Hooks: Crypto Apps' Platform Moment

Key Insights

• Hooks are customizable smart contracts with specific integration rules to a core platform protocol.
• Integrating hooks creates competitive benefits for platform protocols by strengthening network effects, shifting the protocol’s revenue burden, and creating greater defensibility.
• As applications shift from relatively isolated services to being more foundational platforms with revenue potential, there is room for valuations to converge with that of emerging base chain protocols.

Crypto application protocols and open-source software at large have always faced a business model problem. Since anyone can copy and paste the source code, applications have a hard time charging fees to their customers and establishing dominance over competitors.

Historically, returns in tech have therefore accrued to close-sourced, platform-based business models. The platform model is usually two-sided. On one side, external businesses can build applications on top and contribute IP or a service. On the other side, the platform connects these providers with consumers of their product. By aggregating users in one application, this typically creates strong network effects since service providers are compelled to join for customers, which draws in more customers, and so on. Once enough of each side has been onboarded, competitors struggle to gain market share since users already have a home. For example, in Web2, Spotify allows artists to upload music IP (their business) and then connects them with listeners. Similarly, Airbnb connects home providers with vacationers.

In crypto, the platform model has manifested as the fat-protocol thesis, which hypothesizes that returns in crypto will not flow to application protocols but instead to their underlying blockchains. This is because a public blockchain offers a shared compute and data platform for other businesses (application protocols) to launch on. As a result, application protocols have been valued as second-class businesses. Uniswap is crypto’s largest application protocol with a $4.5 billion fully diluted market cap. That is 2% of Ethereum’s market cap, less than half the valuation of Arbitrum, and nearly half of the lesser-used chains such as Avalanche and Cardano.