Building Web 3.0

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With crypto market whiplash strong as ever, “so much is happening!” often echoes in virtual halls. We prefer “so much is being built!”

Mental models are useful for taking stock of the building. They also help early-stage investors to map industry progress to their portfolio’s strategy and outlook. Here’s our three-layered model of the decentralized web:

How The Decentralized Stack Has Grown

Settlement Layer: a year of ossification

2020 cemented Ethereum’s transactional settlement layer dominance. There are more than 3,000 decentralized applications currently running on the Ethereum blockchain — more than 10 times the amount on the next most app-trafficked chain. Eth2 upgrades to scalability, layer-2’s, and UX, and stronger network effects, may further entrench Ethereum’s dominance.

With better middleware solutions, developers plug secure, quality building blocks into their apps, ship them faster, and can focus on delivering superior user experiences.

Middleware Layer: a year of experimentation and growth

2020 saw a surge in the depth and strength of middleware projects, which sit atop the settlement layer, serve as data and interoperability bridges, and support app development. This is typical of maturing industries; they become less vertically integrated, as specialized service providers enter markets and make them more efficient. Starting a business becomes faster, and scaling it becomes easier with these new “lego-like” components. With specialized technologies starting to pave the way for richer end-apps, a golden age of Web 3.0 middleware feels fast upon us. Of the thirteen new investments we have made in 2H20–1Q21, seven are in the decentralized web middleware layer.

API3 is a middleware protocol that allows decentralized applications to access off-chain, real-world data. Think DeFi borrowing and lending apps that need the market price of an asset to settle contracts or games that sync with pro athlete stats. While other projects have successfully bridged data and blockchains, API3’s novel approach improves the experience for developers and data API providers. “Oracles” are the mechanism by which external data reaches blockchains. Historically, they only worked with third-party middlemen running nodes to connect them into DApp smart contracts. API3 lets data providers connect into DApps directly by running an “Airnode” — a serverless, lighter-touch oracle node. With the middlemen gone, they retain full control of their data. Data flows are easier and more trustworthy, which is great for app developers.

Another middleware solution we are excited about is Ceramic Network, which makes distributed data and identity readily available to app developers. Any app that pulls user information from different web sources, and syncs user identities across devices needs a data solution. For example, when you connect to a MetaMask wallet, it shows your information like account names, contact lists, past transactions, settings, token watch lists and more. Apps like MetaMask need to access cross-platform user data, but they (and we users!) don’t want it stored on centralized servers. Enter Ceramic: an identity graph that developers can easily tap into, allowing users to effectively take their identity with them across a decentralized web free of data vaults.

In the past, developers ran their own nodes and data queries, and created their own identity solutions. That sucked valuable building time and led to inconsistent, or sloppy, end-products. With better middleware solutions, developers plug secure, quality building blocks into their apps, ship them faster, and can focus on delivering superior user experiences.

If 2021 is the golden age of middleware, it’s likely to represent an inflection point in DeFi’s push mainstream.

Interface Layer: still early days

There are few winning interface companies today. The Netscape or Ask Jeeves browsers of the 90s, which are likely to elicit grimaces now, weren’t hideous interfaces because the designers had no taste — they were derived from an underdeveloped middleware layer. As the decentralized web plumbing improves, UX-friendly, sophisticated interfaces will emerge to take DeFi and DApps mainstream.

Our challenge as investors is to find the interface companies that will most effectively absorb middleware developments. We invested in Slingshot, a smart order router for DeFi, which is accessible via a UX-friendly front-end and API, because we believe the business and team, which is at the bleeding edge of DeFi, can incorporate new middleware better than most. As the settlement layer scales, and the middleware improves, Slingshot’s functionality will evolve — perhaps beyond its current interface’s recognition.

As the middleware expands, leading hosted and hardware wallets, like Luno and Ledger, and portfolio management tools, like Zerion, will be tested to apply their UX and product development expertise to tap new higher-order functionalities.

If 2021 is the golden age of middleware, it’s likely to represent an inflection point in DeFi’s push mainstream. After developers toiled for years with only HTML, the leap from CSS to flash and the modern web frameworks ushering in Web 2.0’s heyday was fast. A similar acceleration would be a gamechanger for developers, users, and next-gen interface entrepreneurs.

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