Mustafa Al Bassam - L2's and the Fat Application Thesis - TOKEN2049 Dubai 2025

Hey guys. So I'm going to talk to you today a little bit about why rollups and modular blockchains shift value to the application layer and specifically what we describe as the fat application thesis. So just for some quick context, uh how do blockchain how have blockchain architectures evolved over the past 10 years? Systems like Ethereum and Salana have this monolithic architecture where it's like a shared smart contract environment where all the smart contracts share the same chain. But over the past few years, we've seen this kind of shift and more popularity in this modular architecture where instead of having instead of using the same blockchain like Salana or Ethereum for all the applications, instead what you can have is just use a blockchain like Ethereum or Celestia just for the consensus and data availability.

But your application can actually be on on its own chain on its own execution environment. And that gives you a lot more control over your application and a lot more um ability to capture the revenue uh of of your application instead of leaking it to the base layer. And if you can think if you think about it, this is actually a very similar way to how web two evolved. Like if you look at if you think about web 2 when uh the web was first created if you wanted to create a new website on the internet you had to have your own server your own physical server like either in the university or office or something like that but then shared web hosting providers came around in in the 2000s in early 2000s you know geo cities was a very early one but you have things like DreamHost and Blue Host but those were very limited because you have to share you have to share um the same server as everyone else and you only could use certain programming languages like PHP. But now in the modern web, we have the cloud.

And what the cloud enables you to do is have the best of both worlds because you can you can basically have the control and freedom of having your own server, but instead of having to maintain your own hardware, you basically get a virtual server on um in a data center that's operated by someone else like AWS or Digital Ocean or Google Cloud. This is very similar to cryptocurrency. In the early cryptocurrency days, every um application had its own blockchain. Bitcoin was the first one and then you had like things like Namecoin, Litecoin, Mastercoin. But then Ethereum changed everything because Ethereum provided a general uh share shared blockchain with a general smart contract environment that that everyone can share.

But that's not it wasn't scalable and it was very limited. So that's why in the modern crypto ecosystem you have the idea of layer 2 blockchains and rollups that make it very very easy for someone to launch their own rollup and have a lot more freedom over their application but without the complexity of having to actually launch your own layer one blockchain and have a valid data set and so on and so forth. And in this kind of model rollups are basically the execution layer of web 3 because rollups um offload the execution from layer one. They just use layer one for security and consensus. And here and in the past few years we've seen an explosion of new roll-up systems.

We both have general purpose rollups but also we have application specific roll-ups. So these are these are rollups um that uh like have a rollup have a new chain just for their application. You know hyperlid is a famous example of that. It's basically kind of like in between L3 and L1. And then you have the things like dydx and so and so on and so forth that are basically applications in their own chain.

Now the fat application the fat protocol thesis let's recap what uh the fat application thesis and the fat protocol thesis. So the fat protocol thesis was basically a kind of thesis that was put forward by um one of the partners at placeholder ventures that basically said that unlike unlike the web if you look at the web most of the value on the web 2 is not captured by the infrastructure layer but by the application layer. So if you think of like Ubers and the the Ubers and the Airbnbs uh where does the most of the value acrew um it's on the actual applications not in the not in the um infrastructure like internet service providers like like Google on Airbnb are worth a lot more than internet service providers like Comcast for example. But the thesis was like in the blockchain world, it's actually the other way around where um the protocol layer captures a lot more value than the application layer because the protocol layer has this network effect and has a lot of speculation where the protocol layer gains value as there's more uh speculation that valuable asset valuable protocols and applications will be built on it. And this is kind of like has turned out to be true like in in the history of blockchains like there's been there's been this layer one premium and applications have historically been less valuable at least from the from a valuation perspective but we can kind of see like more recently this thesis this thesis is kind of breaking down a bit uh because like this L1 L2 premium is kind of reducing like people are tired of new layer ones and layer 2s they want to see like applications of revenue and in 2024 I think crypto apps were the real winners.

Like you had a lot a lot of interesting crypto apps like Poly Market, Pump Fun, Hyperlquid, you know, virtuals, these kind of stuff applications and a lot of them, you know, have generated a lot of revenue. And thirdly, uh what we're seeing is that people are actually building new layer 2s on rollups um because they think as a because in many cases it's simply a more a better way to build their application rather than scaling Ethereum because historically the rollup rollups were exist existed as a scaling mechanism for Ethereum. But what we're seeing in the market is that actually roll-ups are simply people are people are not deploying roll-ups because they want to scale Ethereum, but they're deploying roll-ups because they want more uh control over their application and do things that simply aren't possible to do if you're sharing a layer one. And so um with fat applications in the modular world uh hopefully that basically allows you to have a to flip the flat vertical thesis and have a fat application thesis because rollups and layer twos um allow application developers to prevent uh value from being leaked to base layer and that would allow applications to acrew acrew more and more value and I think that's a I think that's very important um thing that we need to achieve if we want crypto to mature and we want to see applications actually real world applications actually become successful then we need to kind of shift towards a economic model where the applications are actually a able to acrue more value than the protocol layer and um you have to go back to this. So where Celestia provides Celestia fits into this because Celestia provides like a like a base layer that's very unopenated and scalable for rollups to use as a consensus and data layer.

And that basically allows application developers to create a rollup that captures revenue, their own revenue without needing to build a consensus layer from scratch. Just like how if you just like how you can deploy a virtual machine on AWS in one minute without needing to um like maintain a physical server. Now you can deploy basically a virtual blockchain in one minute you know using a rollup rollups and applications if done correctly they can win for several reasons. First of all, you can simply create user experiences and products that just aren't possible if you're limited by using a shared layer one. So, if you want to do certain things like um account abstraction techniques or different kind of like uh like abstraction techniques, you don't have to wait for the layer one to go on uh upgrade to enable that.

You can just do that directly yourself. And as I said, it allows for better economic environment because it allows for app um the app token to directly capture value whether that's through mev or through the execution fees. The value the value can directly go to the rollup sequencer and finally you have more flexibility over how the governance of your app works and um applications can also have composibility if they use the sh the same shared deal layer. Now as I said um to accelerate the application cheaters uh we've seen a rise of rollup frameworks that make it really easy to do this especially um roll up as a service providers. So there's various role up as a service providers in the market now which I kind of as I said the analogy I would use is that kind of like AWS u just like how AWS lets you launch virtual server um these rollup service providers let you deploy a virtual blockchain as a rollup and they've become so good that you can like now go um I think this is the either the caldera or conduit interface you can now go and within like two minutes you could just fill out this form for example and you can have your own blockchain very quickly and and and they will also support you with any kind of integration you need like indexes or wallets or bridges.

Yeah. And so as I mentioned um Celestia enables this shift by providing extremely scalable block space for those rollups to operate on. And recently we announced um our new test net which supports 128 megabyte blocks. And what this basically enables is we we often hear that uh the goal for the goal for these blockchains is to enable visa scale or masterard scale networks but our goal is to allow like multiple visa scale networks. Like imagine if you could go and deploy your own rollup and each rollup that is deployed by any by each developer is itself a visa scale network and the celestial architecture or the modular architecture um kind of enable this enables this by separating execution from data availability and so we can basically provide extremely fast extremely high data through port on layer one because the execution does not happen on layer one it happens on layer Uh a good case study of this is our recent partnership with Athena and we where we have we announced a new chain called Converge and Converge is a chain that's focused on um trading and issuing real world assets like tokenized funds or tokenized stocks or stable coins.

And uh historic and that requires a kind of like dedicated blockchain because for a lot of these real world assets um the the the organizations issuing these assets don't necessarily want it to be traded by anyone. So converge for example provides a permissioned um permissioned uh like network and a permissionless network. And in the permission network, it basically provides like a like a sandbox where you can trade real world assets, but only for users that have been KYCed and authorized to trade those assets. And that's something that's way way easier to do as your own chain with your with your own execution environment. But obviously there's some there's still some challenges that remain.

The the biggest one is fragment fragmenting liquidity. But I think that's uh being solved that that will be solved. I think within the the next year or so as intent infrastructure becomes much much more smooth and yeah I think the importance of why we need as I mentioned we need the fat application thesis to succeed for crypto to mature because you know people keep saying oh yeah there's too much infrastructure not enough apps and I think what we've basically ended up with is this kind of like infinite cycle what I call the like the monolithic layer one loop where you know every cycle there's these new layer one blockchains that get launched. Um then early participants kind of extract the value from those chains and then they either fail to get traction or the scalability limits get le reach le uh reached and then someone new comes along and in the next cycle and says hey I've got this new blockchain that is slightly better than the blockchains of the previous cycle that can do slightly more transactions or have these cool new features and this will keep happening as long as the fat protocol thesis continues to exist And um if you actually have a fat application thesis where the applications can actually accue more of the value then I think the focus can be more on launching new applications rather than launching new infrastructure. So in summary, I think modular blockchains reshape the value flow of our industry by allowing applications to capture more value and the fat protocol thesis is giving way to that and rollups are basically at the center of that by enabling applications to have the sovereignty they need to capture to capture more and more um value and revenue and Celestia powers this future by providing extremely scalable block space to make that possible in the first place.

If you want to learn more, you can check out the Celestia website at celestia.org. Thank you.