The Ideological Ramifications of Chain Abstraction

Chain abstraction is going to change the way the entire market thinks about apps vs. infra, valuations, chain tribalism, and investing.

I believe this change will take place within the next 6 months.

This raises plenty of questions about how it changes the behaivor of builders, VCs, and investors. In today's post, we'll explore the shifts I foresee and the downstream effects of the realities of a chain abstracted future.

When users can transact on multiple chains like Base, Solana, Taiko, Aptos, Arbitrum, Stacks, and ETH from the same wallet without worrying about gas fees, what happens to chain maximalism?

Eventually, users won’t know or care where their funds are or where transactions happen (outside of risk assessments).

It comes down to the user and the wallet. We're seeing dApps (brands) become extremely popular, capturing the majority of attention, unlike previous cycles where chains dominated.

This is because these dApps OWN the user relationship.

Think about the FB, IG, TikToks of the world. These apps have absolutely ballooned because they own the user relationships, whereas the underlying infra isn't valued nearly as high.

Now, all this to say, we've been actively deploying into infra deals because the infra side needs to be well ahead of the app side.

See this market map which has a ton of chain abstraction infra providers from The Rollupco:

We need the infra like Halliday for commerce automation, like 

Particle Network, One Balance, Okto, and Burnt for wallet abstraction and LiFi Protocol, Aarc, NEAR Protocol for orchestration...

We'll need better orderflow sources like Jumper Exchange, Catalyst, Shogunfi and others. We'll need a clearing layer like Everclear and transport layers like Hyperlane, Union Build and others. We'll need fast finality like Aligned Layer & ZKV Protocol. We'll need clusters like Polygon AggLayer and Initia.

We need all of this infra to be well ahead of the apps, or else when we do see a massive app, the tech won't be ready for it and we'll have another re-run of DeFi Summer 2020 where L1 gas fees surged and crushed the momentum.

However, we're getting very close to this tech being "ready" and many of these live on mainnet. So, I believe this trend of apps gaining more value will continue (especially, if they are on their own chain).

The "chain trade" (or infra trade) will look less appealing as it's easy to launch a chain, but much harder to build a killer app. However, I still think apps will eventually launch their own chain as a means to improve valuation & offer far more customizations.

Farmers chasing chain narratives for easy gains will still find it lucrative, but over time, capital will shift from infra to apps, realizing another infra cycle isn’t needed.

This begs the question:

As chain maximalism fades and users care less about chains, how does this affect investing? 

While the total crypto market cap will rise, it will be more dispersed since further down the chain, fundamentals matter more, even with temporary meme spurts. New coins will continue to be created, and people will keep bagholding.

ETH’s ETF is a saving grace, as it opens access to flows from non-crypto-native investors. While ETH may not outperform significantly this cycle, it shares qualities with BTC and is currently a highly undervalued asset. In a liquidity surge, the market could be caught off guard.

Long-term, ETH could become powerful "community money" with its institutional-grade DeFi ecosystem, native yield, leverage, interoperability through chain abstraction, and clear scaling capacity. Other L1s and many L2s face the challenge of competing for flows, as the modular ecosystem becomes cheaper and easier to build on with a smoother user experience.

As dApps seek more control and revenue from their blockspace, app-specific L2s are the solution. We've already seen Reya accrue a ton of revenue from sequencing and grow a big network for traders, as well as XAI GAMES and others.

Putting an L2 on Ethereum is just one option, because it’s the most battle-tested. Other L1s must find ways to compete in both the attention economy and the "monetary premium" meme.

Amongst this development, the ideological and tribalism shifts will contribute to further competition. I believe this is quite healthy as the market matures to a state of development which is necessary to eliminate non-productive behaivor and reward true innovation.

The thesis here then starts to unfold on distribution...

Focusing on crypto natives isn't going to lead to market differentiation and a real moat. Those who nail down the onboarding for non-crypto natives will be the next market leaders.

General-purpose L2s are designed to cater to a broad range of applications, which means they often lack the flexibility to optimize for the specific needs of a single application.

Go niche-specific instead. Control your execution environment. Build around one app or idea, and onboard consumer apps within the niche which can expand your distribution. Those who don't will be fighting for a finite amount of liquidity and users.

Chains like Abstract Chain are doing a great job to push the boundaries of consumer crypto and will likely find themselves with a massive edge in the next 18 months when compared to L2s without a massive top of funnel.

The teams who can get this funnel right and figure out how to turn first touches into a long-term loyal onchain user will win big.

I anticipate the users coming into these popular ecosystem apps will not care about the chain which they are on. If I'm correct, these users will also be able to access other apps within *other* L2s easily via a chain abstracted UX and damn good interop.

This means that if an app on rollup A grows massively in popularity, apps on rollup B,C,D *could* be a beneficiary of this growth in overall onboarding of net new users.

This will result in a positive feedback loop as seen below:

The ideological ramifications of this could lead to more alignment between rollup ecosystems and encourage a "grow the pie" mindset amongst chain operators vs. the current TVL games and yield games we see now.

Overall, the ramifications of a chain abstracted future are much deeper than we realize and moves all the way from valuations, distribution strategy, building competitive moats, collaborative efforts, market maturation, and more.

I believe we are 6-9 months from these changes taking place in the market. This is very exciting for everyone involved and I look forward to participating in this new era of onchain crypto.