The case for investing in Crypto Protocols
Straight Outta USV’s Fat Protocols
“Blockchain’s got no Killer App yet” warned Morgan Stanley in its latest report. The crypto space is waiting for the Killer app to emerge and prove to the world that we have moved past the “Proof of concept” phase.
I believe that not having the Killer App yet is a good thing. I believe that the real work is happening in the infrastructure- the roads, the pipes and the grid that will allow the development of future Dapps. Smart, dedicated teams are working on the infrastructure to develop the foundation for consumer facing Dapps.
Union Square Ventures outlines in its blog post- Fat Protocols
The previous generation of shared protocols (TCP/IP, HTTP, SMTP, etc.) produced immeasurable amounts of value, but most of it got captured and re-aggregated on top at the applications layer, largely in the form of data (think Google, Facebook and so on)
This relationship between protocols and applications is reversed in the blockchain application stack. Value concentrates at the shared protocol layer and only a fraction of that value is distributed along at the applications layer. It’s a stack with “fat” protocols and “thin” applications.
In the blockchain world, investing in teams developing these protocols will result in capturing more value than any consumer facing app. These protocols become the platforms which other developers will use to create consumer facing applications.
Decentralized protocols have led to crossovers(similar to Open source) resulting in teams building over other decentralized protocols. ethereum allows for this inter-operability and building on top of other protocols increases the value for both the underlying protocol and the protocol built over it.
When asked why District0x was building over other platforms, the founding team replied — The synergies are because everyone is developing over the same database that sits in Ethereum. If you want to use someone’s Dapps, you don’t need to understand how their API is written to utilize their platform, nor can the service be shut down be later. That is a promise that didn’t exist till now with REST APIs.
Luis Cuende of Aragon Project wrote an excellent article on the emergent Ethereum Stack and how network effects benefit all platforms. Some of the teams that he talks about are — Aragon, District0x and Decentraland and I am very optimistic about these projects.
The startup ecosystem understands that platforms represent the future with the success of firms like Uber, Airbnb, Alibaba, Apple, Android which are essentially consumer facing platforms. The HBR article Pipelines, Platforms, and the New Rules of strategy predicts -
Firms that fail to create platforms and learn the new rules of strategy will be unable to compete for long
I think investors have ingrained the importance of investing in platforms but they are looking in the wrong place. The real killer platforms are decentralized platforms being built in the decentralized world through decentralized teams using a decentralized currency. And this time, anyone in the world can be an investor.