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Yesterday, Uniswap announced that they are launching their own chain on the OP Stack: Unichain.
Fast blocks (250ms), cross-chain interoperability, and a decentralized validator network
Built to be the home for liquidity across chains
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The timing of Uniswap's announcement lined up perfectly with my research focus this past week. On Wednesday, I saw this Chris Burniske tweet praising a new blog post by Ryan Watts.
The article, "Applications capture fees, Blockchains store value", was a fantastic read and I wanted to share my takeaways so all of you can better understand how to think about onchain value accrual in the coming years.
Aside from Ryan's post, I also went through the following resources to better understand the topic:
Talk on Sovereign Blockchains by Nick White (Celestia COO)
Mason Nystrom's post on privatization of order flows & Verticalization of social stack
Westies's original thread on the Fat App Thesis
Let's dive in.
Last bull market, the narrative was to find the L1s you thought had the most potential of attracting strong developers, novel apps, and new users.
Many folks tried to create their ideal basket of tokens such as Matic, Sol, Near, Avax, and of course Eth. And the truth is...that was a fantastic play. These L1 tokens gave sensible investors astronomical returns.
But, that was 3-4 years ago and a lot has changed.
As I've mentioned here and here, blockchain infrastructure has rapidly improved in the last two years. The scaling research done from 2015-2020 is rapidly coming into fruition today and as blockspace gets commoditized, we're seeing a shift in balance between apps and infrastructure.
You can start to see the revenue flippening happen in the Ethereum and Solana ecosystems. Just look at the shift in revenue share in the past 3 years.
Products like pump.fun, Maker, and Aerodrome are raking in close to $200 million of revenue per year.
And these numbers are just the trailer of what's to come in the next few years. Right now, initial applications are showing us that it is in fact possible to create novel crypto native products that attract a niche of users and generate meaningful revenue.
The sentence above may sound obvious now, but it's worth noting that just two years ago, most people in the space thought dapps weren't defensible because they could simply be forked.
But now, the pendulum is quickly swinging the other way as builders are starting to realize that due to chain abstraction and scalability, it's in fact the infrastructure layer that doesn't have a moat.
This, along with the fact that users are insanely hard to acquire (and keep) is what's starting to make app revenue look juicier.
I mentioned this in a post from August when Uniswap frontend hit $50 million in revenues:
I remember when I first heard about the fees, my immediate reaction was that everyone would just shift over to other UIs to avoid the fees. What idiot would pay more money when you can use the underlying protocol on any other interface with lower (or no) fees?
Well...turns out me 😂 In the past year, I continued to use Uniswap without thinking twice and I learned that habits do matter, good UX does feel safer, and platform trust takes years to form.
Building trust with users takes time. But! If a team can find a niche and build an initial set of loyal customers around the product, then there's a playbook developing that allows them to quickly build a castle.
At a high level, it looks something like this:
The red steps at the beginning are what most people think about right now. Have an idea? Cool, go build and deploy it on an L2 that makes the most sense. It's in the blue section where things get interesting.
Once the team has identified their target market and proved a reliable revenue stream, then it's time for the them to hyper-optimize their economic and technical freedom by going the rollup route.
Note: reliable revenue stream means on a larger scale that's been proved over time
How are they optimizing? Well, in three ways:
Internalizing MEV fees
Customizing execution and settlement layer
Trying alternative economic models
I'll spare the technical details of the points above for another post (truthfully, I'd need to do more research myself). But the point to takeaway here is that by deploying their own rollup, the team gets a much larger design space with how they create their user experience and optimize their infrastructure.
The only thing the RollAPP would be using the core L1 for is proof of chain integrity through data availability sampling.
Meaning, users can trust verify that the product chain they're using is submitting proof to the L1 (i.e. Ethereum, Celestia) that they are not tampering or manipulating any of the data.
And once the rollApp starts seeing an increase in revenue through new streams such as MEV fees, native yield, etc, then they can start using that capital to further verticalize their stack.
Of course, not every single app will be able to do this. But the products like Uniswap that have the financial and labor resources will try to "grow their castle" by building out an entire suite.
Last point before we wrap up today's post. What does this mean for the L1 tokens such as ETH and SOL?
Well, if the rollup thesis turns out to be right and we see a proliferation of product specific L2s spin up, then the fees that accrue to the L1s will naturally go down. It may not be realistic to justify "infrastructure revenue" as the narrative for eth itself growing.
BUT! That's not to say that L1s will just tank in value. The dominant narrative for these ecosystems will be something more along the lines of Bitcoin: a store of value.
In Syncracy’s view, while applications will continue to capture a greater share of the global blockchain fee pool over time, underlying infrastructure (L1s) may still generate larger outcomes, albeit for a smaller number of players.
The core thesis underpinning this view is that long-term, all base layer assets like BTC, ETH, and SOL will compete as non-sovereign digital stores of value – the largest TAM in the cryptoeconomy.
That's all for today's post.
Hope everyone has a great weekend!
- YB
