In this episode of Bell Curve, Mike and Myles are joined by Zaki and Sam to discuss how Aggregation Theory applies to crypto protocols, if applications can convert user relationships into sticky profits, crypto moats, block space as a commodity, the benefits of controlling the full tech stack and more!
Read our notes below to learn more.
The AppChain Thesis
The value may accrue to the app chain layer, which is closer to consumers, rather than the fat protocol layer.
App chains enable product-market fit in blockchain technology and entrepreneurs to want to vertically integrate the whole experience.
A two-sided marketplace exists in most blockchain applications, which can be optimized for value flow between parties.
The evolution of the Ethereum ecosystem is an example of how it can start as a fat protocol-oriented ecosystem and then applications can be built on top of it to align better with the application-specific thesis.
Aggregation Theory
Successful businesses in the internet era, such as Facebook and Google, optimize for owning demand, and this concept is also applicable to some extent in the crypto world.
Expresses skepticism about the fat protocol thesis where aggregation of demand at the L1 is largely temporary and transitory.
The real aggregation of demand will come from the end user who is barely aware of the blockchain involved and just uses it as a marketplace or a means of computing services.
The long-term user base will be more concerned with the app that provides the services they need, rather than the telegram channels or discord groups that aggregate demand.
Do Moats Exist?
There are relatively few applications with a moat, or a competitive advantage, in retaining users.
The lack of applications with users is a challenge for the future success of crypto.
Factors that have been sources of demand aggregation, such as the availability of stablecoins like USDC, are starting to break down as bridging technology improves.
Ultimately, applications will play a key role in determining the success of crypto, as has been seen in the history of consumer computing.
The process of building a moat in crypto is a long-term and creative process that starts with building a user base and a strong brand and can involve creating a liquidity flywheel.
TODAY’S EDITION IS BROUGHT TO YOU BY ALLUO
Automatically access optimal compounding yields across Curve, Convex, and Frax.Convex, from Alluo’s easy-to-use dApp.
Single-sided staking
Super simple interface
#realyield
BOOST pools with easy access to 15% on ETH
AutoInvest: streaming, yield bearing Dollar Cost Averaging 🚀
All at Alluo
Is Blockspace a Commodity?
Block space is not a uniform resource and is highly context-sensitive.
Block space on Ethereum L1 is valuable because of the large number of counterparties and integrations.
There is a likelihood of this advantage eroding in the future as other systems become more accessible to a large number of counterparties.
The future value of Ethereum L1 block space is an open question, and Uniswap and OpenSea are currently the largest consumers of Ethereum block space.
Ethereum block space's value might be eroded if these systems expand into other chains where the cost of layer 2 transactions is much lower than L1 settlements.
The Smiling Curve
The Smiling Curve is a framework used to describe the distribution of value in a supply chain.
In the case of the early PC industry, the value was created in the R&D phase with patents and technology, the middle phase with fabrication was commoditized, and the final phase with marketing, brand, and service was the most valuable.
This framework can also be applied to crypto, where the R&D is often open-source and IP protection is limited, leading to a focus on brand, marketing, and distribution as the source of value.
The layer 2 solutions in crypto may be at risk of being commoditized.
The overall ethos of crypto, with its open-source and decentralization, leads to a unique distribution of value compared to traditional technology industries.
Will dYdX Validate the AppChain Thesis?
The success of dYdX in migrating a high threshold of its customer relationships from StarkEx to Cosmos is seen as a validation of the app chain thesis.
This is because dYdX is building a decentralized option that has the potential to blow people's minds about what is possible with an app chain.
The Cosmos SDK and app chain thesis is the flagship endeavor, and the creativity and innovation of high-performing teams using the SDK are seen as early validation.
However, one instance of success is not enough to prove the thesis.
Controlling the Entire Stack
The full-stack app chain provides the greatest level of customization and optimization, but also requires more resources and expertise.
On the other hand, app-specific L2 or L3 roll-ups may offer lower costs and greater accessibility, but may also have limitations in terms of what can be customized.
Examples of applications that may benefit from full-stack control are privacy-focused applications where the level of functionality and integration required can be challenging to achieve on even an L2.
In the middle of the spectrum, there are modular applications such as Celestia, which offer a compromise between the two extremes, with defined boundaries between different utilities, but also limitations on the ability to break these boundaries.
Ultimately, the choice of whether to go with a full-stack app chain, an app-specific roll-up or a modular application will depend on the specific requirements and goals of each application.
Check Out These Important Links
TODAY’S EDITION IS BROUGHT TO YOU BY ALLUO
Automatically access optimal compounding yields across Curve, Convex, and Frax.Convex, from Alluo’s easy-to-use dApp.
Single-sided staking
Super simple interface
#realyield
BOOST pools with easy access to 15% on ETH
AutoInvest: streaming, yield bearing Dollar Cost Averaging 🚀
All at Alluo