Decentralized Infrastructure: Bedrock of Web 3.0
Sharanya Sahai
As the world continues to pivot towards Web 3.0, the decentralized infrastructure stack will be instrumental in ensuring mainstream adoption beyond just blockchain “innovators”¹ given that only 0.71%² of the world’s population currently uses blockchain enabled technologies. New use cases of decentralized technologies are constantly emerging - be it for supply chain management (Scantrust), climate change (Klima), publishing (Mirror), income generation (Axie Infinity) or foreign aid (Ukraine DAO) among others. Despite debate around individuals’ frustration with and low trust in centralized authorities, such as the government or large Web 2.0 gatekeepers, users will switch to Web 3.0 alternatives not for ideological reasons but utilitarian ones. This furthers the importance of establishing the robustness of the decentralized infrastructure stack that powers Web 3.0 to be a reliable alternative commanding the trust of both developers and users alike.
The paper is an attempt to explain the following
I. What is decentralization?
II. Web 3.0 and underlying infrastructure stack
III. Advantages of decentralized infrastructure over centralized offerings
IV. Unpacking the infrastructure stack
V. In depth analysis of the Privacy and Security infrastructure
VI. Challenges for decentralized offerings
VII. Exciting themes going forward
I. Decentralization in the context of blockchain
The idea of decentralization as enabled by the blockchain first came to light with the introduction of bitcoin. The bitcoin network is open and therefore connectable by anyone. It also exhibited other key features such as transparency, where anyone can verify the transactions if needed. In such a network, a machine that connects to the network is termed as “node.” Ultimately, there exists a network with thousands of nodes that can send and receive funds from each other.
Let’s imagine a real-world example to understand the power of decentralized infrastructure. A decentralized payments network could enable people to connect and make payments to each other without having to pay high fees to the intermediaries for the same. This distributed payment network would rely on blockchain technology without a designated central authority and the nodes that generate the transaction could share it with the network and get paid for it directly. The fees involved would be a fraction of traditional payment solutions and the settlement could happen in a matter of seconds versus the long delays that plague today’s payment offerings especially cross border payments.
II. Web 3.0 and the underlying infrastructure stack
The diagram below depicts the various layers constituting Web 3.0 as enabled by the blockchain including the infrastructure stack⁷
III. Advantages of decentralized infrastructure over centralized offerings
Decentralized infrastructure stack provides four key benefits over a centralized system:
Control: Users of a decentralized infrastructure stack have complete control of their interactions on the blockchain as no permissions are sought from centralized entities who can often create roadblocks such as utilizing their data for their own benefit or blocking access (case in point twitter) to their applications.
Composability: A highly composable system such as one enabled by decentralized infrastructure provides components that can be selected and assembled in various combinations to satisfy specific user requirements. For example: depending on the level of security / scalability required, a user could build an app on Solana (high throughput) or Ethereum (high security)
Immutability: Blockchain technology’s data structure is append-only. This means that there is no chance for anyone to modify or alter the data once it is stored. Depending on user need this could be a boon or a bane! In case of a hack or unintended transaction, data on the underlying blockchain cannot be reversed and therefore retrieval of the state before the transaction is impossible. On the other hand, data on the blockchain is censorship resistant which could be extremely important in terms of storing important information during an adversity.
Security: Decentralized infrastructure doesn’t have a single point of failure which makes it difficult to hack and therefore less prone to data leaks unlike centralized offerings. For example: If someone was to hack the bitcoin network it would simultaneously have to hack 50%+ of the nodes powering that network which makes such a feat practically impossible.
IV. Unpacking the infrastructure stack
The framework below is used to further understand the multiple use cases within the decentralized infrastructure stack
The infrastructure stack offers Lego-like pillars across network, computation, storage, security, analytics, governance and transacting which are composable enough to enable applications to be built across several use cases often beyond the realm of possibilities within the Web 2.0 world
We can bucket the infrastructure developments under two broad categories:
(1) Alternatives to Web 2.0 offerings: This includes infrastructure / services already provided by companies in the Web 2.0 space. For example: Temporary storage provider Filecoin competes directly with centralized cloud storage providers such as Amazon and Google. The success of decentralized providers depends on their ability to provide users a superior alternative on a cost / efficiency basis, both of which are difficult to do at scale especially when competing against behemoths with large pools of disposable capital.
(2) Web 3.0 native offerings: Sticking to the decentralized storage space, Arweave provides permanent storage which is not offered by the incumbents. While the service is significantly higher priced, it is extremely relevant for specific use cases that are not served well by non-permanent storage such as legal contracts, legacy artefacts, censorship free publishing etc. The utility of such an offering is only going to grow as the world moves to traceable on-chain visibility.
While some of the applications built on decentralized infrastructure will replace their predecessors, the superiority of Web 3.0 characteristics as defined through decentralization, self-sovereign identity, open, public, composable back ends over Web 2.0 will depend on the specific type of application being built.
To simplify comparison, below are some examples of the infrastructure providers across several pillars in the Web 2.0 and Web 3.0 world
V. In depth analysis of the Privacy and Security infrastructure
Within the infrastructure stack, privacy and security providers look particularly interesting given their criticality in blockchain’s existence for both proponents (Crypto native users, Gen Z) and opponents (regulators, conservatives / traditional) alike. Two sides of the same coin are used to argue for the adoption / elimination of the crypto movement. While the supporters advocate complete privacy of user data and security of their savings / wealth without unnecessary intermediaries or central authorities, the dissidents cite anonymity and vulnerabilities of the nascent technology as a serious cause of concern for enabling illicit activity.
The main inference though is that decentralized apps can cater to the needs of both these stakeholders wherein the underlying stack is interchangeably used to cater to customized use cases. This takes place while adhering to the laws of the land which will also have to move with the evolving technological and social developments. For example: The Indian / US government can use blockchain for election voting. The system will be “tamper-proof”, providing traceability, anonymity and security in voting records while also guaranteeing the integrity of the end outcome; while it may be difficult to envisage such a scenario, the Australian government has already set out a plan to do so, starting from smaller local elections⁴
The privacy offering can be explained in detail with the below framework
An interesting example of a unique functionality provided by the decentralized stack is NYM which uses mixed net to create hard-to-trace communications between the sender and receiver. Sensitive information such as a patient’s health records or secret messages between a company’s internal teams can use this technology to ensure that the conveyed information is accessible only to the desired parties. On the other hand, Aleo uses zero knowledge cryptography to cater to enterprises’ demand for privacy and programmability. Zero knowledge cryptography allows third parties to verify the truth of a transaction without revealing all the details about the same. To simplify, it allows users to transfer value between each other in a pre-defined way without disclosing the inputs that led to the value transfer.
While the above-mentioned provisions build a customizable foundation for a Dapp (decentralized application) to be built, other innovations are happening at the user end to ensure maximum control over identity disclosure and security of individual data and wealth.
Growing number of Dapps garner user trust by getting audited by trusted agencies such as Certik, Open Zeppelin or utilizing threat detecting infrastructure through Forta. Bug discovery platforms such as Immunefi and Hackerone have gained significant traction given the importance of exposing vulnerabilities due to the irreversible nature of Web 3.0.
Security solutions are not confined only to software, in order to ensure heightened security of a user’s transactions, hardware wallets also known as cold wallets such as those provided by Ledger and Trezor are increasingly used as individuals start transitioning to investing in and using blockchain in a meaningful way. Identity verification offerings by Civic and Self Key enable individuals to participate in permissioned markets while also allowing institutional participants to manage risk in the decentralized finance ecosystem by keeping a fully user-controlled record of their real identities.
Around 18.5 million Bitcoin worth ~$150 billion³ appear to be in lost or otherwise stranded wallets, key management solutions such as Torus and Silence Laboratories are providing unique solutions to ensure private keys are never exposed to malicious entities (browser malware or phishing scams). While Torus supports multi-sig with social logins, Silence Laboratories have been building multimodal proofs supported threshold signature schemes for truly decentralized signatures.
Enterprises are supporting social recoveries and splitting of private keys; thus allowing user with easy key recoverability without a central entity.
VI. Challenges for decentralized offerings
The Web 3.0 revolution as powered by its infrastructure stack has been attracting huge resources in terms of capital flows and quality talent in the recent past with several large blockchain dedicated funds spurring up to further the developments in the field. However, challenges as detailed below remain key to unlocking mainstream usage and acceptance
Maintenance⁵ – Dapps can be harder to maintain because the code and data published to the blockchain are harder to modify. It is hard for developers to make updates to their Dapps (or the underlying data stored by a Dapp) once they are deployed - even if bugs or security risks are identified in an old version.
Performance overhead⁵ – There is a huge performance overhead, and scaling is difficult. For example: To achieve the level of security, integrity, transparency, and reliability that Ethereum aspires to, every node runs and stores every transaction. On top of this, proof-of-work takes time as well. A back-of-the-envelope calculation puts the overhead at something like 1,000,000x that of standard computation currently. However, several solutions have come up to solve for this including optimistic and zero knowledge (zk) rollups along with scalable Layer 1 chains such as Solana.
User Experience – The current user experience is extremely broken in the decentralized space. Not only is it extremely difficult for a lay man to interact with decentralized applications; features such as desktop only usability, multiple checks, unappealing visuals make it extremely difficult for users to even try out decentralized applications let alone adopting them.
Network Congestion and Cost – Most Dapps are currently built on Ethereum which gets clogged when one application uses too many computational resources resulting in long lead times for transaction to get validated. Additionally complex transactions involve high fees which makes regular interaction extremely expensive to be put on chain. To solve for this, solutions such as Polygon which is a layer 2 scaling solution on Ethereum have sprung up to enable developers to build applications that can enable a greater volume of transactions at lower costs by putting only the most essential data on the Ethereum network using rollup technology. Rollups increase scalability through mass transfer processing rolled into a single transaction.
VII. Exciting themes going forward
Blockchain today is where the Internet was in the mid 1990s with plenty of room for growth, powered by superior product offerings and subsequent adoption. Some of the most investible themes that I am particularly excited about as we go deeper into the Web 3.0 journey include the following
Institutional Enablement: Bitcoin has largely been the reason behind institutional interest in Web 3.0. While this trend may continue, it is essential to broaden the overall attractiveness of the blockchain movement. Institutional adoption is a gradual journey and infrastructure providers that will help them understand and access the benefits of the decentralized stack are positioned for success. For example: Conduit is “enabling mainstream fintechs offer DeFi products to their end customers without building everything from the ground-up”.⁶
Multichain Compatibility: The future of blockchain will include a multichain world with varied blockchains serving customized use cases thereby necessitating frictionless cross chain transfer. Currently the usability of decentralized infrastructure providers across chains is far from optimal and solutions solving for this pain point can create large outcomes.
Improving User Experience: Attracting the next wave of individuals to Web 3.0 would require seamless and intuitive tools to help non-native crypto users navigate the decentralized infrastructure stack. Simplifying user experiences and providing blended offerings with Web 2.0 platforms is key to long term success of the underlying technology. For example: Western Union partnered with Coin.ph’s blockchain enabled platform to facilitate cross border remittances for its customers.
The decentralized infrastructure forms the bedrock of Web 3.0 and is here to stay. While it may face several changes impeding large scale adoption and may not completely replace centralized infrastructure, it is driving new conversations and receiving substantial investor interest. Organizations are beginning to realize the importance of incorporating some form of decentralization in their offering and are allocating substantial resources and headspace towards this dynamic field. While the long-term prospects of decentralized infrastructure are bright, it is subject to great volatility in the short to medium term due to government restrictions, competition from Web 2.0, overspeculation by investors and use cases limited to gaming, trading and entertainment. However, this in turn will spur opportunities for innovation and power a more convenient technology enabled future!
Selected References
1. Diffusion of Innovation Theory, Rogers 1971
2. 45 Blockchain Statistics & Facts That Will Make You Think: The Dawn of Hypercapitalism, I. Mitic 2022
3. Tens of billions worth of Bitcoin have been locked by people who forgot their key.
4. Charted: Blockchain use in governments, Charlene Chin
5. Stage of Evolution vs Internet: Where are cryptocurrencies at?, Ledger Blog 2021
6. The Next Wave of Crypto/Fintech Convergence, Mike Giampapa 2022
7. A simple guide to the Web3 stack, Coinbase Blog 2022
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