Building Super Apps: The Rise of Fat Apps and Fat Protocols

The concept of the Fat Protocol was proposed by Joel Monegro in 2016. So far, it has been a good investment theme, but in the long run, it seems that this concept is not comprehensive enough for the protocols that are creating most of the value.

We propose the concept of Fat Application (FAPP) and assume the following:

An application that offers a wide range of products will accumulate the most value.

Web 2 dominant applications typically start from a specific domain and once they gain dominance, they offer a range of different products to leverage network effects and fully utilize user advantages:

"Use tools to attract them, use the network to confine them."

In the field of cryptocurrency, killer applications and products have excelled in many aspects so far. A certain trading platform stands out as a leader, sparing no effort to cater to every user, and gradually providing all crypto-related products within its custody platform.

From the very beginning, the primary Web 2.1 applications have been exchanges that provide a large number of services, which seem to form the gateway to Web 3. We believe the same logic applies to pure Web 3 on-chain products.

This is the new "paradigm shift"; value accumulators are shifting from protocol to application (or a specific application?). Ironically, exchanges are not Web 3 applications. They are thoroughly Web 2, requiring permission and centralized, yet they extract a large amount of value from the entire ecosystem.

In the future, on the battlefield for value, we believe that protocols may lose to Web 3 native applications, and there are two possible paths:

1. Appchains

2. All-encompassing super application

We define a super app as "WeChat for the crypto space." This sounds a bit daunting, but this dystopian vision is indeed hopeful to come true. The internet follows a long-tail model: at the front are one or two Amazon-level leaders, followed by a massive number of small players vying for the remaining market share.

Historical Review

Many people compare blockchain to a city and Ethereum to modern Manhattan. We have different views. The current construction is still relatively primitive; we would compare blockchain to a religion and applications to cities.

We believe that today's applications are like medieval cities, their historical status still relatively fragile compared to modern Manhattan. In our analogy, blockchain is religion, and Ethereum is the medieval papacy.

Medieval cities were established based on the protocol of the papacy, enjoying only half of their autonomy, with the pope's power being supreme. The pope participated in formulating tax policies and guidelines, and the Bible was the main basis for tax law, with various fees flowing to Rome.

Simply put, a developer named Martin later appeared, nailing a white paper on the church door, which contained 95 lines of code. A few years later, a hard fork occurred. Some validators joined the newly forked protocol, while others decided to stay.

As a result, the applications (cities and principalities) became more independent, and for centuries, the influence of the papacy on the flow of fees gradually diminished. The papacy still played a certain role, but the public began to embrace the ideas of nation-states and secularism, leading to the emergence of new economic models.

What we want to say is that the concept of the fat protocol has not become obsolete, as we are still in the early stages of the blockchain era (i.e., Web 3). Urban applications can organize themselves and become powerful entities of value accumulation, like nation-states, weakening the charge capabilities of the clergy (blockchain).

In other words, over time, applications, mainly super applications or application chains, will accumulate more value.

Application Chain and Super Application

The concept of application chains is not new; it first appeared in the white paper of a project in 2016. It proposed a heterogeneous chain approach that shares security through a common set of validators. Another project proposed a different heterogeneous chain approach: each chain is self-contained and unified only through SDK.

Since then, most people have accepted the concept of shared security. The latter has also changed its direction. People have concluded that it is not easy to build a high-quality validator set from scratch, and doing so before the product finds its market may also be pointless. It is clear that low-quality block space is like a parasite, wasting validator resources, and often there are no real use cases.

Application chains are tailored: the core chain will be optimized for existing and future use cases built upon it. For example, liquidity chains can support decentralized finance applications through various specific designs. Such application chains will not compete for block space with other applications and can promote execution and fee logic that best suits their use case.

We believe that the (best) application chain is a candidate for becoming a super application. The development trajectory is probably as follows:

1. Launch applications on a universal chain's mainnet for proof of concept to demonstrate whether the product matches the market. Tap into an existing user base.

2. After achieving success, expand to multi-chain and even launch your own execution environment (application chain) to exert greater control and obtain more value. A certain project is currently a model that has reached this stage.

3. Eliminate all on-chain traces and execution environments to provide a seamless super application experience. Attract users through a progressive approach, adding features that encourage people to invest more time and money in the product.

4. Congratulations on becoming a super application.

For example, a certain project seems to be trying to build a super application that integrates social and financial aspects. This integration is expected to create a strong moat (think of credit/social scoring used for unsecured loans). Another project also seems to be moving in this direction, as they have customized their own rollup and lending market to complement existing options products. The key point of both projects is non-fully collateralized lending, which is expected to unlock the true DeFi 2.0.

A certain DEX and a certain NFT trading platform are currently the largest applications in terms of fees. They both started with a specific single use case in which they excelled, accumulating a critical number of users (and bots) who are willing to pay ETH to use these applications. They later also acquired NFT aggregators to solidify their core products or achieve horizontal expansion of their offerings.

Regardless of whether the chicken or the egg came first, as long as there is liquidity, users can be acquired. Once there are users, more products and customized experiences can be offered to them. One approach is to provide your own product wallet to the user base and enhance the user experience (not only better UI/UX but also wallet features tailored to the products). Successfully launching a product suite (platform) and seamlessly integrating consumer-facing applications will stand out.

If we consider not only various financial use cases, liquidity is not the key to the rise of all super applications. However, it still relies on other factors (for example, in games, it requires engaging gameplay and a vibrant player economy).

Trojan Middleware

The above describes a user-centered approach to developing super applications. Simple DeFi applications with outstanding user experience can capture market share and improve profitability by horizontally integrating with traditional financial products and/or other on-chain products, while simultaneously establishing a moat. On the technical level, these applications will evolve from simple smart contract interfaces into mature super applications with their own application chains.

Trojan Middleware is another option that can pass through the front door of applications with a welcoming sound, bringing a better developer experience and various advanced features such as account abstraction, front-running protection, and MEV cashback. Trojan Middleware is a top-tier trading mempool that can dominate block construction by accessing order flow from applications.

Through blockchain construction, the Trojan middleware can provide functions that the application itself cannot easily replicate, such as on-chain abstract transaction execution. Ultimately, by creating an outstanding wallet/app store experience, control over touchpoints can be achieved. Some blockchain builders have already demonstrated the ability to access exclusive order flow, on which we can build the things we talk about.

But apart from being deceived by the Trojan horse, there is another option. We believe that the ultimate state of any ambitious super application is to become a major block builder. This can provide the best experience for super application users and offer the best guarantees for transaction execution in the manner deemed appropriate by the super application.

In the Web2 space, major consumer enterprises seek to build their own payment channels to avoid over-reliance on a single provider. Similarly, Web 3 super applications will also seek to exert control over users' financial operations.

Super applications are expected to eventually become the encapsulators of Ethereum and other blockchains, while hosting all other future "applications" as terminals, with these "applications" serving as various functions of the super application. Even now, exchanges can be seen as applications that encapsulate blockchains to provide a better user experience. Most users do not have to leave a trading platform to access a wide variety of content.

If native cryptocurrency applications can span all reasonable underlying layers and achieve seamless bridging, it can effectively realize extreme homogenization of block space, that is, commoditization. The best path for optimal execution will naturally emerge, and users may not even be aware of the specific execution trajectory. Of course, there are limitations here. It relies on whether the quality (security level) of the deployed blockchain is high enough.

In this sense, a super application needs different blockchains to provide services. In addition, an application chain is just another way to enhance execution control. But in this sense, a super application will ultimately be a centralized place.

Users and developers can directly access the blockchain, but super applications, as blockchain abstractions, excel in many ways:

1. Lower transaction fees

2. A smoother application development process

3. Better User Experience

Super apps will become Amazon, and beyond that, users can still directly use a large number of blockchains, just like vendors and buyers use Shopify.

The Blockchain Space War of the 2020s

The power struggle between the application layer and the base layer is inevitable. The base layer captures value through transaction fees (even as the fees themselves are dwindling, making it increasingly difficult to maintain currency premiums) and provides security and a user base in return.

Successful applications with a loyal user base will also seek their own ways to capture value and exert greater control over how to best serve users. In other words, applications want to share the successful foundation of blockchain: reflected in the monetary premium embodied in the demand for native tokens.

This puzzle has several key components: Where does the transaction occur (starting point)? Who controls the block construction process (transforming externalities into value capture)? What is the user's intention? And who is setting the monetary rules?

The transactions that create value for blockchain begin at the application (or wallet) layer. What users need is the application, not the blockchain, because they are not idealists, but primarily pragmatists. This force will inevitably lead to a situation: blockchains specifically targeting applications will become an execution option.

This provides a broader capability for value acquisition, allowing for better trade-offs in design, thus being able to meet user needs better than the standardized layer. The basic layer currently only has advantages in the last factor, namely monetary rules. And this advantage is also temporary. Please see another segment of history:

In many ways, we can compare the base layer to the British Empire and the pound. In the late 18th century, the American colonies rose up against British rulers due to harsh taxes, leading to the Boston Tea Party and the American Revolutionary War, one of the greatest "super applications" in world history.