Fat Protocols vs Fat Dapps vs Fat Wallets

Which crypto thesis would you pick?

The crypto space was a lot less complicated 18 months ago. Back then, risk was systemic. The macro outcomes were binary: the crypto industry either survived or it didn’t. The most likely outcome was that the industry would fall victim to a fatal technical fault, a hack, or government crackdown. Even if one of these didn’t kill crypto, widespread adoption seemed unlikely.

Lightspeed and a handful of other VCs made some targeted investments in crypto before 2016, but only a few people had the conviction to bet the house on it.

Source: Giphy

Now, everything is different. Crypto has mass mainstream awareness, a diverse multi-asset and multi-region ecosystem and an increasingly clear global regulatory environment. The risk profile has totally changed. It’s now less about making a macro binary bet and more about identifying the winners. For this, you need to understand the ecosystem and where the value will be created.

It hasn’t been a straight line to get here. The crypto market has grown through cycles each a few years long. And each wave has been an order of magnitude greater than the last:

  • In 2011, the crypto market cap reached hundreds of millions of dollars and leading platforms saw thousands of weekly new users.
  • In 2013, the market cap grew to tens of billions of dollars with tens of thousands of weekly new users.
  • In 2017, the market cap grew to hundreds of billions of dollars with millions of new users.

The next wave could see a market cap in the trillions and millions of weekly new users. That would make it the defining wave that takes the crypto industry into the mainstream.

When this wave comes, where will the value be created? This is one way, as Richard Burton outlined in his insightful tweet:

Source: Richard Burton via Twitter

He frames the question by breaking value creation in the crypto ecosystem into three layers:

1) Base protocols (like ethereum)

2) Decentralized applications (like CryptoKitties)

3) Companies building products (like wallets)


Many people, including Joel Monegro, Chris Dixon, Fred Wilson and Albert Wenger, have drawn parallels between the current state of blockchain technology and the early days of the internet. In the case of the internet, the protocol layers (TCP/IP, HTTP, etc.) produced huge value, but it was companies like Google and Facebook who actually captured the vast majority of this value.

These folks argue that with decentralized, blockchain-based networks the reverse could be true — that platform protocol layers (such as Bitcoin and Ethereum) could capture most of the value, outstripping the value captured by applications built on top. So far they’ve been right. The market cap of cryptocurrencies is many times larger than the total value of blockchain and crypto based companies today. This line of thought has become known as the “fat protocol thesis”.

Joel Monegro

Some people who challenge the fat protocol thesis note that the crypto ecosystem already has hundreds of different protocols, with many more coming. If the ecosystem is not interoperable, this creates a ton of complexity. We’re already seeing technology move towards enabling cross-chain transactions, for instance between bitcoin and ethereum. Cross chain interop would mean low switching costs between different protocols. Would this limit the amount of value any single protocol will capture in the long run? Or could a small number of protocols emerge to dominate specific, high-value parts of the total base stack? (Probably transactions, data storage, computing and messaging to name a few.)

Today the fat protocol thesis holds true, and the future may continue in this way, or see value diffusion or concentration into only some protocols.


All the value accretion in protocols is based on the assumption that these blockchains will ultimately end up being useful for more than just speculation. This is where Dapps (Distributed Applications) come in. Dapps are software that allow for a service to be created outside the control of any one entity. This could look like a decentralized version of an existing application (e.g. file storage) or an entirely new use case (e.g. self-sovereign identity). Lightspeed believes that Dapps have a bright future and will create a lot of value. But perhaps more importantly, they offer the potential to codify incentive structures that drive usage, and they reward those who contribute to their creation and development. This is the “fat Dapp thesis”. Today (July 2018) the top Dapps have less than a few thousand daily users, so it’s still early days. But Dapps pose great promise and some really exciting things are being built.

Source: DappRadar


Moving out one more layer from Dapps, we come to the end-user and the third of the proposed theses. If crypto is to really hit the mainstream, users will want generalized access to ‘the network’ with products that make using both protocols and Dapps accessible, simple and safe. The best analogies would be products like AOL and Netscape in the early days of the internet, Google, and Tencent today. As noted above, the bet here is that Crypto plays out just like the internet did, with protocols creating value but companies capturing value

Let’s look at online music and video as a very concrete example. In the early days, people were willing to use peer-to-peer “sharing” software like Napster and Kazaar to download pirated music and movies. They placed their trust in providers of dubious legal status, and they risked viruses. When Apple introduced the iTunes store, and later Spotify introduced streaming, consumers were drawn to intuitive and seamless product experiences that they grew to love.

Source: Giphy

There are a lot of parallels here with the the crypto market. The “wallet” is the best example. Crypto is complicated. Most users don’t want to worry about managing all of their public and private keys, just as they didn’t want to worry about managing all manner of audio files in the early days of digital music. Instead they want the same high quality UX they have come to expect from the internet and their other apps. Ensuring minimal friction means the familiar experience of “login with password”. From their wallet they will be able to easily interact with multiple protocols and Dapps.

Another consideration is the impact of protocol forks. We’ve already seen forks in both bitcoin and ethereum, and many more attempted forks. In a future with infinite forks, protocol level value could get diluted across many different forks. The only thing that prevents forks is community. Will protocols have the biggest communities to prevent forks, or will wallets be better positioned by aggregating communities across protocols and Dapps?

Users are unlikely to want to use many different wallets, just as they don’t want to use many different music stores or browsers. The majority of customers and assets will gravitate towards the most useful and trusted tools. This is already a concentrated market, with Blockchain (a Lightspeed portfolio company), Coinbase, Xapo and a few others holding the lion’s share of wallets and coins between them. This is the “fat wallet thesis”.

Readers of Niall Ferguson’s “The Square and the Tower” will see this as another instantiation of the pattern of disruptive new networks eventually exhibiting a new hierarchy.

Such a centralized outcome may seem at odds with the decentralized ethos of the crypto world. But success of this “fat wallet thesis” rests on the success of the others. Base protocols will only create value over time to the extent that they generate actual economic value and can support real utility. This will only be the case if Dapps prove useful. If protocols and Dapps are not used then no one is going to need a wallet at all.

So should one invest in protocols, in Dapps or in wallets? We think “yes”. Each segment will contribute a crucial component to the overall crypto ecosystem and value creation won’t be confined to only one layer. Rather than bet on a layer, investors will need to pick winners in each layer.

That has been our approach so far, and has been reflected in Lightspeed’s crypto investments to date. My Partner Adam Goldberg has led our investments in DIRT (protocol), Basis (protocol), Unblockable (Dapp), and several others protocols and Dapps which we are excited to announce soon. I’ve led our investments in Blockchain (company), LedgerX (company), Ripple (company and protocol) and BTCC (RIP).

We continue to be active investors across all layers of the ecosystem. If you’re doing something truly innovative in any of these categories, please reach out to Adam (adam@lsvp.com) who is leading Lightspeed’s crypto efforts in all three fields. And if you have a strong PoV that one layer will rule them all, please make the argument in comments!