A VC Explains Web3 Applications, Protocols, and What To Expect

Most things need to be considered in the appropriate context. This is especially true in the startup ecosystem. Accordingly, we at Nauta like to develop a holistic, high-level view on industries, before investing in new areas.

Most often, mentally structuring industries is simple. One may look at the most important use cases of an industry or try to understand how money flows between participants of a market. For crypto/web3, however, finding a simple and understandable structure has proven very difficult. This fascinating space is still nascent and growing very rapidly. We got the impression that things are changing daily and, sometimes, even in unexpected ways.

Fortunately, we found a blog post by the smart people at Coinbase that inspired our thinking. Instead of characterizing the space according to use cases, it turned out to be helpful to think about crypto projects in terms of layers and functionalities. Together, all these functionalities provide the building blocks for the protocol economy.

Our feeling is that this is a very technical way of looking at the ecosystem and, once the space is more mature, we will have to update our worldview. But for now, it really helped us to understand what is happening in the crypto space.

Fig. 1: A schematic view of the crypto ecosystem heavily inspired by the smart people at Coinbase.

Access

On top of the stack are tools that enable access to Web3 activities. You may call this the Access layer of the crypto ecosystem. Think of wallets (non-custodial or custodial) that allow for holding tokens and logging in, or onramp solutions helping to buy and sell crypto securely. A prominent example would be the Metamask Chrome extension & mobile app which can be used to identify as a user in an application.

An important side role is played by aggregators to discover and search decentralized applications (dApps), decentralized finance (DeFi) projects or communication tools.

Applications

Access is provided to standalone user-facing Applications that are based on blockchain technology. Such applications ideally adhere to the principles of openness, decentralization, censorship-resistance, immutability, trustlessness, and permissionlessness. Current web3 applications only fulfill these ideals to a varying extent.

A great example for such applications would be the decentralized blogging platform Mirror (if you still think that dApps are too slow and basic, please check out this page that provides a beautiful alternative to Medium).

Category Primitives

Decentral applications connect to the core protocols directly or make use of a diverse set of interoperable building blocks that are focused on specific functions, which are referred to as Category Primitives. Not very useful by themselves, they serve as a construction kit for decentralized applications. Developers can bootstrap their projects without building everything from scratch (similar to API economy or open source). The category primitives have the potential to lower the barriers from idea to full-fledged product substantially. Mirror, for example, uses Arweave to store data and let’s publishers link their ENS name to their Mirror profile.

Protocols

All of this is based on the blockchain protocols which define the consensus mechanism (Proof of Work vs Stake, etc.), permissions (permissioned/less), the native coin or token and allows nodes to complete key functions of the blockchain. The protocol powering both ENS and Arweave is the Ethereum blockchain.

Infrastructure

It is fair to say that the infrastructure is absolutely the same as in the general tech space. Blockchain nodes run in the cloud or in on-prem data centers all over the world.

Final Thoughts

Looking at Web3 projects and companies from the perspective of layers helps to make sense of this world. From a technological point of view, a very interesting aspect is the large middle layer of category primitives. One can envision a world in which completely decentral pieces of functionality can be leveraged by every developer to build complex applications. Akin to serverless functions, these building blocks are entirely stored on a decentral computing system and leveraged on a pay-per-use basis. The inherent composability* has the potential to become the next accelerant of tech. At Nauta, we are really looking forward to seeing how entrepreneurs will leverage this to build the next generation of software companies!

* Here’s a good post about composability if it’s a new concept or something we’ll hope to discuss further in another post