Middleware Protocol, A Differentiated Value Creator And Value Capturer
1. Middleware Protocol of blockchain from the perspective of traditional Internet value distribution.
Reviewing the Internet stack of Web 2.0, we can see a large number of excellent Internet business models emerge based on the application layer protocol (especially the HTTP), such as E-commerce (Amazon, Taobao), social network (Facebook), search engine and advertising (Google), as well as streaming media (Netflix, Spotify). From this perspective, Application Layer Protocols which are built on top of the underlying protocols (TCP, IP) have created the most value on the Internet stack.
Looking at the map of Web 3.0 based on the value creation model of Web 2.0, we might be able to imagine the existence of similar Web 2.0 Application Layer Protocol between the top Application Layer/Interface Layer and the bottom Blockchain Layer (Infrastructure & Networking Layer, Protocol Layer and Off-chain services Layer).
So what are the differences between Web 3.0 and Web 2.0’s Middleware Protocols?
First of all, token, the distinct invention of the crypto network, changes everything. Although most of the value of Web 2.0 is created by Middleware Protocols, since protocols such as HTTP are free standards, the value they create is actually stolen by various applications. In the era of Web 3.0, protocols’ native tokens enable them to capture the value that they generate.
Another difference is Web 2.0 mainly relies on the huge HTTP to support the most influential applications, but there will be a wide variety of protocols in the middle layer stack of Web 3.0 to support applications. The reason for this difference is that each application or business model in the crypto network needs its own unique design of token economics, hence a unique protocol to integrate the token economics of the application is necessary.
2. What is Middleware Stack?
Since the network technology stack architecture and value distribution model of Web 2.0 and Web 3.0 are completely different, we tend to use a broader mind to research the middleware stack in the crypto network. We believe that Web 3.0’s middleware stack is between the base layer (layer1 / layer2) of the blockchain and the application layer, which improves the decentralized collaboration capability or the efficiency of token value transmission.
3. Modular reconstruction of the Middleware Protocol by IOSG Ventures
3.1 Technical-service middleware
Some people in the Internet industry believe that Web 3.0’s Middleware Protocol industry will have a similar existence to the protocol platform and services (PaaS) in the Web 2.0 era. We believe that the greatest value of these technical service providers is to enhance the ability of all network participants including nodes, developers, and users to perform decentralized collaboration.
Development Framework
Examples: Solidity, Substrate, Reach Platform
The development framework is almost the most important part of the technical-service middleware. In addition to Solidity language-based Ethereum development framework, the Substrate framework and the newly emerging Reach Platform are reducing the threshold of developers in a more modular and automated manner.
These development frameworks are based on the underlying architecture of the blockchain. Christopher Swenor, CEO of Reach Platform, compares the blockchain development framework to what Microsoft has firstly done to the computer, that is, it abstracts and modularizes all specific issues, which greatly improved development efficiency. In Web 3.0 these development frameworks allow them to contribute all their energy on designing a better business model and better UX / UI, while do not worry about the complicated underlying architecture of the blockchain anymore.
Also, we can take the Substrate development framework promoted by Parity as an example. It is a scalable and modular open-source framework that can quickly build a blockchain. Its core components include a database, transaction queues, and consensus engines (such as PoW, Aura, and Polkadot consensus).
Nodes as a service (NaaS)
Examples: Infura, QuikNode, BlockDaemon, Alchemy, DAppNode
The main function of the NaaS in the crypto network is to provide developers with cloud-based nodes for development and production solutions. Hence NaaS can save the developers’ effort to operate the nodes and they do not worry about the system management of the basic operating system and node software, such as patches and updates.
For example, Infura at Ethereum provides node services to projects such as Metamask, 0x, Mycrypto, Maker, Idex, etc. These projects rely on Infura to broadcast transaction data and smart contracts to the main network.
Data index and query API service
Examples: The Graph, Dune Analytics, Dfuse, Infura
Blockchain data query and API services provide easy-to-use access to DApp data. They solve the pain point that the state of almost all smart contracts on the public chain often does not provide an easily accessible DApp data interface, but is stored in the form of logs presented by logical mechanisms such as event triggering (for example the token balance of a wallet address). In other words, DApps need a way to get and transform data from basic data sources while storing them in a format that can be directly used in applications. The Graph, Dune analytics, Infura on Ethereum, and dfuse on EOS all provide this solution.
Smart contract development tool
Examples: Moonbeam, Edgeware, truffle, ganache
Moonbeam and Edgeware are both smart contract para chains on Polkadot, allowing developers to easily create smart contracts. In addition, they also provide smart contract migration services, while migrating from Ethereum-based systems to Polkadot network. Truffle and Ganache provide smart contract development tools on ETH2.0, and their purpose is also to reduce the threshold of smart contract development.
Mining & Staking as a Service
POW examples: Poolin, F2pool, BTC.com
POS examples: Evertake, Stake.fish, Wetez
The common feature of these two kinds of services is to obtain value by lowering the threshold for network participation. In our opinion, improving active network participation can not only be beneficial for the security of the network but also enhance the network effect and create more value.
The mining pool under PoW connects the physical mining machine to the address of a blockchain mining pool and then operating large-scale mining. Meanwhile, Staking as a Service provider under PoS also reduces the threshold of staking in terms of professional knowledge threshold of operating nodes and economic cost threshold.
3.2 Financial-service middleware
The financial-service middleware is a bridge that transmits the security value of the base layer native token such as ETH to the interface layer. Based on the stablecoin protocol such as MarkerDAO and the decentralized exchange protocol such as 0x protocol, we can see various financial primitives are invented and the financial protocol’s native token also plays a big role in value-adding for the whole crypto network.
3.2.1 Base layer’s value transmission protocols
Stablecoin
Example: MakerDAO
Since the current open financial ecosystem is almost on the Ethereum network, we believe DAI is the cornerstone of open financial and the most important financial service middleware. The reason is that DAI is the stable currency that likes “fiat money” in the crypto network and it supports a variety of application scenarios such as token transactions, commodity and service transactions, long-term preservation, etc. More importantly, DAI is backed by base layer blockchain native assets such as ETH, in other words, the network security value. From this perspective, DAI is a value-added adhesive. MKR, as the protocol’s native token, captures value by playing an important role such as “stability fee” to maintain the price stability of DAI.
Decentralised exchange protocol
Main project: 0x Protocol, Loopring
The 0x Protocol and Loopring allow developers to build decentralized exchanges on top of their matchmaking systems. As an open protocol for decentralized exchanges, it allows the flow of transactions between different currencies to be completed more quickly and without fees. Some exchanges, such as DDEX, Radar, Ethfinex, dEX, imtoken, etc., have used the matching system of 0x Protocol to generate decentralized exchanges. Besides, on top of the 0x Protocol, other projects have developed higher-level protocols based on this derivation, such as dy/dx and dharma (see figure 4) :
3.2.2 Additional financial primitives protocols
Synthetic Assets
Examples: Synthetix, UMA
Compared with the traditional financial industry, all the active financial business scenarios of the financial industry in the cryptographic network still lack some more complex financial products such as equity instruments, put/call options, futures, insurance, and so on. From our view, we think asset synthesis tools such as UMA and Synthetix lay the foundation for a more complex DeFi ecosystem, we expect to see more complicated financial products such as SwanDAI based on the synthetic asset protocol.
We think UMA, which is a protocol that connects the long and short sides, is a great start. UMA provides smart contract templates that allow anyone to create a synthetic asset that tracks the price of any value subject matter. Its mechanism is simple: anyone can create tokens on a Synthetic Token Builder based on the UMA Protocol that track the price of everything from foreign exchange rates to stock prices. SwanDAI is a synthetic asset which is a stablecoin index tracking the deviation of the price between DAI and USD, so it will let people hedge the risk of price deviation.
Market Prediction Protocol
Examples: Augur, Erasure
Augur maybe one of the most technologically complex projects deployed in the Ethereum financial ecosystem. But it has been plagued by bad ex. Although it doesn’t provide services as seamlessly to users as Web 2.0 does, the technical protocols themselves are extremely valuable. Projects like Veil and Guess have developed UI based on Augur protocols to improve the user experience (UX).
The Erasure Protocol, developed by hedge fund competition platform NUMERAI, has a series of key primitives for a wide range of scenarios, including record tracking, payment, and tracing. These three economically related primitives are deployed in the Erasure base template and can be used by anyone building a Web application. To date, Erasure has developed two applications based on this protocol, Erasure Quant and ErasureBay.
Insurance
Examples: Etheris, Opyn
Etherisc built a common, decentralized insurance application platform that allows developers to quickly develop new insurance products. Etherisc’s core team has developed some common insurance infrastructure, product templates that allow anyone to create their insurance products. It now covers everything from flight delay insurance to hurricane insurance to encrypted wallets and mortgage insurance.
Opyn’s ERC20 Convexity Protocol provides financial insurance services to users with the concept of financial instruments. We believe that the credit default swap protocol and option protocol launched by Opyn are very likely to be used as the middleware protocol of DeFi financial insurance in this field to derive a variety of end-user financial insurance products.
Baskets
Examples: Set Protocol、Bskt、Neutral、Crypto Baskets
From a technical perspective, the Set Protocol is a set of smart contracts as well as an interactive interface, it is based on Ethereum ERC-20 standards, smart contract implementation, full mortgage, convertible and composable basket of tokens, abstracted into a collection of tokens infrastructure services.
3.3 Social Services
DAO
Examples: ARAGON、DaoStack
We regard Aragon as a middleware protocol because it is a DAO project that focuses more on providing a secure and general backbone network for the general organization rather than building products around specific decision-making mechanisms. By leveraging the foundation established by the Aragon team, end users can quickly form an organization that meets their specific specifications using only the tools provided by Aragon (see Figure 5).
Identity & Credit Scoring
Example: Bloom
Bloom protocol is an authentication protocol based on Ethereum, which can be used to develop credit-related products such as authentication, risk assessment, and credit scoring.
4. Value of middleware: integration of network resource, token value transmission, and protocol composability
From the investment perspective, let’s first summarize the changes in IOSG’s understanding of blockchain middleware last year and this year. In the end, we will explain why middleware has the potential to capture the biggest value in the whole blockchain stack.
On one hand, based on our understanding of the middleware protocol, we have classified the middleware protocols in different features. Compared with the Web 3.0 research we did at the end of 2019, we have some important updates on the understanding of the middleware stack:
1) In this article, we reclassify the protocols in the middleware in on-chain and off-chain. The purpose of this is to make an abstract based on various complicated protocol functions so that entrepreneurs can stand at a higher level to take an overview of the stack.
2) Comparing with on-chain protocols with off-chain services, we can see more clearly that many on-chain protocols show composability, especially in Ethereum’s open financial ecosystem. These on-chain protocols (what we called middleware protocols) are not completely covered in our Web 3.0 research in 2019.
On the other hand, based on the fat protocol theory, we believe that the middleware protocol can not only absorb the value of network security from the base layer infrastructure but also creating value for many Dapps just like what the HTTP does in Web 2.0. There are three reasons to support this view.
Firstly, the interoperability protocols such as Polkadot and Cosmos enables State and Value to be interoperable on different blockchain platforms. Projects in the middleware stack are not limited to a single blockchain anymore, it can capture great value from different compatible blockchains in the future, and this is similar as a local company expands its market share in different areas. When a middleware project has its popularity, brand reputation, and user base, it can be a great competitive advantage to grow network effects in new markets.
Secondly, the potential for interactivity and composability among protocols is the great soil that allows some derived protocols to breed. For example, we can see that dy/dx and dharma arose based on the 0x Protocol. Also, we found that many DeFi protocols’ biggest value is not directly providing users with products having smooth friendly UX and UI although many whitepapers mention providing a user-friendly product, but to support Interface layer’s Dapp development in a more effective and efficient logic.
Finally, there are quite a few protocols in the middleware that play an important role in “token value transmission” by the approach of mortgage, commission, usage fee or so to bundle the network value on their native tokens ( such as MakerDAO’s MKR). The value created by middleware protocols may be much larger than the value of base layer infrastructure driven by calculation and security. In other words, the middleware protocols’ native tokens may capture the huger value that exceeds the value of public blockchain’s native tokens.
