TLDR:

• Building and using crypto remains painful b/c it requires direct interaction with base protocol layers (L1s) that have made technical and UX sacrifices to satisfy a pre-defined ethos (e.g. decentralization, scaling, etc).

• Modular architecture empowers builders to permissionlessly innovate and customize on behalf of users by creating abstractions on top of the base layer.

• The biggest unlock of modular won’t be general-purpose solutions (e.g. roll-ups), but rather use-case specific protocols and networks (AKA vertically-integrated middleware) that compete with their web2 counterparts — which will finally scale crypto to its proverbial “next 1B users”.

  1. The Wrong Bottleneck

• One of the prevailing sentiments in crypto today is that the lack of cheaper and faster transactions (AKA scaling) is the primary bottleneck for broader adoption. However, the data suggests a different story: Solana’s average TPS hovers around ~4K despite peak capacity of 65K. Rollups (L2s) on ETH on average utilize ~4-5% of available gas. There appears to be plenty of available blockspace and throughput —- but no one to use it.

  Moreover, Ethereum (one of the most popular blockchain ecosystem) has ~400K daily active wallets and 7K full-time devs (23K monthly active), both of which represent < .1% of scaled web2 platforms. So what’s really holding us back?

  IMO, the answer is clear (albeit not fun to admit): building and using crypto is painful. Why? Because builders and users are still largely required to directly interact with the base protocol layer of crypto ecosystems (L1s). This layer is inherently complex and has made pre-defined technical and UX trade-offs to fulfill the particular ethos across the blockchain trilemma it’s trying to optimize for (e.g. decentralization, scaling, etc). Directly interfacing with this layer isn’t easy — nor is it designed to be.

  The lack of abstraction is especially challenging for app builders, who have little choice but to pass on the technical constraints and tradeoffs (decentralization, cost, performance, MEV capture, etc) inherited from the base layer they build on top of on to their users. Because base layers are designed to support a wide array of use cases and total value locked (TVL), they are 1) not incentivized to rapidly innovate at the protocol layer (more downside risk than upside), and 2) general-purpose, requiring builders to implement specific capabilities or customizations required for their use case.

  Builders who wish to innovate at the base layer by creating their own sovereign application chain (or “app-chain”) via an ecosystem such as Cosmos face a different but equally challenging uphill battle. Instead of having network security (validators) provided by the base layer (e.g. Ethereum, Solana, etc), app-chain builders have historically had to hand-roll these on their own.

  Worse, there are meaningful switching costs (technically and politically), which puts builders in the unenviable position of a) choosing a base layer at the onset before deeply understanding their use case, and b) having little flexibility to adjust after the fact.

  So how do we better empower crypto builders with the tools and autonomy to innovate on behalf of users?

  2. Modular Architecture & Permissionless Innovation

  The core value proposition of modular design to builders is simple: instead of relying on base layer protocols to serve their infra needs, modular enables builders and entrepreneurs to permissionlessly innovate on it themselves. This approach empowers builders to create the tech stack required to create delightful end-user experiences, rather than being artificially constrained by the technical and UX limitations of the base layer. Sreeram Kannan, EigenLayer’s founder, offered a recent example of how modular design facilitates innovation in a recent podcast:

  Scaling Ethereum has been a long-standing point of contention within the community, with sharding being the most amenable solution — but was moving slowly given the complexity and blast radius (billions in TVL). EF pivoted to a rollup-centric roadmap which enabled an “open market” approach and led to several teams building solutions (e.g. Optimism, Arbitrum, zkSync) using different techniques to help solve for scaling in a far quicker time than EF could have implemented sharding.

  Modular architecture unbundles the core capabilities and responsibilities of monolithic blockchain ecosystems (eg execution, data availability, consensus, sequencing) via an abstraction on top of the base layer, allowing builders to pick, choose, and modify the components that offer the best UX for their users — and “swap” them out as they learn more about user need. While modular is still very much in its infancy, there are exciting tools available* for developers:

  • Data Availability (DA) - Celestia and EigenDA offer 10-20X faster throughput via their proprietary solutions than Ethereum (83 KB/s).

  • Execution - This can be split up into two categories: 1) General Purpose Rollups or L2s (Optimism, Arbitrum, zkSync, Scroll, Polygon zkEVM, Starknet, Mantle), and 2) Custom Application Rollups (Optimism Bedrock, Arbitrum Orbit, Fuel, Eclipse, Caldera, Sovereign and

  For example, modular allows builders who want to build on Ethereum but may be willing to sacrifice some decentralization/censorship resistance for performance improvements to utilize off-chain execution (e.g. rollup) and/or off-chain data availability (e.g. validium or IPFS).

  A builder who wishes to innovate at the protocol layer to better capture MEV (e.g. a popular game or NFT collection) can more easily do so by standing up an app-chain and bootstrap network security via EigenLayer or Celestia — without requiring large CapEx or recruiting validators.

  And while using a roll-up or a more performant data availability solution is cool — modular design presents a much larger opportunity for builders…

  *some of these tools are not yet launched on mainnet

  3. Vertically Integrated Middleware

  The most exciting unlock of modular design won’t be the general purpose offerings that are popular today (e.g. L2 rollups). Rather, I believe we’ll see the formation of a new layer built on top of general purpose L1/L2s: vertically integrated middleware.

  Before we get any deeper, let’s first define what this term means. I define this layer as:

  • Sufficiently decentralized networks, products and services which utilize modular design to deliver core innovations at the infrastructure or protocol layer

  • Natively designed from day 1 across hardware, software, protocol, integrations, partnerships, etc to power specific use cases with both table-stakes functionality as well as capabilities uniquely native to crypto.

  • Empower app developers to build on top of to create compelling consumer experiences.

Let’s walk through an example: let’s imagine you want to build a payments / remittances app for cross-border use cases on crypto rails. Today, you’d have to solve for a whole host of problems (i.e. identifying the chain to process transactions, multi-chain support, who pays gas, throughput, KYC/compliance, privacy, chargebacks, FX/currency exchange, off/on ramps, etc) — all before you even start to think about your own app experience!

Worse, every other builder trying to create a payments app is experiencing the same pain 😟.

Modular re-imagines this. Entrepreneurs or companies are now empowered to innovate at the protocol layer and create a permission-less network specific to payments with all these capabilities natively supported out of the box — in the shape or size they think is best for builders to build on top of. This vertically integrated middleware solution might look like an evolutionary descendent (and more payments-specific version) of Base, Coinbase’s new L2 which offers access to 100MM+ KYC/KYB-approved users, is gas-less, supports account abstraction, and has native interop with other Optimism-based L2s as part of Superchain.

Alternatively, it might look like an app-chain with bootstrapped network security that uses a stablecoin as its native asset, is gas-less, privacy-first, has escrow/chargeback support plus partnerships with international banks for instant on/off-ramping and uses CCTP or Axelar to abstract multi-chain.

These solutions might additionally offer crypto-unique functionalities such as stable-stable pairs to eliminate FX fees/slippage or bi-directional payment flows to facilitate affiliate/referral marketing.

Middleware solutions such as this unlock app developers to build strong consumer payment experiences that have a meaningful shot of adoption.

The meta-point in all this: instead of waiting for any single ecosystem to enable capabilities like these, modular allows builders to create middleware solutions and compete for developer mindshare in an open marketplace.

We see other examples of this thesis playing out. Farcaster, a sufficiently decentralized social network that facilitiates user-owned data via off-chain hubs, has sprung up an entire constellation of interesting consumer social applications built on top. Chainstory, a project I’m helping build, aims to serve as a permissionless reputation primitive to help builders, projects and communities build more customized experiences by helping them better understand the skills and experiences of their users.

This is just the start. I believe we’ll continue to see this trend of specialized middleware solutions supporting a wide array of verticals from verifiable AI model training & execution to on-chain game execution — and much more.

Over the next 12-18 months, these are the areas surrounding this thesis I’m most excited about:

1. Vertical-Specific Middleware - Sufficiently decentralized protocols and networks that act as core services for specific verticals that crypto is uniquely positioned to disrupt (such as the payments example above).

2. Capability-Specific Middleware - Components or products which abstract specific base layer capabilities for developers such as key management (Lit Protocol**), sequencers, or bridges / interop solutions (Lagrange**).

3. One-Click Infra - Tools that make it simple for developers to stand-up modular infrastucture (e.g. app-specific rollups).

4. Developer/Observabillity Tools - With the developer stack becoming more disparate in a modular world, I’m interested in tools that help builders monitor the health and uage of their tech stack (e.g. web3 DataDog)

5. Blockchain UI as a Service - As middleware networks and protocols proliferate, there will be a growing need for users and developers to navigate them via clean UI interfaces. I’m interested in modern takes on block explorers (e.g OnceUpon) or search engines (e.g. Ora) offered as a service to middleware owners.

**Lattice Portfolio Companies

If this generally resonated with you and/or you’re building in these spaces, please reach out or TG me. We would love to chat!

Huge thank you to Regan, Mike and Pierre from Lattice Fund, Sreeram from EigenLayer, Kyle from Multicoin, Miko from Gumi Cryptos Capital, Dylan Hunzeker, Harrison Dahme from FactionVC, Shawn Dimantha from Hydra Ventures DAO, Eshita from Messari and the many others who reviewed this post.

TLDR:

• Building and using crypto remains painful b/c it requires direct interaction with base protocol layers (L1s) that have made technical and UX sacrifices to satisfy a pre-defined ethos (e.g. decentralization, scaling, etc).

• Modular architecture empowers builders to permissionlessly innovate and customize on behalf of users by creating abstractions on top of the base layer.

• The biggest unlock of modular won’t be general-purpose solutions (e.g. roll-ups), but rather use-case specific protocols and networks (AKA vertically-integrated middleware) that compete with their web2 counterparts — which will finally scale crypto to its proverbial “next 1B users”.

  1. The Wrong Bottleneck

• One of the prevailing sentiments in crypto today is that the lack of cheaper and faster transactions (AKA scaling) is the primary bottleneck for broader adoption. However, the data suggests a different story: Solana’s average TPS hovers around ~4K despite peak capacity of 65K. Rollups (L2s) on ETH on average utilize ~4-5% of available gas. There appears to be plenty of available blockspace and throughput —- but no one to use it.

  Moreover, Ethereum (one of the most popular blockchain ecosystem) has ~400K daily active wallets and 7K full-time devs (23K monthly active), both of which represent < .1% of scaled web2 platforms. So what’s really holding us back?

  IMO, the answer is clear (albeit not fun to admit): building and using crypto is painful. Why? Because builders and users are still largely required to directly interact with the base protocol layer of crypto ecosystems (L1s). This layer is inherently complex and has made pre-defined technical and UX trade-offs to fulfill the particular ethos across the blockchain trilemma it’s trying to optimize for (e.g. decentralization, scaling, etc). Directly interfacing with this layer isn’t easy — nor is it designed to be.

  The lack of abstraction is especially challenging for app builders, who have little choice but to pass on the technical constraints and tradeoffs (decentralization, cost, performance, MEV capture, etc) inherited from the base layer they build on top of on to their users. Because base layers are designed to support a wide array of use cases and total value locked (TVL), they are 1) not incentivized to rapidly innovate at the protocol layer (more downside risk than upside), and 2) general-purpose, requiring builders to implement specific capabilities or customizations required for their use case.

  Builders who wish to innovate at the base layer by creating their own sovereign application chain (or “app-chain”) via an ecosystem such as Cosmos face a different but equally challenging uphill battle. Instead of having network security (validators) provided by the base layer (e.g. Ethereum, Solana, etc), app-chain builders have historically had to hand-roll these on their own.

  Worse, there are meaningful switching costs (technically and politically), which puts builders in the unenviable position of a) choosing a base layer at the onset before deeply understanding their use case, and b) having little flexibility to adjust after the fact.

  So how do we better empower crypto builders with the tools and autonomy to innovate on behalf of users?

  2. Modular Architecture & Permissionless Innovation

  The core value proposition of modular design to builders is simple: instead of relying on base layer protocols to serve their infra needs, modular enables builders and entrepreneurs to permissionlessly innovate on it themselves. This approach empowers builders to create the tech stack required to create delightful end-user experiences, rather than being artificially constrained by the technical and UX limitations of the base layer. Sreeram Kannan, EigenLayer’s founder, offered a recent example of how modular design facilitates innovation in a recent podcast:

  Scaling Ethereum has been a long-standing point of contention within the community, with sharding being the most amenable solution — but was moving slowly given the complexity and blast radius (billions in TVL). EF pivoted to a rollup-centric roadmap which enabled an “open market” approach and led to several teams building solutions (e.g. Optimism, Arbitrum, zkSync) using different techniques to help solve for scaling in a far quicker time than EF could have implemented sharding.

  Modular architecture unbundles the core capabilities and responsibilities of monolithic blockchain ecosystems (eg execution, data availability, consensus, sequencing) via an abstraction on top of the base layer, allowing builders to pick, choose, and modify the components that offer the best UX for their users — and “swap” them out as they learn more about user need. While modular is still very much in its infancy, there are exciting tools available* for developers:

  • Data Availability (DA) - Celestia and EigenDA offer 10-20X faster throughput via their proprietary solutions than Ethereum (83 KB/s).

  • Execution - This can be split up into two categories: 1) General Purpose Rollups or L2s (Optimism, Arbitrum, zkSync, Scroll, Polygon zkEVM, Starknet, Mantle), and 2) Custom Application Rollups (Optimism Bedrock, Arbitrum Orbit, Fuel, Eclipse, Caldera, Sovereign and

  For example, modular allows builders who want to build on Ethereum but may be willing to sacrifice some decentralization/censorship resistance for performance improvements to utilize off-chain execution (e.g. rollup) and/or off-chain data availability (e.g. validium or IPFS).

  A builder who wishes to innovate at the protocol layer to better capture MEV (e.g. a popular game or NFT collection) can more easily do so by standing up an app-chain and bootstrap network security via EigenLayer or Celestia — without requiring large CapEx or recruiting validators.

  And while using a roll-up or a more performant data availability solution is cool — modular design presents a much larger opportunity for builders…

  *some of these tools are not yet launched on mainnet

  3. Vertically Integrated Middleware

  The most exciting unlock of modular design won’t be the general purpose offerings that are popular today (e.g. L2 rollups). Rather, I believe we’ll see the formation of a new layer built on top of general purpose L1/L2s: vertically integrated middleware.

  Before we get any deeper, let’s first define what this term means. I define this layer as:

  • Sufficiently decentralized networks, products and services which utilize modular design to deliver core innovations at the infrastructure or protocol layer

  • Natively designed from day 1 across hardware, software, protocol, integrations, partnerships, etc to power specific use cases with both table-stakes functionality as well as capabilities uniquely native to crypto.

  • Empower app developers to build on top of to create compelling consumer experiences.

Let’s walk through an example: let’s imagine you want to build a payments / remittances app for cross-border use cases on crypto rails. Today, you’d have to solve for a whole host of problems (i.e. identifying the chain to process transactions, multi-chain support, who pays gas, throughput, KYC/compliance, privacy, chargebacks, FX/currency exchange, off/on ramps, etc) — all before you even start to think about your own app experience!

Worse, every other builder trying to create a payments app is experiencing the same pain 😟.

Modular re-imagines this. Entrepreneurs or companies are now empowered to innovate at the protocol layer and create a permission-less network specific to payments with all these capabilities natively supported out of the box — in the shape or size they think is best for builders to build on top of. This vertically integrated middleware solution might look like an evolutionary descendent (and more payments-specific version) of Base, Coinbase’s new L2 which offers access to 100MM+ KYC/KYB-approved users, is gas-less, supports account abstraction, and has native interop with other Optimism-based L2s as part of Superchain.

Alternatively, it might look like an app-chain with bootstrapped network security that uses a stablecoin as its native asset, is gas-less, privacy-first, has escrow/chargeback support plus partnerships with international banks for instant on/off-ramping and uses CCTP or Axelar to abstract multi-chain.

These solutions might additionally offer crypto-unique functionalities such as stable-stable pairs to eliminate FX fees/slippage or bi-directional payment flows to facilitate affiliate/referral marketing.

Middleware solutions such as this unlock app developers to build strong consumer payment experiences that have a meaningful shot of adoption.

The meta-point in all this: instead of waiting for any single ecosystem to enable capabilities like these, modular allows builders to create middleware solutions and compete for developer mindshare in an open marketplace.

We see other examples of this thesis playing out. Farcaster, a sufficiently decentralized social network that facilitiates user-owned data via off-chain hubs, has sprung up an entire constellation of interesting consumer social applications built on top. Chainstory, a project I’m helping build, aims to serve as a permissionless reputation primitive to help builders, projects and communities build more customized experiences by helping them better understand the skills and experiences of their users.

This is just the start. I believe we’ll continue to see this trend of specialized middleware solutions supporting a wide array of verticals from verifiable AI model training & execution to on-chain game execution — and much more.

Over the next 12-18 months, these are the areas surrounding this thesis I’m most excited about:

1. Vertical-Specific Middleware - Sufficiently decentralized protocols and networks that act as core services for specific verticals that crypto is uniquely positioned to disrupt (such as the payments example above).

2. Capability-Specific Middleware - Components or products which abstract specific base layer capabilities for developers such as key management (Lit Protocol**), sequencers, or bridges / interop solutions (Lagrange**).

3. One-Click Infra - Tools that make it simple for developers to stand-up modular infrastucture (e.g. app-specific rollups).

4. Developer/Observabillity Tools - With the developer stack becoming more disparate in a modular world, I’m interested in tools that help builders monitor the health and uage of their tech stack (e.g. web3 DataDog)

5. Blockchain UI as a Service - As middleware networks and protocols proliferate, there will be a growing need for users and developers to navigate them via clean UI interfaces. I’m interested in modern takes on block explorers (e.g OnceUpon) or search engines (e.g. Ora) offered as a service to middleware owners.

**Lattice Portfolio Companies

If this generally resonated with you and/or you’re building in these spaces, please reach out or TG me. We would love to chat!

Huge thank you to Regan, Mike and Pierre from Lattice Fund, Sreeram from EigenLayer, Kyle from Multicoin, Miko from Gumi Cryptos Capital, Dylan Hunzeker, Harrison Dahme from FactionVC, Shawn Dimantha from Hydra Ventures DAO, Eshita from Messari and the many others who reviewed this post.