dApp Chains Go Head-to-Head: A Comprehensive Comparison of Avalanche, Polkadot, Celestia, and Cosmos
Web3 has been growing rapidly in recent years, and with it, the need for scalable solutions has become more pressing. Enter the dApp chain thesis: the idea that specialized, interoperable blockchain networks, each focused on a specific use case, can offer a more scalable, efficient, and flexible infrastructure for decentralized applications. In this article, I’ll explore the merits of the dApp chain thesis and compare four of the leading dApp chain ecosystems: Avalanche, Polkadot, Celestia, and Cosmos. My goal is to determine which of these platforms, with a shared security model, will find a product-market fit and is best positioned to lead the dApp chain space in the years to come. Join me as I delve into the world of dApp chains and explore the cutting-edge technology that powers them.
Why dApp chains?
The blockchain trilemma has long been a thorn in the side of blockchain developers. It is not possible to create a blockchain that excels in all three attributes: security, decentralization, and scalability. Many have turned to dApp chains as the savior, allowing for multiple secure and decentralized chains to work interoperably and achieve scalability without compromising on security and decentralization by reducing the transaction load on each chain. However, this narrative is increasingly being overshadowed by another solution to this conundrum: layer twos. The buzz around layer twos is growing louder, with roll-ups poised to become the preferred solution for achieving scalability while maintaining the integrity of security and decentralization.
Now, you might be thinking that this puts the dApp chain thesis in the dustbin of history, but that’s not the case. Developers who prefer dApp chains argue that having complete control over the blockchain offers other benefits, creating new value propositions for the dApp chain thesis. Transaction fees paid in the native coin of the dApp can enhance the user experience, while a dApp chain allows for the internalization of Maximal Extractable Value (MEV) to create revenues for the dApp itself. So, while layer twos might be the talk of the town, dApp chains still have plenty to offer.
What is Maximal Extractable Value (MEV)
MEV, or Maximal Extractable Value, is a complex topic. To fully explain how it works would require an entire article in itself. But in a nutshell, MEV allows miners and validators to extract more value from the blockchain by manipulating the position of a transaction in the block. This has historically been associated with negative behavior like frontrunning and sandwich attacks, but there are also advantages to be had. Good MEV, such as arbitrage and liquidations, are crucial to efficiency of DeFi applications.
For dApp developers, owning their own blockchain provides greater control over MEV and the ability to minimize bad behavior while maximizing good. This means potential for internalization of MEV to create revenue for the dApp itself, and with the maturation of the crypto space, sustainable businesses that generate profits will be increasingly important. MEV could very well be a driving force behind the launch of more dApp chains in the future. To dive deeper, check out this presentation by Osmosis CEO Sunny Aggarwal.
Who can benefit from MEV?
While the promise of additional revenue through MEV sounds exciting, not every crypto project has the same potential to benefit from it. To really make the most of MEV, you need to be in the DeFi space, where liquidations and arbitrage reign supreme. Think borrowing and lending protocols, AMMs, and perpetual trading apps. These projects lose out on serious revenue if they’re launched on an L1 or L2 solution. So, for them, launching their own dApp chain could be the savvy business decision that sets them apart from the competition. Take dYdX, for example, who said goodbye to Ethereum and announced their own IBC-enabled dApp chain. On the other hand, if you’re building decentralized service applications, NFTs, or gaming applications, MEV isn’t really a thing. It’s more cost-effective and straightforward to launch on a layer-1 blockchain, which might be one reason why Helium recently switched from having its own blockchain to launching on Solana.
Other reasons to build dApp chains
In addition to MEV, there are other compelling reasons for developers to launch their own dApp chain. For instance, transaction fees on layer-1 blockchains can be a major obstacle when trying to onboard users who aren’t crypto natives. Each transaction requires users to pay in the blockchain’s native coin, which can be confusing and costly. With a dApp chain, developers can address this problem by allowing users to pay fees in the dApp’s utility token or offer completely gasless transactions. It’s an elegant solution that simplifies the onboarding process.
Despite L2s stealing the spotlight when it comes to scaling solutions, dApp chains still offer an excellent solution to this problem. Some dApps, particularly those in the gaming sector, require high transaction throughput and low latency. For example, games like FIFA Ultimate Team generate thousands of transactions per second, which even L2s may find challenging to handle. Thus, such games are prime candidates for dApp chains.
Finally, launching your own dApp chain gives you complete control over the network’s design, consensus mechanism, governance structure, and economic model. This level of customizability allows developers to create a tailored solution that meets the specific needs of their application. While layer-1 blockchains are designed to serve the requirements of most general dApps, some niche applications may require specific changes at the protocol level. With a dApp chain, developers can make those changes and provide a unique user experience.
Currently there are arguably four major players that follow the app-chain thesis and look to create an ecosystem of independent and sovereign blockchains.
Polkadot is the OG blockchain interoperability and shared security project launched in 2016 by Dr. Gavin Wood, co-founder of Ethereum. It enables developers to create their own specialized blockchains, called parachains, that can interact with each other and with the Polkadot network. This is made possible through the use of a relay chain that acts as a central hub for communication between different parachains.
Each parachain can have its own consensus mechanism, virtual machine, and governance structure, giving developers a high degree of flexibility and customization. Polkadot also offers a shared security model, allowing smaller parachains to benefit from the security of the larger network.
To gain a parachain slot, developers must win a parachain auction by committing and locking up Polkadot tokens. This can require a significant amount of capital, with the average winning bid in the first five Polkadot parachain slot auctions of 2021 being around 100,000 DOT per slot. This has driven demand for DOT in the short term but may limit adoption in the long term, as developers and their communities must commit a substantial amount of capital to secure a slot.
Despite these challenges, Polkadot has garnered significant interest and institutional backing, with a passionate community and high number of daily active developers.
Avalanche is a blockchain platform that offers developers a range of options for launching decentralized applications (dApps). On the Avalanche C-Chain, developers can deploy dApps in a permissionless, Ethereum-like environment. Alternatively, developers can create their own customizable blockchain networks, called subnets, which can operate independently or in conjunction with other subnets on the Avalanche platform.
Subnets are highly customizable, with developers being able to choose parameters such as consensus mechanisms, virtual machines, and smart contract languages according to their needs and preferences. This allows for greater flexibility and scalability, as subnets can be tailored to specific use cases and can operate in parallel, rather than as a single, monolithic blockchain network.
One of Avalanche’s key features is its consensus mechanism, called Avalanche Consensus, which is designed to achieve high throughput, low latency, and low transaction fees. This is attractive to developers who value speed and efficiency.
Cosmos is a blockchain ecosystem that is well-known for its Inter-Blockchain Communication Protocol (IBC), a standard that allows for the authentication and transport of data between two different blockchains. This means that users can send funds between different IBC-enabled blockchains without needing to use bridges. Within the cosmos ecosystem we can find two different solutions for shared security.
Interchain Security (ICS)
While IBC has created a lot of value for Cosmos, the Cosmos Hub – the main hub of the Cosmos ecosystem – has struggled to find its own identity and capitalize on this value. However, the introduction of Interchain Security (ICS) is expected to change that.
Developing and maintaining an IBC-enabled blockchain can be complex and costly, since these chains can’t rely on a central security provider to keep them safe. Instead, they need to find their own set of validators and incentivize them to keep validating transactions. With ICS, IBC chains will be able to use the Cosmos Hub validators to secure their chain, rather than having to establish their own validator set. Interested dApp chains need to submit a proposal to the Cosmos Hub and gain approval through a governance vote in order to be secured by the Hub. While this simplifies the process of maintaining a sovereign blockchain by eliminating the need to find and maintain a large set of validators, there are still significant costs associated with setting up an ICS chain. Although the Cosmos SDK simplifies the process of launching a blockchain, it still requires specialized engineers. This adds to the already high personnel costs that web3 companies are facing. Moreover, even after a successful launch, additional costs arise as projects must continue to reward Cosmos Hub validators and delegators for securing the chain.
Within the Cosmos ecosystem, Mesh Security is a novel approach to enhancing the security of decentralized networks through a shared security model. Specifically, Osmosis and Juno are working on creating a two-way bridge between their respective blockchain networks to leverage the security of each network’s native token. This bridge allows tokens from one network to be staked and used as collateral to secure transactions on the other network, creating a feedback loop where the security of each network reinforces the security of the other. To dive deeper into how Mesh Security works, watch this presentation by Osmosis CEO Sunny Aggarwal.
This unique two-way shared security model is different from other one-way models where developers rent security from a provider. Mesh Security allows every participant to act as both consumer and provider, creating opportunities for revenue and offsetting some of the costs associated with renting security from other chains.
However, implementing Mesh Security comes with some complexity and setup costs. For example, even after a fully independent IBC blockchain is established, integrating Mesh Security requires passing government proposals on each chain involved. Developers looking to enter a Mesh Security relationship with multiple chains will need to pass proposals on each of those chains and implement code to make it work. Despite these challenges, Mesh Security offers the most independence and economic prospects among shared security models.
Celestia, a blockchain project that has been generating a lot of buzz lately, has introduced a new “modular” approach that is expected to revolutionize the space. The project has already raised a whopping $56.5 million in two private funding rounds and its highly anticipated launch is just around the corner.
What makes Celestia stand out is that it is a minimal blockchain that only orders and publishes transactions, while the actual execution happens on independent roll-ups that developers can deploy on top of the Celestia chain. By separating the consensus and application execution layers, Celestia offers developers similar benefits to dApp chains in other ecosystems, without the need for them to set up their own blockchain. Each dApp launched with Celestia gets its own independent roll-up, allowing developers to define their own virtual machine and get their own execution space, ensuring scalability while benefiting from the security of Celestia’s consensus layer. To learn more about how independent roll-ups work in detail, check out this informative article posted by Celestia.
While Celestia’s approach reduces development costs and makes dApp chains more attainable for less capitalized projects, it also comes at the cost of autonomy and sovereignty. With a Celestia roll-up, developers have fewer options in terms of product and economic designs, and less opportunity to capitalize on MEV compared to a sovereign dApp chain.
Polkadot has a lot of potential with its experienced and reputable team, as well as its active developer community. However, in the long run, it might struggle to attract developers due to its high capital requirements to gain access to a parachain slot compared to other solutions. With no additional benefits over other contenders, it might be difficult to convince developers to launch with Polkadot. Instead, they might choose more affordable and economically interesting options.
I believe that Avalanche has a great product-market fit in the gaming industry, with impressive developments already happening in that direction. Furthermore, developers can enter the ecosystem through a permissionless L1 or sovereign blockchains, providing multiple avenues for growth. Despite having incredible technology, Avalanche faces competition from brands that are stronger. Ethereum, along with its layer two solutions such as Arbitrum, Polygon, Optimism, and Immutable X specifically for gaming, benefits from a larger community and the massive Ethereum brand. While I consider Avalanche to be the superior gaming solution, especially for big studios, it remains to be seen whether it can overcome Ethereum’s much stronger brand. The question of brand versus technology is intriguing, and it will be interesting to see how it plays out in the end.
Although Celestia has generated a lot of buzz, its narrative seems to be stuck as a scaling solution. With Ethereum layer 2 solutions offering all the scalability needed for most projects, I’m not sure if there is a clear niche for Celestia. Nevertheless, I can see smaller developers adopting Celestia for its dApp chain solution as they may lack the resources to build a sovereign blockchain. Despite this, I’m not entirely convinced that this is enough to make Celestia a winning player in the dApp chain space.
It’s important to keep in mind that Ethereum is on a mission to become more roll-up friendly, allowing more projects to create their own dApp specific roll-ups. But while Ethereum is a big player in the blockchain space, Celestia is specifically focused on being a platform for dApp specific roll-ups, offering significant advantages in scalability and cost-effectiveness. Despite this, Ethereum’s massive brand and large community mean that many developers may still choose it over Celestia once dApp specific roll-ups become more mainstream on Ethereum. If Celestia wants to succeed, it will need to move quickly and capitalize on its early advantages.
Cosmos’ Inter-Blockchain Communication protocol (IBC) sets itself apart from its competitors Polkadot and Ethereum by offering complete openness and independence from the Cosmos Hub and its native token, ATOM. This is both a positive and negative attribute for the ecosystem. On the one hand, it fosters ecosystem growth, while on the other, it is detrimental to the Cosmos HUB’s value proposition.
“The flexibility Cosmos affords developers in creating their own chains (custom inflation schedules, transaction fees, transaction types, security models, coding languages, etc.) and the value accrual mechanisms the IBC affords appchains (MEV, transaction costs, etc.) make the ecosystem compelling for those with the technical chops to vertically integrate their apps. Look no further than dYdX, arguably the largest application in crypto, which migrated from a ZK-rollup to an appchain this year.” – Messari crypto theses for 2023.
When evaluating the Cosmos ecosystem as a whole, the IBC protocol is poised to become a major player in interoperability by connecting a wide range of dApp chains and different layer 1s. Its permissionless nature and free-to-use model make creating an IBC chain a highly attractive proposition for developers looking to launch a dApp chain. Moreover, when comparing ecosystems, Cosmos consistently leads the way in terms of innovation. Skilled developers are exploring the possibilities that fully autonomous blockchains provide. While other contenders are focused solely on dApp chains as a solution to scalability, Cosmos has moved beyond that stage, and developers are now exploring how dApp chains can improve product and economic designs of their applications. Leveraging such revenue streams through MEV and other novel possibilities makes Cosmos especially appealing for DeFi applications. It is expected that the Cosmos ecosystem will become a major player in DeFi innovation, as evidenced by dYdX and SushiSwap’s move to Cosmos.
With respect to the future of the Cosmos ecosystem, the prospects of the Cosmos Hub itself are less certain. The largest and most successful applications will likely leverage full autonomy in designing their economic model, excluding the Hub from the equation, while finding enough committed validators willing to secure their chain. While Interchain Security (ICS) is intended to make launching a dApp chain easier and cheaper by removing the need to find a validator, projects will still require expensive and specialized blockchain developers on their team. Thus, the major cost point and complexity remains, even with ICS, making it attainable and sensible for mainly larger, well-capitalized projects. Presumably these projects will prefer to create a fully autonomous IBC chain independent of the Hub. In addition, there is a limit to the scale that ICS can handle. If the same validator set of the Hub were securing multiple chains through ICS, it would introduce a hardware burden and impact throughput for all the ICS chains.
Moreover, even if smaller projects choose to go down the ICS route, it is unclear whether this will benefit the Cosmos Hub. Smaller chains will generate limited transaction volume and therefore little value for the Hub and its validators and stakers. As a result, the Hub may secure such chains at a loss. Without developers who bring significant value, ICS may prove to be a disappointment.
Regarding Mesh Security, if IBC lives up to its potential and becomes the main communication standard, I expect that Mesh Security will become the ecosystem’s most successful shared security concept. As previously mentioned, the largest and most successful developers will seek a fully autonomous chain independent of the Cosmos Hub. However, smaller market cap Cosmos chains may opt to rent additional security. Mesh Security offers a compelling solution in this regard. As Mesh Security is a two-way shared security solution, it not only incurs costs for renting security but also generates revenue by providing security, offsetting some of the costs, or for some large security providers even generating a profit.
Despite its strong community, team, and large institutional backing, I struggle to see how Polkadot will find a great product-market fit due to its expensive and complicated onboarding process for developers.
For Avalanche I see a great fit in the gaming space, offering the best solution for that specific niche. However, I’m unsure if it can overcome its competitors leveraging the much stronger Ethereum brand.
Meanwhile, the Cosmos ecosystem I foresee to become a major player in the dApp chain space, particularly in the DeFi sector, thanks to its innovative revenue mechanisms. While I predict the ecosystem to thrive, I’m worried about the Cosmos HUB as interchain security may struggle to find product-market fit. For developers seeking a scalable dApp chain without the resources to develop their own blockchain, Celestia offers a cheaper and simpler solution. On the other hand, well-capitalized developers who want to explore the novel economic possibilities of IBC chains may prefer Mesh Security.
Although there is significant competition in the dApp chain space, it is not a winner-takes-all arena. Different architectures and targeting allow projects to serve different niches and even operate together. Initiatives on that front are already underway, and it will be exciting to observe how they develop.
Of one thing I’m certain though: dApp chains are here to stay. Their advantages and possibilities make them the perfect solution for many applications, and it will be exciting to see if my predictions become true and which models and ecosystems come out on top.
This article has been written and prepared by Lukasinho, a member of the GCR Research Team, a group of dedicated professionals with extensive knowledge and expertise in their field. Committed to staying current with industry developments and providing accurate and valuable information, GlobalCoinResearch.com is a trusted source for insightful news, research, and analysis.
Disclaimer: Investing carries with it inherent risks, including but not limited to technical, operational and human errors, as well as platform failures. The content provided is purely for educational purposes and should not be considered as financial advice. The authors of this content are not professional or licensed financial advisors and the views expressed are their own and do not represent the opinions of any organization they may be affiliated with.
The post is very in-depth, but it misses one of the biggest launches this year: Parathreads, which are pay-as-you-go chains built using Substrate for faster time to market and cheap onboarding. Since Polkadot has the second biggest ecosystem of developers (second only to Ethereum), it makes it one of the best contenders for the multi-chain/appchain approach.