As popular decentralized applications (dapps) continue to grow their user base, eventually they will break away from their original platforms to form their own blockchains. We have already seen this happen with several popular games that launched on a general-purpose platform, but later branched off to their own application-specific blockchains.
With this in mind, we can make better investment decisions knowing that eventually capital will flow from the speculative crypto tokens to those which have actual utility. The key objective of this analysis is to identify which tokens on the market are overvalued, which are undervalued, and invest accordingly.
Let's consider Ethereum - the first ever smart contract platform for dapps. It was designed in such a way that any developer could build an application atop the platform. At its inception this was fine, because the chain was getting so little usage. However, as certain dapps started to gain in popularity, there were more and more performance bottlenecks, the transaction fees skyrocketed, and the entire platform became less usable.
For example, you may recall how the NFT collectable game Cryptokitties slowed Ethereum to a crawl in 2017, or how more recently the Yuga Labs NFT drop clogged the entire network, and caused the performance of other dapps to suffer.
Some software engineers realized that Ethereum wouldn't scale, so they designed blockchains which could do more transactions per second (TPS) by enhancing the technology, and used innovative consensus algorithms such as Proof of Stake (Pos). Even so, we've seen that even these chains can get bogged down by a misbehaving dapp, such as what happened with the EIDOS fiasco on EOS.
The bottom line here is that communities don't want to risk having their dapps competing for resources with other applications on the same chain. Rather, the community wants to ensure their dapp has sufficient resources and can scale up as its user base grows. This requires migrating the entire dapp to its own blockchain.
Let's take a look at some examples where this has happened already.
The Birth Of Application-Specific Chains
- Axie Infinity, one of the most popular blockchain games on Ethereum, transitioned their AXS and SLP tokens from mainnet Ethereum to their own sidechain Ronin after transaction fees become too burdensome for their players.
- Gods Unchained players were suffering from low performance and high gas fees on Ethereum so they transitioned to their sidechain ImmutableX and launched their GODS token.
- DeFi Kingdoms, and their JEWEL token, which started on the Harmony ONE chain, has branched off onto their own "DFK" chain, in partnership with Avalanche and their subnet technology.
- Splinterlands will be splitting off of the HIVE platform to form its own dedicated blockchain with the SPS token.
The trend is clear, and we should expect other popular blockchain-based games and social networks to eventually branch off of their original platforms. The question is, does the architecture support cross-chain communication with other dapps, because isolated blockchains will not have much value in our multi-chain future.
Some blockchain ecosystems have been designed with this concept in mind. For example, the architecture of Cosmos and Polkadot (and eventually Ethereum 2.0) support the idea of having multiple application-specific blockchains interconnected via their beacon chains, which will use the DOT, ATOM, and ETH tokens for gas, respectively. The beacon chain serves to pass assets back and forth between the sidechains, parachains, or whatever they may be called by the architects.
Other blockchains such as Harmony ONE, Zilliqa and Elrond support the idea of sharding or keeping distinct dapps on separate shards to distribute resources.
So, with this in mind, we can start making educated guesses about which dapps will grow in usage to the point where they become their very own blockchains.
Dapps With Potential
Let's take a look at dappradar.com, which offers a plethora of information on the dapp ecosystem. By default, it ranks the dapps based on number of active users. However, you can sort them by category (games, DeFi, marketplaces, etc.) and by specific blockchain too.
As of today, the aforementioned Splinterlands (SPS) is at the most popular dapp with approximately 335 thousand daily active users. Interestingly enough, even though Splinterlands is the most active dapp by user count, its market cap only ranks at around 400 on CoinGecko.
In third place we have Alien Worlds on the WAX blockchain. The game's TLM token, which players are actively mining, resides primarily on the WAX blockchain. If the game were to grow to millions of users, and had to compete for network resources with other popular games on WAX, the community could indeed vote to move the game onto its own EOSIO blockchain, and perhaps use the EOS mainnet at some point to facilitate communication with WAX, Telos, and other EOSIO-based blockchains.
In fifth place we have the game Farmer's World which has over one hundred thousand daily active users despite its setbacks earlier this year. There still appear to be a lot of people playing the game, so it could also end up migrating to its own blockchain at some point in the future.
You can also use Dappradar to identify popular dapps by category, and check if their usage is trending upwards or downwards. If you see a dapp that has a lot of users, but the marketcap of the token is relatively low, it could be an indicator of a token worth adding to your portfolio.
Now you may be thinking, if all popular dapps end up moving to their own blockchains, does that reduce the openness of public blockchains?
Are Application-Specific Blockchains Open or Closed?
Consider how Ethereum was designed to be a completely open, smart contract development platform. So long as developers can afford the gas fees to upload their dapp to the network, anybody, anywhere in the world can develop whatever they want to on Ethereum. While being completely open does allow dapps to easily communicate with one another, the downside is that the whole chain gets bogged down by popular dapps which hog resources.
Would a blockchain be a truly open development platform if it's specific to only one dapp? Because permitting only one application to run on it would mean blocking developers from freely creating other dapps alongside it.
If governance were implemented correctly on application-specific blockchains, the token holders could vote on additions and changes to the dapp itself. This would allow the dapp to scale, while keeping its development transparent and decentralized.
When assessing the true value of a crypto token we need to take into consideration how much actual utility there is behind it, and how much is pure hype and speculation. When it comes to mass adoption, the majority of the population wants ease-of-use, security, and low transaction fees. Eventually the capital will flow from speculative tokens to useful dapps that have an active and growing user base.
The key issue is will these app-specific blockchains be decentralized enough to be censorship-resistant, free from the collusion of block producers and outside interference. All of these blockchains will have their security tested time and time again as they gain in users, popularity and value. And because cryptocurrency is a free market, the competition can scoop up users if one blockchain proves itself to be insecure.
At the end of the day, what matters is the economic activity of a dapp itself, not the speculative fiat value of a token. How many people are actually using the dapp, and does the tokenomics model support sustainable future growth. In the long-run, it may be the popular dapp tokens that retain the most value, rather than the general-purpose gas tokens of today's blockchains.
Do you think all popular dapps will eventually move to their own blockchains, or that general-purpose blockchains still have a bright future? Let me know in the comments section.
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