The first blockchain network, Bitcoin, was created for peer-to-peer (P2P) payments. However, as the base chain’s user base and usage increased, Bitcoin’s base layer struggled to offer the highest throughputs at the lowest transaction costs compared to other blockchains. However, ongoing developments such as the Lightning Network are actively working to address these limitations and improve its scalability for everyday transactions.
The second-largest blockchain network by market capitalization, Ethereum, has had similar scaling troubles since the decentralized finance DeFi summer of 2021, when usage of its DeFi applications increased exponentially, along with transaction times and fees. Despite arguably better success from monolithic chains like Solana, appchains may be a long-term solution to dealing with high throughputs at low transaction costs.
Appchains, explained
An application-specific blockchain, or appchain, is a blockchain designed to support a single application or a specific set of applications. Unlike general-purpose blockchains like Ethereum or Solana, which host a multitude of applications and smart contracts, appchains are tailored to the needs of a particular application.
An appchain (a layer-2 or a layer-3 chain) can be a fork of the base chain (layer-1 chain), leveraging the existing codebase while introducing customizations and optimizations. This approach allows developers to build on a proven foundation, reducing development time and effort. Forking also provides a degree of compatibility with the base chain, potentially facilitating easier integration and interoperability.
This customization allows for optimized performance, bespoke user experience and tailored chain economics for the application’s specific requirements.
Why are appchains important?
Appchains offer the flexibility to tailor the blockchain’s architecture, consensus mechanism and governance to the specific needs of the application. This customization can enhance performance and user experience.
By dedicating the blockchain’s resources to a single application, appchains can achieve higher throughput and lower latency than general-purpose blockchains. Appchains can implement security measures specifically designed for the application, reducing the risk of vulnerabilities that might affect general-purpose blockchains.
Appchains can also allow teams to develop bespoke transaction prioritization strategies, which can be harder on the base chain, where multiple apps compete to get their transactions ahead of the others. In doing so, an appchain could improve the transaction experience for its users.
Developers have greater control over the blockchain’s features, upgrades and governance, allowing for more rapid innovation and adaptation to changing requirements.
What are the challenges associated with an appchain?
Building and maintaining an appchain requires significant technical expertise and resources, which can be a barrier for smaller projects. Apart from focusing on just growing a user base for the application being built, appchains need to ensure their infrastructure is taken care of as well. Therefore, the cost and the skills required are a major barrier.
Appchains may face challenges interacting with other blockchains, requiring robust bridging solutions to ensure seamless communication and asset transfer. Bridges are notorious for their centralization risk, which hackers have successfully exploited over the years. The Wormhole bridge hack and the Ronin bridge hack are examples of bridge-related hacks.
Developing a robust economic model to incentivize validators and users can be challenging, especially for applications with smaller user bases. Validators will become key economic actors in an appchain, and applications will need to build tokenomics to cater to them and ensure the scalability and viability of the chain, not just at the app tier but also at the infrastructure tier.
General-purpose blockchains benefit from network effects, where the value of the network increases with the number of users and applications. Appchains may struggle to achieve similar levels of adoption and community engagement. While this may come as a challenge in the short and medium term, as bridges across appchains and base chains improve in security and user experience, this could become a non-issue.
What is the difference between sidechains and appchains?
Both sidechains and appchains are separate blockchains that interact with a main blockchain (often called the parent chain or mainnet). However, their purpose and design differ significantly. Sidechains cater to various applications, while appchains focus on niche functionalities. Both leverage the security and decentralization of the main blockchain, but appchains allow more tailored user experiences.
Here are some of the key differences between the two:
Examples of appchains
Some appchains have managed to scale despite the challenges discussed above.
Arbitrum
Arbitrum is a layer-2 chain on Ethereum. Over the last few years, Arbitrum has built a strong DeFi community. As of June 2024, the chain manages a total value locked (TVL) of over $3 billion and a daily volume of over $200 million. The chain also supports Ethereum DeFi apps like Aave and Uniswap while successfully building native DeFi apps like Pendle and GMX.
Immutable
Immutable is a layer-2 Ethereum chain focused on the gaming ecosystem. It found its niche after the 2021 DeFi expansion on Ethereum. Gaming requires micropayments and a higher number of transactions than Ethereum, which, as a base chain, can support.
Therefore, Immutable made a deliberate attempt to focus on the gaming ecosystem. While the TVL of the chain is quite low due to the focus on gaming, it has been the go-to chain for gaming applications, with over 200+ gaming projects on the chain.
Pythnet and ZetaChain
While Arbitrum and Immutable are rollup chains that address the scalability issues of Ethereum, they do not necessarily serve just one application. They defy the singular implication of their name by hosting numerous decentralized applications (DApps) within that category. However, pure appchains, which address one app instead of an app category, are starting to take shape, with examples like Pythnet and the ZetaChain, which were forked out of Solana.
The Pyth Network provides data that facilitates onchain transactions, and ZetaChain is one of the most used derivatives trading platforms on Solana. The total value of transactions supported by Pyth data has reached $4.4 billion since the beginning of 2024. In April 2024 alone, Pyth data facilitated over $110 billion in cumulative trading volume, according to data shared by its team.
ZetaChain is still a young platform with a cumulative volume of over $9 billion and a daily transaction derivatives volume of about $80 million as of June 2024, according to data from DefiLlama.
While these examples are some of the success stories of appchain implementations, there have been apps with dedicated chains that struggled to focus on both the app and the chain tiers and then moved their app to a matured base chain.
For instance, Helium — a decentralized physical internet network (DePIN) app — started with its own chain. However, the project couldn’t focus on its chain infrastructure and, therefore, had to migrate to Solana.
Does an appchain need its own token?
An appchain does not necessarily need to launch its own token, but doing so can provide several benefits:
- Incentives: A native token can be used to incentivize validators and users, ensuring the security and functionality of the appchain.
- Governance: Tokens can facilitate decentralized governance, allowing stakeholders to participate in decision-making processes.
- Economic utility: Tokens can be used to pay for transaction fees, access services, or participate in the application’s ecosystem, creating economic utility and driving demand.
However, launching a token also introduces challenges, such as establishing a sustainable economic model and managing regulatory compliance.
Bridging infrastructure for appchains
Bridging infrastructure connects appchains with other blockchains, enabling the transfer of assets and data. Various bridging solutions exist, including:
Centralized exchanges (CEXs)
CEXs act as intermediaries, allowing users to transfer assets between different blockchains. While convenient, they introduce centralization risks and potential points of failure.
Decentralized bridges
Decentralized bridges leverage smart contracts and decentralized networks to facilitate cross-chain transfers without relying on a central authority. Examples include Polkadot’s parachains and the Cosmos Inter-Blockchain Communication protocol.
Atomic swaps
Atomic swaps enable direct peer-to-peer exchanges of assets between different blockchains without the need for intermediaries.
Impact of restaking on appchains
Restaking refers to the process of staking assets on multiple chains or applications to maximize the utility of staked cryptocurrency in multiple financial operations without needing additional investment. In the context of proof-of-stake (PoS) chains, restaking can have several impacts on appchains.
By allowing validators to restake assets on multiple chains, the security of appchains can be enhanced as more assets are at stake in maintaining the network’s integrity. Restaking can provide additional economic incentives for validators, encouraging more participation and strengthening the appchain’s validator network.
However, restaking requires careful resource management to ensure that validators can effectively support multiple chains without compromising performance or security. Managing restaking across multiple chains introduces additional complexity and potential risks, such as ensuring proper reward distribution and preventing double-signing or other malicious behavior.
Restaking can be a mechanism through which appchains can use the base chain’s security, token and even the validator infrastructure. This effectively reduces their overheads of launching a new token; however, restaking still requires managing proper incentives to the economic actors on the chain.
As the efforts to build the most scalable mainstream crypto app intensify, the voice of appchains across the ecosystems will only get louder. Some success stories with appchains or their variations can inspire future builders.