substantial rewards from sovereign effects and synergies. AWS was initially developed to support Amazon's logistics and transportation business, and today, AWS has evolved into Amazon's main business line, bringing astonishing growth and returns, which sufficiently illustrates the long-term advantages of having one's own infrastructure.

Part Three: Evolving Application Chain Infrastructure

Before the argument for application chains is confirmed, the development of corresponding necessary underlying infrastructure has become an urgent demand for the expansion of application chains. Ethereum's slow block time and high gas fees have driven the community to explore and develop scaling solutions. These efforts have led to some innovations, such as optimistic rollups (Optimism and Arbitrum), sidechains (Polygon), validiums, and zkRollups (Starknet, zkSync, etc.). While these technologies have defined the industry's initial understanding of modularity to some extent, most of them still operate as general-purpose monolithic networks with limited customizability. However, application chains represent the ultimate form of modular blockchains and are increasingly accepted and adopted. The increasingly prosperous ecosystem of dedicated application chain infrastructure supports this view. Dedicated application chain infrastructure encompasses solutions like "Rollup as a Service" such as Vistara, shared sequencers like Astria and NodeKit, and security networks and liquidity middleware like Omni Network and Exocore. Because this infrastructure provides developers with more powerful and convenient tools and offers users a superior experience, Dora Ventures[2] predicts that the wave of application chains has arrived, and it is inevitable and will continue to accelerate in the foreseeable future. In just the past three months, the following projects have announced that they will launch their own independent application chains, including some well-known star projects:

• Frax - Fraxchain
• Circle - Noble
• MakerDao - Newchain
• PUBG/Krafton - Settlus
• Wormhole - Wormholechain
• Octopus Network - Ottochain
• DeBank - Debankchain
• Shared Sequencers - NodeKit, Astria, Rome Protocol, Espresso Systems, Radius
• Move - Movement Labs
• Zora - Zora Rollup
• Public Goods Network - PGN Rollup
• Pokt Network - Pokt Rollup
• Aevo - Aevo Rollup
• Mode - Mode Rollup
• Celo - Celo Rollup
• Frontier - Selfchain
• Hooked - Hooked Chain
• Rariable - Rarichain

Part Four: Monolithic vs Modular

Recently, discussions around monolithic and modular architectures have garnered widespread attention. Dora Ventures[2] believes that both designs have their unique philosophies and advantages, as well as their respective trade-offs. The advantage of monolithic chains lies in their ability to quickly realize value, aiding the rapid accumulation of network effects. Established blockchain networks like Ethereum, Solana, and Bitcoin have a foundational network token as a community symbol. Although older monolithic chains like ETC, BCH, and LTC have fallen behind in terms of ecosystem and developer activity, they still hold a place in the top 100 by market capitalization.

However, as mentioned at the beginning of the article, Dora Ventures[2] firmly believes that in the future, as application sovereignty and customizability are valued more by people, the practical framework of modularity will also be adopted more widely. The emergence of new-generation application chains continues to validate this viewpoint. If large applications with substantial community support, like dYdX, Frax, and MakerDAO, continue to choose to upgrade their projects to application chains, then application chains will have more advantages in competing with monolithic chain systems.

Part Five: Application Chains Beyond Cosmos

Undoubtedly, Cosmos is one of the most critical ecosystems supporting the adoption of application chains. Cosmos-SDK empowers developers to create and launch autonomously governed application-specific blockchains. Currently, the ecosystem of application chains built using Cosmos-SDK is in a phase of prosperous growth. However, application chains are not limited to Cosmos; they are penetrating the boundaries of traditional perceptions and gradually infiltrating ecosystems that embrace monolithic chain designs. A notable example is Ethereum, which now has a gradually maturing rollup infrastructure track, and projects like Zora, PGN, and DeBank have begun to explore their own rollup paths. The following diagram illustrates the various forms this argument takes as it spreads across these two major modular ecosystems. Voices from Solana may be more representative. This industry giant has also let go of its obsession with extreme monolithic chains and has begun to slowly explore and embrace the concepts of application chains and modularity. Kyle Samani from Multicoin wrote a research article that sparked much discussion against modular design, upgrading the description of monolithic systems to an "integrated" framework. However, it is undeniable that the ideas of modularity and application chains have taken root in Solana. Given the increasing popularity of the Solana Virtual Machine (SVM) as an execution layer, projects like Eclipse are building infrastructure to easily launch SVM rollups. These rollups settle on Eclipse's shared settlement layer but have independent execution layers on their own SVM rollups. Nitro is another team that began researching SVM early on, dedicated to launching SVM rollup projects on Sei Network (Sei is a newly launched general-purpose chain on Cosmos). Even the veteran Ethereum project MakerDAO has announced plans to migrate away from Ethereum and launch its own application chain, claiming that it is most likely to adopt SVM as the execution layer for the new chain.

In addition to the launch of these SVM chains, a plethora of development tools and modular infrastructure are also entering Solana. Rome Protocol, a shared sequencer designed specifically for SVM rollups, aims to become an important infrastructure for the next generation of SVM rollups seeking decentralization and censorship resistance. Helius has become the preferred development platform for SVM developers, currently providing API, RPC, Webhooks, and other tool support for over 300 projects in the Solana ecosystem, and it can be anticipated that Helius will also provide indispensable assistance for future SVM application chains, including Makerchain. Although Solana still focuses on providing an integrated high-performance experience in its technical vision, an increasing number of application chains have begun to explore their best fit in products and markets within the SVM ecosystem.

Part Six: Current Issues and Challenges Facing Application Chains

Despite demonstrating strong growth and market adaptability in recent times, application chains also face some unresolved issues and challenges, such as liquidity fragmentation, community cold start difficulties, and composability issues.

1. Liquidity Fragmentation:

Application chains and independent rollups face the problem of insufficient on-chain liquidity, primarily stemming from the excessive fragmentation of liquidity across different ecosystems. In integrated blockchain network designs, all liquidity exists within a single chain, so this problem does not arise. However, in modular or application chain networks, liquidity is dispersed across many chains. For example, the $100 USDC that a user holds in the Cosmos ecosystem may be spread across multiple chains like Archway, Osmosis, Stargaze, and Neutron. This leads to a suboptimal interaction experience for users, especially those participating in DeFi. Liquidity fragmentation makes it difficult for users to obtain the best prices, reduces the trading depth of orders, limits trading volume, and consequently affects overall on-chain activity. Many teams are actively exploring solutions to this problem. For instance, Osmosis strives to serve as the actual liquidity center of Cosmos. However, most Cosmos application chains still need to integrate with Osmosis to enable users to better exchange or transfer assets. Interoperability protocols like IBC, Hyperlane, and LayerZero, as well as general messaging protocols (GMP) like Axelar and Connext Network, are also attempting to address this issue by standardizing tokens, data, and messages across various application chains. These efforts theoretically make the transfer of on-chain assets easier and safer. However, no one can claim to have completely solved this problem, which gives chains like Solana or rollups sharing liquidity with Ethereum (such as Optimism and Arbitrum) a liquidity advantage.

2. Project Cold Start Problem:

Currently, application chains are more suitable for mature applications with large communities. For example, dYdX has a loyal user base and community that is likely to migrate with the project. However, for relatively new or smaller applications, transitioning to an application chain may face user attrition, known as the "project cold start problem." Acquiring users purely through an application chain is not easy, as it is akin to launching a native application on a blockchain with insufficient users and liquidity, where the project lacks sufficient channels for customer acquisition and stable revenue generation. Therefore, for such applications, the most effective strategy may be to first launch on a mature monolithic chain, then continuously BUIDL to build a stronger community until they can support the launch of their own application chain. However, we have also seen some brand new application chains, such as the low-collateral lending protocol Nolus and the DePIN project Soarchain in the mobility sector, skip the aforementioned steps and directly enable dedicated application chains, achieving good responses through support garnered from the Cosmos community. In the future, building better infrastructure and tools specifically for application chains, such as decentralized market-making protocols like Shogun, development tool platforms like Abstract, and liquidity aggregators and portfolio management tools like FortyTwo Money, will contribute to the success of application chain projects.

3. Lack of Composability:

One of the challenges of asset composability, which is less discussed (or deliberately ignored) in modular design but is crucial, is particularly significant in asynchronous environments, where a second transaction may start before the previous one is completed, leading to a series of issues and potentially irreparable losses. Parallel transaction architectures like Aptos, Fuel, and Monad also face similar challenges, and the application chain architecture exacerbates this issue as it may involve hundreds of application chains. There are numerous cross-chain applications on these chains, all relying on various cross-chain transactions to operate. Compared to synchronous environments, ensuring consistent information states in such environments is more challenging. Composability is especially critical in DeFi use cases (such as liquidity mining), where asset re-staking is common. In synchronous environments, such as most monolithic chains, re-staking and composability can usually be easily achieved because new transactions will only begin after the previous transaction is completed. However, in asynchronous and cross-application chain environments, achieving composability requires more complex programming and technical implementation logic to ensure state stability. Although these technologies are still under ongoing research, over time, we can reasonably expect them to improve and optimize and be adopted more widely.

Part Seven: Conclusion

As the demand for flexibility, customizability, and application sovereignty among the new generation of Web3 developers continues to grow, application chains will become one of the mainstream choices for future blockchain developers.

The validation of this viewpoint depends on whether the most important Web3 networks, such as Ethereum L1 or Solana, will continue to explore and adopt application chain design frameworks more deeply or choose to continue to delve into integrated frameworks. However, we have already seen that some of the largest and most influential communities and projects, including MakerDAO, Frax, Zora, and Wormhole, have launched their application chain strategies following dYdX's migration. Therefore, we infer that the iteration and evolution of application chains and related infrastructure will continue.

In the future, while maintaining research in the field of application chains, Dora Ventures will also continue to support teams dedicated to solving key challenges in application chain infrastructure and modular design, helping them further expand the boundaries of application chains and modularity.