Will AppChain rise, and will L1 become a cheap commodity?

The price of Block space will tend toward zero, and the future winners will be those applications that best meet the demand.

Written by: @0x_Arcana, Crypto Research Institute

Compiled by: Rhythm Xiao deep

Editor’s Note: The "Fat Application Theory" suggests that as the cost of block space approaches zero, L1 blockchains transition from monopoly to commoditization, with value shifting from the foundational protocol layer (such as Ethereum and Solana) to the application layer. Successful applications capture more revenue through vertical integration, controlling order flow, and MEV, becoming sovereign application chains. The market is repricing L1/L2, and the future winners will be applications that are close to demand and focus on practicality, rather than chains that pursue high TPS.

The following is the original content (for ease of reading and understanding, the original content has been reorganized):

The stage of crypto infrastructure is entering a world of marginal cost. Just like bandwidth and computing power, the price of block space will quickly trend towards zero. The only chains that can survive are those that are able to:

• Achieving growth today through subsidies
• Capture non-inflationary income tomorrow
• Provide infrastructure that is difficult for applications to easily replicate or abandon.

However, in this new environment, L1 is no longer a monopolist defined by early advantages or native ecosystems. Instead, they have become commodities—interchangeable tools for economic activities that compete based on performance, interoperability, and cost efficiency.

Their value now depends on whether they can be well integrated into application processes and provide indispensable or non-outsourcable services. The "protocol premium" that once drove high valuations is fading, replaced by a demand for real utility and performance. The current market repricing of many L1/L2 reflects this trend.

Charts include: BERA, MOVE, SCR, STRK

Did the Fat Protocol Theory go wrong?

In 2016, Joel Monegro proposed the Fat Protocol Thesis, pointing out that in crypto networks, most of the value is concentrated at the foundational protocol layer (like Ethereum, Solana, etc.), rather than the application layer. This is in stark contrast to the Web2 model, where applications like Facebook, Google, and Amazon capture most of the value, while protocols like HTTP and TCP/IP have been commoditized.

The fat protocol thesis has indeed been correct over the past eight years. This can be seen in the vast disparity between infrastructure and applications in terms of valuation and revenue multiples. On average, the trading valuations of applications are still far lower than those of infrastructure relative to revenue.

In this model, the crypto infrastructure has received significant funding and venture capital. In fact, this situation is so common that founders and developers are almost incentivized to launch another alternative L1 or general Rollup, as they know that venture capital will readily support them.

In a recent report, I mentioned that data availability (DA) is being commoditized and is inevitably trending towards zero. Based on the same logic, we can assume that all components of the infrastructure stack will eventually be commoditized and value will be extracted. What is the reason?

1. Fat Application Theory: Applications realize that by becoming a sovereign "application chain" and vertically integrating the entire stack, they can capture more value.

2. Application-specific ordering: Applications can control their own transaction ordering and inclusion process. This is an alternative path for those applications that do not want to build an application chain from scratch.

Fat Application Theory

The fat application theory suggests that successful crypto applications will capture more value than the underlying blockchain protocols. The simple reason is that applications are commercial entities, and commercial entities prioritize maximizing revenue.

The most successful applications in the space are those that continuously generate revenue, such as pumpfun, Hyperliquid, Jupiter, and Uniswap. What do they have in common? Fee income. These business entities want to control their order flow and MEV capture, or in many cases, become sovereign application chains, which is completely reasonable.

Vertical integration seems to be the most cost-effective direction for applications to block value leakage. As the scale of applications grows, the opportunity cost of not doing so will only increase. This is good for applications, but not necessarily for underlying infrastructures like Ethereum. We have already seen clear signs of this trend in Unichain and JupNet.

What is left at the protocol layer?

Speculations about the future value accumulation of the underlying protocol layer present two viewpoints:

1. Base fees and transaction fees will tend towards zero over time. MEV, as the only remaining source of income, will be sought to internalize all value through application abstraction. The protocol layer (e.g., Ethereum, Solana) will serve as a settlement layer providing value but will not capture any value—similar to HTTP and TCP/IP.

2. Cheap block space will lead to increased demand and a surge in applications. Transaction volume will consequently increase to offset the low base fees and will re-accumulate value at the protocol layer.

Let's break down the first scenario:

A series of possible occurrences: · SOL surpasses ETH · We all realize that no one is special, just technology · SOL is surpassed · The value of L1 provides more and more for the world, but the value captured by its tokens decreases relatively · BTC reigns supreme

This view is based on the assumption that infrastructure is fully commoditized. Regardless of data availability, costs, or computational expenses, all stack components will trend towards zero over time. The cheap and abundant Block space of Rollup and DA layers is eroding Ethereum's transaction monopoly.

Blob-based data availability (EIP-4844) will decouple execution from settlement, with L2 choosing alternative DA solutions, resulting in a further reduction in the remaining value of sorting and data storage over the past year.

But the main evidence in this direction is the decline in MEV shares captured by L1 Block proposers. In 2024, most MEV is captured by searchers and relayers through systems like Flashbots, rather than Ethereum validators. Currently, 90% of Ethereum blocks are proposed through MEV-Boost, with a significant portion processed by relays associated with Flashbots.

This does not yet take into account applications like CoW Swap, which use solver networks to handle matching and execution off-chain, completely bypassing the public mempool and its associated MEV.

The second scenario heavily relies on the surge in demand and transaction volume brought about by near-zero fees. It assumes that the abundance of inexpensive block space will lead to increased consumption, rather than a deflationary effect.

Just as the decline in computing costs gave rise to the internet boom, the reduction in transaction fees will unlock new categories of applications and use cases. The main analogy here is that general computing and coordination layers are more akin to AWS or Linux, rather than HTTP. Ethereum and Solana are not just about "settling" transactions, but rather supporting large-scale programmable state coordination.

As usage grows and cost barriers lower, the value of this trustless computing power becomes greater, not less. Low fees do not drive value to zero, but rather expand the addressable market for block space.

• Low fees > Increased network demand
• Increased demand for the network > Total fee revenue

Token Valuation — What Does This Mean for My Investment?

If I had to summarize one point, it would be: capital allocation will undergo a shift in a way that is unfamiliar to many since 2016/17.

The fat protocol theory unfortunately implanted an illusion of L1 premium subsidized by hundreds of millions of dollars in venture capital. However, we are currently at a turning point in the value distribution curve, and the revenue of applications is evidently growing relative to the protocol layer.

Fat Application Theory > Fat Protocol Theory

In terms of L1 valuation, we have abused the narrative to the extent that these tokens can no longer maintain their price after TGE. Hundreds of millions of dollars in financing and billion-dollar valuations before the mainnet launch have become the norm for L1/L2. The common trend among most new protocols is that prices only fall and do not rise.

This is not to say that infrastructure will become irrelevant; however, the signs of market maturation are clear. The transactions of L1/L2 have saturated. The sentiment of low liquidity and high FDV reflects this. The FDV of newly launched L1s is several orders of magnitude higher than that of the previous cycle. Monad, Bera, and Story Protocol raised nine-figure funding before their launch, while Solana only raised 45 million dollars (including public token sales).

The next cycle will not be led by chains competing to reach 100,000 TPS. It will be driven by focused and composable applications that prioritize usage over architecture and sustainability over speculative hype. The winners will be those applications closest to the source of demand.