Sylo, Fat Protocols and Fat dApps
A lens to assessing the value of Sylo projects in the cryptosphere.
Blockchain is confusing. It doesn’t help that it’s riddled with scams that make the ecosystem even more difficult to navigate.
At Sylo, we strive to make sure things are as clear as possible. But since we are industry-building, it’s not always as straightforward as we’d like it to be.
We’ve noticed that Sylo often gets categorised as a dApp. Yes, we are a dApp, but we’re also so much more than that. Sylo is also a protocol that other dApps can be built on top of.
Additionally, we are a fully-functioning and feature-rich wallet for a growing list of cryptocurrencies. While we were building our dApp and wallet, we were also building our protocol. As our dApp scaled to become one of the the most widely adopted dApps in the decentralised ecosystem, we had to scale our protocol to handle all of the users, every step along the way.
Let’s Talk Semantics
We’ll make a bold statement here. As it stands, Sylo is one of the most widely adopted and scalable PROTOCOLS for high volume APPLICATIONS in the crypto ecosystem.
If there is difficulty in accepting the last statement, we can at least settle on the fact that Sylo, as a distributed protocol, runs one of the most adopted decentralised applications. A more easily defensible, but separate assertion, is that Sylo is one of the most used app-specific protocols in the crypto ecosystem. This is because Sylo, which runs on SYLO Protocol, is considered one of the most widely-adopted and scalable dApps in the blockchain ecosystem.
We could also say that, arguably, Sylo is the most adopted decentralised MESSAGING protocol and application. This will become important later.
So why does this matter? Why are we talking about semantics?
An introduction to fat protocols
and dApp protocols
Well, it matters whether you think value accrues at the protocol level, at the dApp level, or both. This boils down to the Fat Protocol Thesis and the Fat dApp Thesis.
If that sounds complicated, we will explain.
It’s tough to fathom, much less measure, the amount of value creation on the internet. By value, we mean both societal impact/improvement and economic wealth (the part that is measured by token market caps and blockchain company revenues). However, with new distributed technologies, not only is the measurement of value becoming easier, but the distribution effects of the value are being amplified.
The Fat Protocol Thesis
Historically, value for technology is accrued at the application layer.
This is a fact.
We know this to be true because no singular company, person, or organisation runs, governs, and profits from the internet at aggregate, or as a whole the internet, as a whole, is in the public domain.
For this reason, most of the value accrued in applications and in data that these applications were farming, was from their users. This data was then monetised by selling it to third parties or using it to serve better advertising experiences to their users. A few obvious companies like Google and Facebook should come to mind here.
Because of how value accrued, it was far more profitable for venture capitalists to invest in applications than to invest in protocol-level improvements. In fact, because of how investment was structured and returned to capital, workers and governments at large, applications normally drove the demand for protocol- level improvements.
Let’s use Amazon as an analogy. They essentially built Amazon Web Services (AWS) to help scale their e-commerce businesses, applications and websites. In scaling their business and applications, they realised other companies would likely need similar cloud services. As time passed, Amazon Web Services became far more profitable than the original application it was built to serve. However, AWS itself is still an application that is used by many organisations and is still running on top of traditional internet protocols that are not accruing the value from all of the usage (TCP/IP, HTTP, SMTP, etc.).
If you consider that AWS runs about 40% of the internet, you can start to understand that this is a VERY big opportunity as we scale to new use cases in Web3. Amazon became the most valuable company in the world by figuring out a way to get the closest thing to what we would call protocol-level valuations in AWS, by making it easy and cheap for other applications to run on their infrastructure.
An important distinction is that when we talk about value accrual for AWS, we are primarily referencing cloud based storage. We aren’t talking about other areas of value accrual like identity/data and computational power. Later, we’ll segment out why this distinction is important.
With the advent of blockchain and other decentralised technologies, the internet now has the opportunity to turn the old way of the internet and value accrual upside down. Thin protocols and fat applications become fat protocol and thin applications. Hence the value accrual will also be turned on its head.
In other words, if blockchain and decentralised technologies win out, value will accrue at the PROTOCOL layer because governance and profit will have been democratised. Hence, the value capture will have become distributed. Even if they don’t ‘win out’ and simply exist as a piece of the whole, within that piece of the whole, value accrual will still be flipped.
In theory, we will move from left to right on the diagram below.
At this point, this is more of an observation than a theory. We have already seen fat protocol stacks accruing large swaths of value with thin applications, with lesser value accrual, running on top of them in Bitcoin and Ethereum.
In other words, this is clearly represented in the most dominant blockchain networks where the protocol level stacks, Ethereum and Bitcoin, have the most valuable market capitalisations.
Still, the battle of fat protocols vs. fat dApps is far from over. So while the fat protocol thesis is currently in the lead, it’s still to be determined which theory is the long-term champion.
With that said, tokens and coins — which govern blockchain protocols — are scarce. This is what gives them value.
Keep in mind that the blockchain industry is ripe to speculation as a nascent industry, so valuations can run astray from fundamentals, but over time, arbitrage normally makes the market more rational. So while there are edge cases that may disprove some of these theories, depending on when you read this, over time you’ll see reversion to the mean. In other words — bubbles pop.
However, most of the current value accretion in blockchain assumes usability will catch up to speculation.
The Fat dApp Thesis
The Fat Protocol Thesis is not the only theory in blockchain value accrual. However, most theories center around the same three buckets:
- Base protocols (like Ethereum)
- Decentralised applications (like CryptoKitties)
- Companies building products (like wallets)
Since Sylo is all three, we won’t talk too much about the third bucket. It’s also important to note that most of the wallet and node functionality in the fat wallet thesis focuses on will happen WITHIN decentralised applications.
So it’s difficult to imagine that features of dApps would accrue more value than the dApps at aggregate. Instead, it is more likely they would be a value-add to the dApp at aggregate.
Because of this, we’ll focus on the dApp Protocol Thesis.
Much like the current internet, with Web3 (the decentralised internet of the future), most of the actual usage will happen with decentralised applications (dApps) with wallets and nodes existing within that bucket.
Decentralised apps run on top of blockchain technology and seamlessly integrate with it in ways that create dynamic value. Quite often, dApps are open source and operate autonomously without having a single controlling entity. By removing the role of a central authority, dApps put the ownership of data and oftentimes overall functionality back in the hands of users.
The use case potential is unlimited, as dApps afford the ability for unrestricted creation. For example, dApps could be a decentralised version of an existing application, such as those that involve gaming, digital asset management, and file storage. Because dApps are theoretically more cost-effective to operate and maintain, they could also be utilised for entirely new and innovative applications.
The power of dApps lie in their potential to drive usage by structuring incentives that reward creators and developers.
Jeremy Liew from Lightspeed Ventures put it best,
“If crypto is to really hit the mainstream, users will want generalised access to ‘the network’ with products that make using both protocols and dApps accessible, simple and safe. The bet here is that Crypto plays out just like the internet did, with protocols creating value but companies capturing value.”
With a solid understanding of the fat dApp thesis, we can move to our biggest knock on the fat protocol thesis. When Joel Monegro from Union Square Ventures first theorised about fat protocols and thin applications, he postulated that “the market cap of the protocol [will] always grow faster than the combined value of the applications built on top.” (Monegro 2016).
Therein lies the rub. It’s difficult to imagine a world where the now-nascent decentralised application space will not grow to be more valuable than the base protocols. While the base protocols will likely accrue more value in Web3 than they did in the traditional internet, it’s very difficult to imagine a world with millions of dApps and billions of users in which those dApps don’t accrue more value at aggregate than the sum whole value of the protocols these are built on.
This becomes even more true when you think about the value of application-specific protocols, side chains, and blockchains running in conjunction with ZK-roll ups, which bring down gas fees on the base layer networks. But that is a conversation for another day. If you’d like to learn more about optimistic and ZK-rollups this is a good resource.
Suffice it to say, if applications are only verifying the most important transactions or zipped batches of transactions to the main chain, it’s tough to imagine that each and every dApp would need to verify EVERYTHING on the main chain.
This, in turn, would make operating on main chains far less expensive to operate on top of, which is an unforeseen knock to the fat protocol thesis. With unsustainable gas spikes hampering everyday applications from operating directly on main chains without the usage of side chains and rollups, then the main chains will not accrue the aggregate values that Monegro originally envisioned.
Another knock on the fat protocol thesis is that it may have become a victim of its own success. Because everyone believed the fat protocol thesis from 2016–2020 until the DeFi boom gave ample reason to question its merit. Hundreds, if not thousands, of base layer protocols were funded. With the existence of so many blockchains and protocols, the user experience of switching between chains will be very wonky and likely a worse user experience than Web2.
So many blockchain startups have decided to focus on interoperability between various chains and protocols. If one specific chain does not end up getting the bulk some of transactions of singular dApps, and these dApps not only transact across multiple chains but also build certain components of their usability across chains, then the singular value of any blockchain or protocol decreases in total addressable market they can chase for aggregate market capitalisation.
You can already see this happening with more bitcoin transactions occurring on Ethereum instead of inside the Lightning network.
It’s important to consider that, with the impact of protocol forks, protocol level value could potentially become weakened. A strong community, highly invested in efficiency and performance, helps to prevent forks. It’s worthwhile to consider the idea that either dApps will be better positioned to prevent forks by building communities across protocols or protocols will simply create larger communities to ensure the same outcome.
In short, roll-ups and protocol interoperability paired more nefariously with forks MAY hurt the long term legitimacy of the fat protocol thesis. Yet they may pave the way for the still-nascent dApp space to win out on market caps and valuations long term.
Fat wallet/identity thesis
The final thesis is the fat wallet thesis and the “wallet” is the best example because it mostly focuses on identity and user experience. Because of KYC and AML regulations internationally (specifically focused in the West), it’s important that many cryptocurrency specific actions are regulated. Having to go through KYC and AML for every new dApp and protocol you decide to use is a user experience nightmare.
What’s more, how your data is handled across platforms, how you consent to data sharing, and how the user is compensated for their data will vary across protocols. Thus, dApps will likely be easiest to deal with at the wallet level where your identity and digital assets are all tied into one wallet as opposed to spread across hundreds or thousands of protocols and dApps (as they are today in Web2).
Managing private and public keys can become a problematic barrier for users who don’t wish to expend time and energy keeping track of credentials. These users expect the seamless, secure, and frictionless experience and UX that they are accustomed to with other apps and the internet. A digital wallet should allow users to effortlessly engage and interact with multiple dApps and protocols.
However, just because data is handled, measured, and divided out at the wallet and identity layer does not presuppose or even beg the question of whether it’s actually accrued at the wallet level vs. the protocol or dApp layer. While usability matters, we can assume there will be numerous wallets with high functionality. Eventually there will be a race to the bottom on which wallet is the lowest rent seeker.
Meaning, if there are three wallets with similar UX, users will opt for the wallet with the lowest transactions fees. This would suck quite a bit of value out of the fat wallet thesis unless, like Sylo, Metamask, or Brave, the wallet becomes a dApp in and of itself. Otherwise, users will likely opt for trustless low or no-transaction wallets that are open source and community driven.
Web3 Protocol and Application Layers — Smart Contracts is just one of them
All of this pertains to how value accrues in Web3. Whether you think value will accrue at the protocol layer, the application layer, or the wallet layer — it’s still important to understand the Web3 buckets that these protocols, applications and wallets fall into.
In our analysis of the pitfalls of the fat protocol thesis, most of these can be captured in a steady rebuke against any “one chain to rule them all” component of the fat protocol thesis. However, a likely scenario is there could be one chain to rule each use case.
So let’s look at some of the use cases of the fat protocol thesis. We’ll cover the two largest chains first and their use cases.
Bitcoin: A Secure store of value
Bitcoin seems to be winning, through first mover advantage, the secure store of value use case. Ethereum heads can argue against that to their last breath but, at the moment, no other chain has displayed such an impressive mixture between security and store of value in conjunction. Some stablecoins may exist as superior stores of value long term depending on their pegs and some chains may be more private and/or more secure than bitcoin.
However, nobody is using those chains and liquidity matters when you are talking about stores of value. Maybe Monero has superior privacy and security for $20 transactions, but try moving $20m or $20b and you’ll see why liquidity matters. Tether has held its value while being pegged to the US dollar but who knows whether the USD will outperform BTC long term. Most people in the crypto space are not taking the fiat-side of that bet.
Ethereum: Smart contracts
On the other hand, Ethereum is clearly winning or has already won the smart contracts war.
Remember that DeFi is just one component of smart contracts, which is just one component of the fat protocol thesis.
In seeing how much infrastructure has been built around these two use cases, it’s important to look at other use cases of blockchain technology and protocol level functionality.
Other Potential Fat Protocol Use Cases:
- Mesh networking
- Computation
- Artificial intelligence
- Gaming
- Identity
- Media/Censorship
- Storage
- Networking
- Messaging
Sylo: Messaging as a part
of the Fat Protocol Thesis
This use case is quite obvious since we touched on it in the opening. However, we want to expand into why using decentralised technology for messaging services is so important.
It’s important to note that we aren’t wedging ourselves in here. Every major academic analysis of the Fat Protocol thesis lists messaging as a major building block of the Fat Protocol thesis.
With that said, we’ve already established that Sylo is one of the most widely used messaging protocols and widely adopted messaging dApps in the decentralised ecosystem.
However, it’s important to look at something like DeFi, that is valued between $2b & $3b in market capitalisation based off of just ONE USE CASE of smart contracts. That’s a use case within a use case that has enormous potential and should only grow from here.
So what is the Sylo Protocol/Sylo Network?
The Sylo Network is a decentralised communication and storage network with the performance and scalability to support millions of users. Applications use the network for decentralised, private communication, storage, and micro-payments.
Instead of centralised cloud server infrastructure, Sylo users create the decentralised Sylo Network together by running Sylo Node software on their own computers. By running a Sylo Node, users earn Sylo Tokens (SYLO) in exchange for their device automatically providing critical services to the network.
The Sylo Platform has three major features which separate it from other centralised messaging services.
End-to-end encrypted and p2p
All messages, voice calls, video calls and file transfers on the Sylo platform are end-to-end encrypted which means only you and your intended recipients can see the content of what is sent.
Sylo uses the Signal Protocol for chat messages for ‘forward secrecy’ which means even if one message is compromised nothing else is — each message is encrypted with new keys.
The Sylo Network is built to enable users devices to connect directly (peer to peer) whenever possible which means there is no middle man other than the global internet infrastructure needed to send data.
Sylo Nodes exist to help users connect directly, store encrypted data (they cannot read it) when a user is sent something while they are offline, and will relay encrypted channels when a users device is in a restricted networking environment (most common when using mobile internet).
No central point of failure or data collection
Sylo community members can choose to run Sylo Nodes. Sylo Node operators stake Sylo Tokens as collateral to ensure that they act honestly and fairly. The act of staking then announces their presence as infrastructure contributors to the network.
Without any further user action, their device begins to serve the Sylo Protocol, helping users connect directly (p2p), share privately, host files, and run dApps, all for Sylo Token micro-payments.
‘Layer-two’ micro-payment system
Sylo offers a ‘layer-two’ (off blockchain) probabilistic micro-payments system to enable an ecosystem of micro-services.
Using this system, apps and users pay Sylo Nodes for their work with Sylo Token-backed ‘tickets.’
Micro-services are paid for with off-chain ‘tickets,’ providing very low transaction fees and limitlessly scalable transaction volume.
Each ticket has a verifiable chance of winning a prize of staked Sylo Tokens. While any ticket is accepted as payment, only winning tickets are redeemed on-chain.
Sylo Protocol Use Cases
When you start to think about WHY decentralised messaging is important, it becomes clear that what look like minor use cases now, could be multi-billion dollar opportunities in the future. This is similar to DeFi and smart contracts.
So let’s dive in to some of these use cases, specific to Sylo…
Unlocking Data
With decentralised messaging protocols, platform holders see everything, own everything, control everything. We can’t truly be ourselves, even with those we trust the most, and we cannot fairly benefit from our contributions to the networks we use everyday.
Privacy and Respect
The Sylo Network enables everyone to be both a consumer and a provider of the services that run on the network.
There is no ‘all-seeing’ centralised entity responsible for running the network. Instead, anyone can become a Service Peer, run software and provide a subset of the user base with services.
Having thousands of service providers instead of one removes the ability and the incentive to benefit from users’ data.
Unstoppable Services
On the Sylo Network, developers deploy functionality that organically attracts the resources required to keep running.
Once a service or protocol is deployed, the network will self-organise to provide that service as long as there is demand for it.
The price for each service is determined by its own market: the more people that use it, the more payments flow to Service Peers to provide that service.
Micro-Charging
Every interaction across the Sylo Network has the ability to be charged in Sylo micro-payment tickets, an off-chain payment mechanism unique to Sylo.
These micro-payment tickets allow value to flow efficiently across the network without the need for intermediaries, making space for a plethora of micro-charging models to compete with incumbent systems.
Highly-scalable and with very low transaction fees, micro-payments are the key to unlocking a decentralised future.
Summary
In summation, the Sylo Network is a decentralised communication and storage network that has been built with performance and scalability in mind. Millions of users — and the applications that run on top of our protocols — capitalise on our robust network for messaging and communication, storage, and micro-payments.
Sylo’s entire network infrastructure is built to not just handle — but adapt to — the market demands that both dApps and protocols have created in the crypto ecosystem. This is where value creation becomes key and inherently present in the Sylo network. Because Sylo is one of the most widely adopted scalable PROTOCOLS for high volume APPLICATIONS in that ecosystem, it also becomes a forerunner in decentralised messaging.
But Sylo is diving further into value creation by featuring a platform that offers what no other centralised messaging service does: True, impervious privacy and a level playing field. We achieve this through end-to-end encryption and p2p, no central point of failure or data collection, and a ‘layer-two’ micro-payment system.
Sylo has already successfully introduced use cases specific to Sylo that include highly-scaled, integrated features and capabilities such as unlocking data, secure privacy and respect, unstoppable services like a self-organising network and micro-charging.
With continued focus and research that accommodates the ever-evolving considerations within the Fat dApp Thesis and Fat Protocol Thesis, Sylo offers users the ultimate in use-case adaptability. The Bitcoin and Ethereum blockchains have proven the fat protocol thesis with the infrastructure built around of smart contracts. These successful use cases push us to examine the potential of other use cases of blockchain technology and protocol level functionality that will powerfully transform the future of the crypto ecosystem.
Authored by:
Dorian Johannink — Co-Founder, Sylo.io
Tyler Ward — Founder, Proof Systems.io
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