SF and NYC / Investor at Thoma Bravo / Founder of Cornell Blockchain www.linkedin.com/in/eric-hu
SF and NYC / Investor at Thoma Bravo / Founder of Cornell Blockchain www.linkedin.com/in/eric-hu
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Disclaimer: All views are my own and do not represent financial advice
The internet has transformed society, individuals, and economics at the very core. A tool for unlocking unprecedented knowledge transfer, it has ushered in the information age, serving as the fundamental platform that enables applications, networks and services.
The Web has evolved over time, and will continue to do so - today, we’re shifting from “Web2” to “Web3”, the next evolution of the internet. Ask 10 people to define Web3, and you’ll get more than 10 different answers, but the internet is changing, a result of the convergence of multiple technologies reaching maturity, globalization, and societal shifts.
There are numerous principles that Web3 embodies - but it promises to be a more decentralized and collaborative, internet of data and value. Blockchains and crypto are a core, but only one of many technologies for this new web.
The explosion of experimentation with blockchains and crypto have demonstrated novel structures and business models: powerful network effects, coordinating stakeholders more trustlessly for a common goal, aligning incentives, transforming governance models, defining agreed-upon ownership rights, and perhaps most importantly - interlinking data with value, all done in a digitally native manner.
As much as blockchains and crypto help allow new applications and businesses to be created, it’s important to highlight Web3 is an evolution of technologies for front-end applications / UX as well as the back-end. Web3 highlights greater composability in the tech stack and a more intelligent network underneath. Whether through smart contracts or machine-learning driven decisions, an upgraded computation network is better suited to automate and manage the convergence of high throughput analytics or monitoring technologies (NLP, Computer Vision, IoT) with data-intensive use cases (AR/VR, self-driving, smart cities). Paralleling the explosion of bandwidth in the 2000s to support a growing internet, 5G rollout and edge compute on the hardware side will mesh as processing power (whether through scaled blockchain-powered compute and/or next-generation cloud) opens new possibilities for applications and services.
Another point to emphasize is the cultural and societal shifts integral to the success of new technologies (i.e. timing). The last few years, accelerated by the COVID pandemic, support numerous trends. We’ve seen a major increase in digital transformation, cashless payments, and shift to the cloud. As a society, we’re increasingly comfortable with transacting and experiencing our lives digitally. Crypto has entered mainstream culture and has grown to be accepted as a real (although still nascent) asset class. After years of saying “when will the institutions come”, the institutions are now here.
Today’s version of “web3” is clunky and filled with friction. Onboarding, better UX/UI, proper regulation, and superior or novel use cases are the next step. But it’s foolish to bet against a technology based on where things are today; there’s a tremendous amount of groundwork being laid. And it starts with proper building blocks.
In the last 2 years, there’s been a Cambrian explosion of innovation - from teams building layer 1 or scaling protocols, new applications and projects, and novel governance or token models. And where talent and innovation go, capital follows. In 2021, $25bn of funding has flowed into blockchain-based projects. And of these projects, those categorized as “infrastructure” are some of the most critical.
So, why infrastructure today, not apps?
As the founder of Signal, Moxie, aptly points out - no one wants to run their own servers. As Web3 matures, as in other iterations of the web, abstracting complexity is a key driver for growth. Managed services and tools allow teams to build to their strengths and innovate, without needing to dedicate significant resources to the back-end (security, reliability, scalability). As we onboard the next billion users to Web3, most shouldn’t have to care what blockchains or token standards a protocol uses, or jump through hoops (and fear!) to interact with applications. That’s why proper infrastructure, architecture, and tooling is key. The landscape of this in web3 is vast, so zooming out, we can use a framework for Web3 infrastructure as a mental model on what’s going on.
Under the Hood - Evolution of the Web and Web3 Principles
Before we dive deeper into infrastructure, it may be useful to talk a bit more on Web3 principles - after all, that’s what all these projects are building for.
Digitization: Today, we’re in a transition state from physical information and assets to digital. Web3 exists in an age of data flow. Physical data can be measured, combined with, and executed with digital information. Back-end compute will process information from various sources - AR/VR, IoT sensors, and Autonomous devices to name a few.
Convergence and Maturation of Emerging Technologies: No technology exists in a vacuum. Crypto and blockchain technologies are a key part of architecture and values. But other technologies are maturing as well - 5G, AI, Edge Compute, IoT. Combining more efficient, intelligent processing of larger data sets, flexible infrastructure, and new business models (ex. tokens) will provide a base for the next generation of applications
Ownership of Data and Assets: Web3 will help deliver true ownership of data, assets, and work. Blockchains are revolutionary because they trace and prove digital ownership. Digital assets - whether it be fiat, crypto, or NFTs can be user-controlled through wallets. Traceability (and with zero knowledge for privacy) allows measurement and control of an asset or individual’s contributions. Combined with digital identity, this is powerful.
Increased Decentralization of Control and Governance: Crypto and blockchains are fundamentally based on the issues of decentralization, trust and coordination. A token represents more than just an asset, but oftentimes a voting right, or membership pass. Decentralization will always be a scale where entities exist on a spectrum. Centralization has its own benefits, but with the first iterations of DAOs, new models of corporate governance, network control, and distributed decision-making are forming. More decentralized control will allow builders, operators and users of a platform to be able to own and have a say over the progression of a platform, should they choose.
Composability: Before the internet, there were walled intranets. Increasingly it appears the same with blockchains, with interoperability a key focus. Through open-source code, Web3 is built with composability built in mind. This means teams can take existing projects or programs and build on top of them. This allows faster development and communication (interoperability) across applications and through the tech stack.
A more mature Web3 will lay the groundwork for transforming the relationship of data, value, and ownership on the web. Corporations, users, and networks can more freely share or interact with data or transfer value. So Web3 has a lot to live up to, and today we’re watching a space in the growing pains of development. Which is why people care about the infrastructure services laying down the necessary groundwork for Web3.
So, What’s Important About Infrastructure?
Infrastructure is the building block for development. Today, we think of this as roads, bridges and utilities, and core “digital infrastructure”. “Digital infrastructure” meaning the plumbing and services for the internet today. Over the last few years, digital infrastructure has grown from hard assets like cell towers or fiber optic networks into “up the stack” technologies such as cloud, data centers, and managed networking software.
For Web3, we’ll define infrastructure for now as the tools, services, and architecture that allow Web3 applications to be deployed, built, and utilized at scale. After all, enterprises and retail alike have to utilize Web3 in a much more frictionless and scalable manner. Web3 infrastructure comes in many flavors - particularly where one falls on the spectrum of decentralization. A large portion of web3 projects are natively decentralized. That is, usage of a token or community-based governance. However, decentralization is a spectrum and for good reason - there are tradeoffs in funding, user experience, and operational efficiency. Across Web3 infrastructure, projects and teams are building across the spectrum, with many taking a centralized approach, raising through traditional equity.
There are traits about Web3 infrastructure that make it appealing to builders and investors. More predictable revenue, similarity to existing platforms/software, more seasoned management teams and mission criticalness to the ecosystem. This has led to funding from both Web3-native/Crypto capital, along with growth or venture from traditional financial players. Thus, starting 2021, these Web3 infrastructure rails have begun to form.
Guiding Questions for a Framework
As we take a look at infrastructure for Web3 there are few guiding questions underpinning the framework as a way to think about the landscape as it continues to evolve:
What Web3 services and tools are commonly used by project teams (“architecture”) and what data, storage or compute (“core infrastructure”) systems underpin these?
What operational challenges exist for builders or institutions in Web3? What solutions have been developed that are “mission critical” or abstract unnecessary complexity?
What fundamental services have been and need to be established for certain use cases (ex. DeFi, NFTs) to succeed at scale?
What capabilities are existing companies and projects spending resources on - whether through M&A or organic buildout?
How do the components of Web3 “infrastructure” interact with each other? How established is each component (i.e. # of projects in the space, common standards, maturity of solutions)?
In Web3, one can think about digital infrastructure in three buckets of services and products on top of the base computation (blockchain) layer - Data, Value/Liquidity, and Interplayers/Blockchain-Supporting Services.
Computation Layer (Blockchains and Blockchain Inspired Tech): At the foundation of Web3 is the computation layer. This consists of blockchain and blockchain-inspired networks (Layer 1s, subnets/sidechains and scaling solutions) that everything else is built on top of. As there are many blockchains today, cross-chain / omnichain protocols, as well as on-chain messaging projects, have emerged to allow value and information to be exchanged from one chain to another. And that’s an important point - blockchain networks interweave transfer of both data and value across various stakeholders, in a more trustless manner. There’s a wealth of information on this developing computation/blockchain layer, but suffice to say this is where a lot of time has been spent and will continue to be invested in.
Above the foundational blockchain layer, we can frame the services, tools, architecture and infrastructure into three buckets:
Data Players: Supplying the core infrastructure, architecture and tooling for teams to build and operate Web3 projects
Value and Liquidity Players: Building blocks for capital to flow across Web3 applications and participants with less friction (i.e. prohibitive gas and slippage fees)
“Interplayers” or Blockchain Supporting Infrastructure: Stakeholders that support and maintain the blockchain / compute networks
Note that, there are endless nuances in how applications and projects utilize or build web3 infrastructure, but we’ll keep it high level. (See Appendix 1 for more depth)
Data Infrastructure: Web3 will be an evolution in semanticism. This means that machines and computers will need to analyze, message and compute massive amounts of data.
For data infrastructure, there is more “core” or established data infrastructure and “emerging” services and tools that form the architecture for development teams. Data Infrastructure here encompasses the various tools, services and components that make blockchain data easy to utilize or build on top of.
A brief overview of these data-focused building blocks:
Core Data Infrastructure:
Node and API providers that manage the interactions with a blockchain, Decentralized Data Storage, Block explorers for tracking transactions, and Indexing/Querying services to access data efficiently
Emerging / Adjacent Data Infrastructure:
Toolings and managed services that interact for developing applications; this ranges from developer environments to assist with code shipping, code auditors, SDKs (ex. Privacy/zero-knowledge toolkits) and digital identity services
Tools and managed services that assist with Web3 use cases: NFT related and DAO / Community Operations services. Examples include NFT analytics or low-code NFT creation, organization treasury management, voting platforms, and community onboarding tools.
Value and Liquidity Infrastructure: A key innovation of web3 is tying together information with value on the most fundamental layer - possible due to agreed-upon and verifiable ownership.
For web3, value is intertwined with the core function of operating the network, whether it be through governance, security, or utility token incentives. But value without liquidity isn’t worth much. For all types of capital to flow into Web3, value needs to be secured, on/off ramped, distributed, transformed, accessed, and allowed to flow across the ecosystem without too much friction (i.e. gas, slippage, or usage fees should not be prohibitively destructive to activity)
As such, building blocks of “value or liquidity” are provided by a number of players:
“Core” Value Infrastructure today encompasses:
Wallets: The gateway to web3, wallets serve as the primary interface for users to interact with blockchains, tokens, and applications. We’re seeing wallets evolve to be more “browser-like” lately, which is a good step forward for onboarding
Custodians to secure (institutional or large retail) capital, Exchanges to transform value across the ecosystem and tokens, and On/Off Ramps to existing payment infrastructure (ex. fiat, credit cards)
Emerging Value and Liquidity Infrastructure includes:
Dashboards and Analytics for portfolio management; Defi or Exchange Aggregators for enhanced Liquidity and Institutional Trading Infrastructure for efficient markets
Adjacent services to assist with the operations side of capital - primarily Tax, Compliance, Regulatory, and Cybersecurity (to maintain value) services
“Interplayers” and Blockchain-Supporting Infrastructure: We’ve emphasized that a core tenant of web3 is the marriage of value and data that blockchain technologies allow. And as such, there is infrastructure that supports the blockchain compute layer, which drives the ability for value and data services to succeed.
Interplayer / Blockchain Supporting Infrastructure includes a few subcategories:
Network Maintenance: Cryptocurrency miners (for Proof of Work networks), Staking services, and Validator services allow easier network support or maintenance; these assist with transaction processing, voting (through delegation) and network incentive sharing (ex. block rewards)
On-Chain Analytics: These services, today prevalent for compliance or trading use cases, provide dashboards and tracking for activity in the compute layer. Very helpful with the numerous hacks or security breaches across crypto applications today.
Emerging Supporting Infrastructure: On-Chain Communication and Messaging protocols are of increasing interest, as highlighted in EthCC 5 this summer, and we can include Omnichain protocols or Bridges here as they continue to develop.
Putting it Together - Illustrative NFT Project:
Using this mental model on Web3 infrastructure, let’s see how everything is put together through an illustrative example of a community-governed NFT project. (For more technical readers, there’s a deeper dive on the components of the framework in Appendix 1)
First, let’s choose a network to launch the NFT project, Ethereum. Miners and Staking Providers are used to secure and support the network through processing transactions.
Now, we’ll need to build the NFT. The team will likely use developer toolkits for NFTs or write their own smart contracts in a standard development environment. They’ll utilize a data storage provider like IPFS to house the actual NFT information. Perhaps if it’s a big or complicated project a smart contract auditor will be employed prior to launch. At launch, the team will look to make the collection available on a marketplace like Opensea.
Community participants will need a wallet to store the NFT and pay with ETH. They’ll likely on-ramp fiat to an exchange or pay with card through another on-ramp like Moonpay. Note that crypto exchanges, wallets, and marketplaces all utilize block explorers, and API providers to communicate information with the Ethereum blockchain (ex. when you exchange ETH for an NFT).
Lastly, the community and governance. The NFT project team may use a MPC or multi-sig wallet or custody solution for their treasury. Operations tools like tally may be used to manage their community proposals for voting. Meanwhile, sophisticated players may utilize on-chain or NFT analytics to measure activity, create dashboards and manage their own portfolios.
Concluding Thoughts:
It might not be obvious today, but looking back even a few years, the rate of growth and innovation has been incredible in Web3. In the last few years we have accepted an entirely new asset class, with some of the brightest minds, largest corporations, and tons of capital joining to innovate. Mass adoption will take improvement in regulation, onboarding, novel applications (with real revenues), business models, social structures and technological infrastructure.
To the critics, we’re not there yet. But there’s a lot being built and to be excited for. We’re experiencing in real-time a new industry grow and as a society learn to interact in a digital age. Criticism is definitely needed. But as builders tackle each iteration of problems, from privacy to scalability, we’re already seeing the fruits of experimentation with new models of governance, digital or physical hybrid business, and the power of incentive-aligned networks. It’s never been a better time to build, and I’m excited to see where things go from here.
Author Note: See Appendix 1 for more detail on the Web3 Infrastructure framework and Appendix 2 for helpful readings on the topic. Please don’t hesitate to reach out if you have any thoughts on the framework, points to add or disagree on anything!
About Me: Technology investor from NYC, currently in San Francisco. I first fell into the web3 rabbithole in 2016; this turned into co-founding and leading one of the first university organizations focused on blockchain education, development and research - Cornell Blockchain, in 2017. Previously, an investment banker at Evercore, focused on communications & digital infrastructure, where I helped the firm enter the Web3 space, and spent some time investing in credit at KKR. Passionate about supporting the evolution of the web.
Appendix 1: Web3 Infrastructure Framework - A Deeper Dive
Data Infrastructure:
Core Data Infrastructure:
Node and API Infrastructure: Core to the function of web3 applications, node providers provide APIs and RPCs (remote procedure calls, allowing programs to speak with blockchains) through a usage-based revenue model. Ex. Alchemy and Infura
Data Storage: Many types of data don’t make sense to put on a blockchain (ex. Videos and most front-end content) due to efficiency and cost. Decentralized storage solutions, as well as the services built to support scaled usage, fill this gap. Ex. IPFS and Arweave; Pinata and Ceramic
Data Streams - Querying, Indexing and Oracles: Data is distributed across nodes in a blockchain. Querying and Indexing protocols are essential for making this data easy to use through APIs. Similarly, oracles provide data from external systems to a blockchain (ex. Weather data, token prices, etc.), acting as on-chain APIs for smart contracts. Ex. The Graph, Chainlink
Block Explorers: Blockchain explorers are search engines for data within a blockchain network displaying flow of funds or status of transactions. Wallets like Metamask will use API calls to block explorers to display items like recent transactions. Ex. Etherscan, Blockchain.com
Emerging Data Services and Tools:
Developer Platforms / Toolkits: Developer tooling helps teams create, test and debug their software. This includes tools to make it easier to develop applications like SDKs. Although developer environments more are established for EVM-compatible chains, as developers build Apps on non-EVM chains, similar tools for these chains are used.
Ex. Hardhat, Truffle, Aleo
Smart Contract Auditing: A critical part of the blockchain development process, auditors are relied on to ensure robustness and safety of the code before public deployment. Ex. Open Zeppelin, Trail of Bits
Digital Identity: A core tenant of Web3 hinges on digital identity - which may include key properties like KYC or permissioned access. Projects here are building the services like single sign (SSO) with a wallet or Web3 identities like a “.eth” name. Ex. ENS, Spruce
NFT Tools and Services: As use cases for NFTs have grown, a wide array of tools and services have emerged to support the ecosystem. Projects range from analytics to developer studios, NFT toolkits, aggregators, and marketplaces. Ex. Opensea, Rarity Sniper, NFTrade, LooksRare
Community Building and Operations: As DAOs (decentralized autonomous organizations) have grown in popularity, many encountered challenges with logistics and operations. Projects have emerged to help with collaboration, discovery, operations, treasury management, launch, and analytics. Ex. Coordinape, RabbitHole, Snapshot, DeepDAO, SuperDAO, Tally
Value and Liquidity Infrastructure:
Core Value Infrastructure:
Wallet Providers: Fundamental as the primary interface with much of Web3, wallets not only store value (digital assets) but enable on-chain identity and interaction with dapps (ex. DeFi). Several types exist depending on specific need in regards to security and UX. Ex. Metamask, Rainbow, Coinbase Wallet
Custodians: Qualified custodians are critical for widespread adoption of digital assets. Trusted safekeeping, record-keeping and management of assets are the first step for institutions to enter Web3. Ex. Anchorage Digital, Fireblocks, Gemini, Qredo
Exchanges and Marketplaces: Value cannot be maintained without liquidity. Exchanges and marketplaces are essential. Much M&A has occurred in the exchange space as companies look to build out a full suite of asset management offerings. Ex. Coinbase, FTX, Uniswap
On and Off-Ramps: Many users on-ramp (i.e. exchange fiat for crypto) through centralized exchanges, however as the Web3 develops, fiat and crypto rails must become more seamless. Platforms today offer integrations for dapps, allowing actions like purchasing NFTs with a credit card. Ex. Moonpay, Wyre
Emerging Value and Liquidity Services:
Liquidity and Defi Tools: DeFi has gone through a number of iterations, and the importance of proper liquidity and portfolio management in the ecosystem cannot be understated. Projects range from dashboards to decentralized exchange aggregators to trading infrastructure. Ex. 1inch, Bloxroute Labs, Talos
Tax Services: As tax guidelines are put in place, accurate tax and accounting tools for Web3 or Defi activities will be essential for any organization. Ex. Koinly, Taxbit
Compliance: Particularly important for DeFi, projects here focus on transaction monitoring, KYC, AML and Regulatory compliance. Ex. Elliptic, Coinfirm
Security: Still nascent, current cybersecurity services in Web3 are primarily bounty platforms or crowdsourced threat detection. Ex. Immunefi, Polyswarm
Interplay Infrastructure (Blockchain-Supporting Infrastructure and Architecture)
Cryptocurrency Mining and Staking Providers: Fundamental infrastructure to support the compute layer (blockchains and similar technology) in Web3. These process transactions and help secure the network by validation through mining or staking. These providers run the node infrastructure and allow users to participate in staking rewards by allocating funds. Ex. Core Scientific, Foundry, Whinstone, Blockdaemon, Figment
On-Chain Analytics: Blockchains contain a large amount of data, with useful information for all players in the ecosystem from Governments to Traders. Metrics include transaction data, wallets, and user activity. On-Chain analytic services aggregate useful metrics and provide dashboards to visualize blockchain data for due diligence, discovery, market sentiment and more. Ex. Chainalysis, Nansen, Dune Analytics
Memo: Cross-Chain Bridges, On-Chain Messaging and Omnichain Protocols: In traditional internet infrastructure, “messaging / networking” is a key concept. As Web3 likely encompasses a multi-chain / compute future, protocols allowing blockchains to interoperate are fundamental to unifying the ecosystem. This may come in many forms, from single to multi chain bridges, to interoperability protocols. On-Chain messaging is also being developed (ex. Between wallets, combining transactions with direct messaging for use cases such as reconciliation) Ex. Wormhole, CCIP (Chainlink), Layer Zero, WalletConnect, EPNS (Ethereum Push Notification Services)
Appendix 2: Helpful Further Resources and Frameworks
Jump Crypto: Peeking Under the Hood of Web3
Coinbase: A simple Guide to Web3
Disclaimer: All views are my own and do not represent financial advice
The internet has transformed society, individuals, and economics at the very core. A tool for unlocking unprecedented knowledge transfer, it has ushered in the information age, serving as the fundamental platform that enables applications, networks and services.
The Web has evolved over time, and will continue to do so - today, we’re shifting from “Web2” to “Web3”, the next evolution of the internet. Ask 10 people to define Web3, and you’ll get more than 10 different answers, but the internet is changing, a result of the convergence of multiple technologies reaching maturity, globalization, and societal shifts.
There are numerous principles that Web3 embodies - but it promises to be a more decentralized and collaborative, internet of data and value. Blockchains and crypto are a core, but only one of many technologies for this new web.
The explosion of experimentation with blockchains and crypto have demonstrated novel structures and business models: powerful network effects, coordinating stakeholders more trustlessly for a common goal, aligning incentives, transforming governance models, defining agreed-upon ownership rights, and perhaps most importantly - interlinking data with value, all done in a digitally native manner.
As much as blockchains and crypto help allow new applications and businesses to be created, it’s important to highlight Web3 is an evolution of technologies for front-end applications / UX as well as the back-end. Web3 highlights greater composability in the tech stack and a more intelligent network underneath. Whether through smart contracts or machine-learning driven decisions, an upgraded computation network is better suited to automate and manage the convergence of high throughput analytics or monitoring technologies (NLP, Computer Vision, IoT) with data-intensive use cases (AR/VR, self-driving, smart cities). Paralleling the explosion of bandwidth in the 2000s to support a growing internet, 5G rollout and edge compute on the hardware side will mesh as processing power (whether through scaled blockchain-powered compute and/or next-generation cloud) opens new possibilities for applications and services.
Another point to emphasize is the cultural and societal shifts integral to the success of new technologies (i.e. timing). The last few years, accelerated by the COVID pandemic, support numerous trends. We’ve seen a major increase in digital transformation, cashless payments, and shift to the cloud. As a society, we’re increasingly comfortable with transacting and experiencing our lives digitally. Crypto has entered mainstream culture and has grown to be accepted as a real (although still nascent) asset class. After years of saying “when will the institutions come”, the institutions are now here.
Today’s version of “web3” is clunky and filled with friction. Onboarding, better UX/UI, proper regulation, and superior or novel use cases are the next step. But it’s foolish to bet against a technology based on where things are today; there’s a tremendous amount of groundwork being laid. And it starts with proper building blocks.
In the last 2 years, there’s been a Cambrian explosion of innovation - from teams building layer 1 or scaling protocols, new applications and projects, and novel governance or token models. And where talent and innovation go, capital follows. In 2021, $25bn of funding has flowed into blockchain-based projects. And of these projects, those categorized as “infrastructure” are some of the most critical.
So, why infrastructure today, not apps?
As the founder of Signal, Moxie, aptly points out - no one wants to run their own servers. As Web3 matures, as in other iterations of the web, abstracting complexity is a key driver for growth. Managed services and tools allow teams to build to their strengths and innovate, without needing to dedicate significant resources to the back-end (security, reliability, scalability). As we onboard the next billion users to Web3, most shouldn’t have to care what blockchains or token standards a protocol uses, or jump through hoops (and fear!) to interact with applications. That’s why proper infrastructure, architecture, and tooling is key. The landscape of this in web3 is vast, so zooming out, we can use a framework for Web3 infrastructure as a mental model on what’s going on.
Under the Hood - Evolution of the Web and Web3 Principles
Before we dive deeper into infrastructure, it may be useful to talk a bit more on Web3 principles - after all, that’s what all these projects are building for.
Digitization: Today, we’re in a transition state from physical information and assets to digital. Web3 exists in an age of data flow. Physical data can be measured, combined with, and executed with digital information. Back-end compute will process information from various sources - AR/VR, IoT sensors, and Autonomous devices to name a few.
Convergence and Maturation of Emerging Technologies: No technology exists in a vacuum. Crypto and blockchain technologies are a key part of architecture and values. But other technologies are maturing as well - 5G, AI, Edge Compute, IoT. Combining more efficient, intelligent processing of larger data sets, flexible infrastructure, and new business models (ex. tokens) will provide a base for the next generation of applications
Ownership of Data and Assets: Web3 will help deliver true ownership of data, assets, and work. Blockchains are revolutionary because they trace and prove digital ownership. Digital assets - whether it be fiat, crypto, or NFTs can be user-controlled through wallets. Traceability (and with zero knowledge for privacy) allows measurement and control of an asset or individual’s contributions. Combined with digital identity, this is powerful.
Increased Decentralization of Control and Governance: Crypto and blockchains are fundamentally based on the issues of decentralization, trust and coordination. A token represents more than just an asset, but oftentimes a voting right, or membership pass. Decentralization will always be a scale where entities exist on a spectrum. Centralization has its own benefits, but with the first iterations of DAOs, new models of corporate governance, network control, and distributed decision-making are forming. More decentralized control will allow builders, operators and users of a platform to be able to own and have a say over the progression of a platform, should they choose.
Composability: Before the internet, there were walled intranets. Increasingly it appears the same with blockchains, with interoperability a key focus. Through open-source code, Web3 is built with composability built in mind. This means teams can take existing projects or programs and build on top of them. This allows faster development and communication (interoperability) across applications and through the tech stack.
A more mature Web3 will lay the groundwork for transforming the relationship of data, value, and ownership on the web. Corporations, users, and networks can more freely share or interact with data or transfer value. So Web3 has a lot to live up to, and today we’re watching a space in the growing pains of development. Which is why people care about the infrastructure services laying down the necessary groundwork for Web3.
So, What’s Important About Infrastructure?
Infrastructure is the building block for development. Today, we think of this as roads, bridges and utilities, and core “digital infrastructure”. “Digital infrastructure” meaning the plumbing and services for the internet today. Over the last few years, digital infrastructure has grown from hard assets like cell towers or fiber optic networks into “up the stack” technologies such as cloud, data centers, and managed networking software.
For Web3, we’ll define infrastructure for now as the tools, services, and architecture that allow Web3 applications to be deployed, built, and utilized at scale. After all, enterprises and retail alike have to utilize Web3 in a much more frictionless and scalable manner. Web3 infrastructure comes in many flavors - particularly where one falls on the spectrum of decentralization. A large portion of web3 projects are natively decentralized. That is, usage of a token or community-based governance. However, decentralization is a spectrum and for good reason - there are tradeoffs in funding, user experience, and operational efficiency. Across Web3 infrastructure, projects and teams are building across the spectrum, with many taking a centralized approach, raising through traditional equity.
There are traits about Web3 infrastructure that make it appealing to builders and investors. More predictable revenue, similarity to existing platforms/software, more seasoned management teams and mission criticalness to the ecosystem. This has led to funding from both Web3-native/Crypto capital, along with growth or venture from traditional financial players. Thus, starting 2021, these Web3 infrastructure rails have begun to form.
Guiding Questions for a Framework
As we take a look at infrastructure for Web3 there are few guiding questions underpinning the framework as a way to think about the landscape as it continues to evolve:
What Web3 services and tools are commonly used by project teams (“architecture”) and what data, storage or compute (“core infrastructure”) systems underpin these?
What operational challenges exist for builders or institutions in Web3? What solutions have been developed that are “mission critical” or abstract unnecessary complexity?
What fundamental services have been and need to be established for certain use cases (ex. DeFi, NFTs) to succeed at scale?
What capabilities are existing companies and projects spending resources on - whether through M&A or organic buildout?
How do the components of Web3 “infrastructure” interact with each other? How established is each component (i.e. # of projects in the space, common standards, maturity of solutions)?
In Web3, one can think about digital infrastructure in three buckets of services and products on top of the base computation (blockchain) layer - Data, Value/Liquidity, and Interplayers/Blockchain-Supporting Services.
Computation Layer (Blockchains and Blockchain Inspired Tech): At the foundation of Web3 is the computation layer. This consists of blockchain and blockchain-inspired networks (Layer 1s, subnets/sidechains and scaling solutions) that everything else is built on top of. As there are many blockchains today, cross-chain / omnichain protocols, as well as on-chain messaging projects, have emerged to allow value and information to be exchanged from one chain to another. And that’s an important point - blockchain networks interweave transfer of both data and value across various stakeholders, in a more trustless manner. There’s a wealth of information on this developing computation/blockchain layer, but suffice to say this is where a lot of time has been spent and will continue to be invested in.
Above the foundational blockchain layer, we can frame the services, tools, architecture and infrastructure into three buckets:
Data Players: Supplying the core infrastructure, architecture and tooling for teams to build and operate Web3 projects
Value and Liquidity Players: Building blocks for capital to flow across Web3 applications and participants with less friction (i.e. prohibitive gas and slippage fees)
“Interplayers” or Blockchain Supporting Infrastructure: Stakeholders that support and maintain the blockchain / compute networks
Note that, there are endless nuances in how applications and projects utilize or build web3 infrastructure, but we’ll keep it high level. (See Appendix 1 for more depth)
Data Infrastructure: Web3 will be an evolution in semanticism. This means that machines and computers will need to analyze, message and compute massive amounts of data.
For data infrastructure, there is more “core” or established data infrastructure and “emerging” services and tools that form the architecture for development teams. Data Infrastructure here encompasses the various tools, services and components that make blockchain data easy to utilize or build on top of.
A brief overview of these data-focused building blocks:
Core Data Infrastructure:
Node and API providers that manage the interactions with a blockchain, Decentralized Data Storage, Block explorers for tracking transactions, and Indexing/Querying services to access data efficiently
Emerging / Adjacent Data Infrastructure:
Toolings and managed services that interact for developing applications; this ranges from developer environments to assist with code shipping, code auditors, SDKs (ex. Privacy/zero-knowledge toolkits) and digital identity services
Tools and managed services that assist with Web3 use cases: NFT related and DAO / Community Operations services. Examples include NFT analytics or low-code NFT creation, organization treasury management, voting platforms, and community onboarding tools.
Value and Liquidity Infrastructure: A key innovation of web3 is tying together information with value on the most fundamental layer - possible due to agreed-upon and verifiable ownership.
For web3, value is intertwined with the core function of operating the network, whether it be through governance, security, or utility token incentives. But value without liquidity isn’t worth much. For all types of capital to flow into Web3, value needs to be secured, on/off ramped, distributed, transformed, accessed, and allowed to flow across the ecosystem without too much friction (i.e. gas, slippage, or usage fees should not be prohibitively destructive to activity)
As such, building blocks of “value or liquidity” are provided by a number of players:
“Core” Value Infrastructure today encompasses:
Wallets: The gateway to web3, wallets serve as the primary interface for users to interact with blockchains, tokens, and applications. We’re seeing wallets evolve to be more “browser-like” lately, which is a good step forward for onboarding
Custodians to secure (institutional or large retail) capital, Exchanges to transform value across the ecosystem and tokens, and On/Off Ramps to existing payment infrastructure (ex. fiat, credit cards)
Emerging Value and Liquidity Infrastructure includes:
Dashboards and Analytics for portfolio management; Defi or Exchange Aggregators for enhanced Liquidity and Institutional Trading Infrastructure for efficient markets
Adjacent services to assist with the operations side of capital - primarily Tax, Compliance, Regulatory, and Cybersecurity (to maintain value) services
“Interplayers” and Blockchain-Supporting Infrastructure: We’ve emphasized that a core tenant of web3 is the marriage of value and data that blockchain technologies allow. And as such, there is infrastructure that supports the blockchain compute layer, which drives the ability for value and data services to succeed.
Interplayer / Blockchain Supporting Infrastructure includes a few subcategories:
Network Maintenance: Cryptocurrency miners (for Proof of Work networks), Staking services, and Validator services allow easier network support or maintenance; these assist with transaction processing, voting (through delegation) and network incentive sharing (ex. block rewards)
On-Chain Analytics: These services, today prevalent for compliance or trading use cases, provide dashboards and tracking for activity in the compute layer. Very helpful with the numerous hacks or security breaches across crypto applications today.
Emerging Supporting Infrastructure: On-Chain Communication and Messaging protocols are of increasing interest, as highlighted in EthCC 5 this summer, and we can include Omnichain protocols or Bridges here as they continue to develop.
Putting it Together - Illustrative NFT Project:
Using this mental model on Web3 infrastructure, let’s see how everything is put together through an illustrative example of a community-governed NFT project. (For more technical readers, there’s a deeper dive on the components of the framework in Appendix 1)
First, let’s choose a network to launch the NFT project, Ethereum. Miners and Staking Providers are used to secure and support the network through processing transactions.
Now, we’ll need to build the NFT. The team will likely use developer toolkits for NFTs or write their own smart contracts in a standard development environment. They’ll utilize a data storage provider like IPFS to house the actual NFT information. Perhaps if it’s a big or complicated project a smart contract auditor will be employed prior to launch. At launch, the team will look to make the collection available on a marketplace like Opensea.
Community participants will need a wallet to store the NFT and pay with ETH. They’ll likely on-ramp fiat to an exchange or pay with card through another on-ramp like Moonpay. Note that crypto exchanges, wallets, and marketplaces all utilize block explorers, and API providers to communicate information with the Ethereum blockchain (ex. when you exchange ETH for an NFT).
Lastly, the community and governance. The NFT project team may use a MPC or multi-sig wallet or custody solution for their treasury. Operations tools like tally may be used to manage their community proposals for voting. Meanwhile, sophisticated players may utilize on-chain or NFT analytics to measure activity, create dashboards and manage their own portfolios.
Concluding Thoughts:
It might not be obvious today, but looking back even a few years, the rate of growth and innovation has been incredible in Web3. In the last few years we have accepted an entirely new asset class, with some of the brightest minds, largest corporations, and tons of capital joining to innovate. Mass adoption will take improvement in regulation, onboarding, novel applications (with real revenues), business models, social structures and technological infrastructure.
To the critics, we’re not there yet. But there’s a lot being built and to be excited for. We’re experiencing in real-time a new industry grow and as a society learn to interact in a digital age. Criticism is definitely needed. But as builders tackle each iteration of problems, from privacy to scalability, we’re already seeing the fruits of experimentation with new models of governance, digital or physical hybrid business, and the power of incentive-aligned networks. It’s never been a better time to build, and I’m excited to see where things go from here.
Author Note: See Appendix 1 for more detail on the Web3 Infrastructure framework and Appendix 2 for helpful readings on the topic. Please don’t hesitate to reach out if you have any thoughts on the framework, points to add or disagree on anything!
About Me: Technology investor from NYC, currently in San Francisco. I first fell into the web3 rabbithole in 2016; this turned into co-founding and leading one of the first university organizations focused on blockchain education, development and research - Cornell Blockchain, in 2017. Previously, an investment banker at Evercore, focused on communications & digital infrastructure, where I helped the firm enter the Web3 space, and spent some time investing in credit at KKR. Passionate about supporting the evolution of the web.
Appendix 1: Web3 Infrastructure Framework - A Deeper Dive
Data Infrastructure:
Core Data Infrastructure:
Node and API Infrastructure: Core to the function of web3 applications, node providers provide APIs and RPCs (remote procedure calls, allowing programs to speak with blockchains) through a usage-based revenue model. Ex. Alchemy and Infura
Data Storage: Many types of data don’t make sense to put on a blockchain (ex. Videos and most front-end content) due to efficiency and cost. Decentralized storage solutions, as well as the services built to support scaled usage, fill this gap. Ex. IPFS and Arweave; Pinata and Ceramic
Data Streams - Querying, Indexing and Oracles: Data is distributed across nodes in a blockchain. Querying and Indexing protocols are essential for making this data easy to use through APIs. Similarly, oracles provide data from external systems to a blockchain (ex. Weather data, token prices, etc.), acting as on-chain APIs for smart contracts. Ex. The Graph, Chainlink
Block Explorers: Blockchain explorers are search engines for data within a blockchain network displaying flow of funds or status of transactions. Wallets like Metamask will use API calls to block explorers to display items like recent transactions. Ex. Etherscan, Blockchain.com
Emerging Data Services and Tools:
Developer Platforms / Toolkits: Developer tooling helps teams create, test and debug their software. This includes tools to make it easier to develop applications like SDKs. Although developer environments more are established for EVM-compatible chains, as developers build Apps on non-EVM chains, similar tools for these chains are used.
Ex. Hardhat, Truffle, Aleo
Smart Contract Auditing: A critical part of the blockchain development process, auditors are relied on to ensure robustness and safety of the code before public deployment. Ex. Open Zeppelin, Trail of Bits
Digital Identity: A core tenant of Web3 hinges on digital identity - which may include key properties like KYC or permissioned access. Projects here are building the services like single sign (SSO) with a wallet or Web3 identities like a “.eth” name. Ex. ENS, Spruce
NFT Tools and Services: As use cases for NFTs have grown, a wide array of tools and services have emerged to support the ecosystem. Projects range from analytics to developer studios, NFT toolkits, aggregators, and marketplaces. Ex. Opensea, Rarity Sniper, NFTrade, LooksRare
Community Building and Operations: As DAOs (decentralized autonomous organizations) have grown in popularity, many encountered challenges with logistics and operations. Projects have emerged to help with collaboration, discovery, operations, treasury management, launch, and analytics. Ex. Coordinape, RabbitHole, Snapshot, DeepDAO, SuperDAO, Tally
Value and Liquidity Infrastructure:
Core Value Infrastructure:
Wallet Providers: Fundamental as the primary interface with much of Web3, wallets not only store value (digital assets) but enable on-chain identity and interaction with dapps (ex. DeFi). Several types exist depending on specific need in regards to security and UX. Ex. Metamask, Rainbow, Coinbase Wallet
Custodians: Qualified custodians are critical for widespread adoption of digital assets. Trusted safekeeping, record-keeping and management of assets are the first step for institutions to enter Web3. Ex. Anchorage Digital, Fireblocks, Gemini, Qredo
Exchanges and Marketplaces: Value cannot be maintained without liquidity. Exchanges and marketplaces are essential. Much M&A has occurred in the exchange space as companies look to build out a full suite of asset management offerings. Ex. Coinbase, FTX, Uniswap
On and Off-Ramps: Many users on-ramp (i.e. exchange fiat for crypto) through centralized exchanges, however as the Web3 develops, fiat and crypto rails must become more seamless. Platforms today offer integrations for dapps, allowing actions like purchasing NFTs with a credit card. Ex. Moonpay, Wyre
Emerging Value and Liquidity Services:
Liquidity and Defi Tools: DeFi has gone through a number of iterations, and the importance of proper liquidity and portfolio management in the ecosystem cannot be understated. Projects range from dashboards to decentralized exchange aggregators to trading infrastructure. Ex. 1inch, Bloxroute Labs, Talos
Tax Services: As tax guidelines are put in place, accurate tax and accounting tools for Web3 or Defi activities will be essential for any organization. Ex. Koinly, Taxbit
Compliance: Particularly important for DeFi, projects here focus on transaction monitoring, KYC, AML and Regulatory compliance. Ex. Elliptic, Coinfirm
Security: Still nascent, current cybersecurity services in Web3 are primarily bounty platforms or crowdsourced threat detection. Ex. Immunefi, Polyswarm
Interplay Infrastructure (Blockchain-Supporting Infrastructure and Architecture)
Cryptocurrency Mining and Staking Providers: Fundamental infrastructure to support the compute layer (blockchains and similar technology) in Web3. These process transactions and help secure the network by validation through mining or staking. These providers run the node infrastructure and allow users to participate in staking rewards by allocating funds. Ex. Core Scientific, Foundry, Whinstone, Blockdaemon, Figment
On-Chain Analytics: Blockchains contain a large amount of data, with useful information for all players in the ecosystem from Governments to Traders. Metrics include transaction data, wallets, and user activity. On-Chain analytic services aggregate useful metrics and provide dashboards to visualize blockchain data for due diligence, discovery, market sentiment and more. Ex. Chainalysis, Nansen, Dune Analytics
Memo: Cross-Chain Bridges, On-Chain Messaging and Omnichain Protocols: In traditional internet infrastructure, “messaging / networking” is a key concept. As Web3 likely encompasses a multi-chain / compute future, protocols allowing blockchains to interoperate are fundamental to unifying the ecosystem. This may come in many forms, from single to multi chain bridges, to interoperability protocols. On-Chain messaging is also being developed (ex. Between wallets, combining transactions with direct messaging for use cases such as reconciliation) Ex. Wormhole, CCIP (Chainlink), Layer Zero, WalletConnect, EPNS (Ethereum Push Notification Services)
Appendix 2: Helpful Further Resources and Frameworks
Jump Crypto: Peeking Under the Hood of Web3
Coinbase: A simple Guide to Web3
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