2014: Blockchain Application Stack(left) = hierarchical stack of functionality
Blockchain base layer with shared data and protocol layers
Decentralized services then independent apps on top that abstract and extend protocol services to end users
2020: Blockchain Application Stack
Can build on top of multiple blockchains, not just Bitcoin
“Overlay networks” = Now“Layer 2”
Better known as“Web3 Application Stack”
Fat Protocols: Thesis that most crypto market value would be captured at the“protocol layer”
Highly debated given that value capture at the protocol layer is driven by the speculative value of the token
Think of it this way: Where does the value of a well-designed protocol stand during a bear market, when speculation is generally negative across tokens?
Token economics is what creates long-term value:“For tokens to appreciate in value, external(outside protocol usage) utility demand is required.”–Henry He
Worth noting that in 2016, token uses cases were less clear. Now, there are hundreds of token-centered protocols and applications whose success we can observe.
Cryptoservices Architecture: Single services independently built on top of multiple“composable” protocols(like microservices, but with sovereign components)
Single services can’t“own” interfaces(like Google or Facebook do) because they don’t control the data
For example, DeFi apps like Zerion use Ethereum & Compound protocols to deliver complete suites of financial services(transactions, borrowing, lending, trading, investing, etc.) without having to build all functionality, infrastructure, and liquidity in-house
Protocols provide specific services across many interfaces and apps share resources and data with no centralized platform risk
Sharing infrastructure also lowers costs, so cryptoservices architecture are great for startups
Therefore,“thin applications” can scale more effectively across markets
Bring Your Own Data: Non-custody approach to handling data
For centralized services, security and regulation makes data maintenance costly
Cryptoservices architecture enables users to move their data from interface to interface using their private key
“Giving ownership and control to the users offloads a lot of costs while fulfilling many of today’s consumer demands.”
Regarding losses in defensibility,“what you lose in control, you gain in potential efficiency and scale”: Businesses can run at very low costs, and apps benefit from each other’s success by contributing to a shared pool of resources at the protocol level
Main question here: How exactly can thin applications create long-term business value and defensibility when everything is open?
Value through the lens of cost = more precise way to think about value, i.e. we can estimate a specific market’s value structure by studying its cost structure
Protocol layer bears most of the cost of production so it requires more investment; therefore, more value has to accrue the protocol layer to maintain equilibrium within the ecosystem
Applications cost less to operate and require less investment, so they naturally demand less of the market’s value
However, because the cost structures of entire crypto networks are so distributed,“investing in tokens will generally get you a smaller piece of what has to be amuch bigger pie to cover your cost of capital.”
The forces driving token prices are chaotic and unclear, whereas, business value of apps is a much more well-known function
Seems to be the case that investments in apps typically = more ownership concentration → higher returns
Growth of cryptonetworks will eventually flatten in growth. Outsized returns on investments will always be where there is concentrated growth, i.e. in high-utility apps
(Worth noting that today, we’re still finding high return opportunities at both the protocol and application layers.)
P2B2C or Protocol to Business to Consumer: When protocols provide specific services that are bundled at the application layer for distribution to consumers
The setup enables healthy competition and pricing but raises the question, yet again, about creating defensibility for businesses in such an open environment
Answer: Application businesses have to create value outside the protocols’ functions, i.e. new business models that deliver value to users outside of what the protocol can already do
“…subscriptions or transaction fees make sense. But as the infrastructure matures and applications become thinner, we need new business models.”
General Strategies for business model innovation:
Building Cost Moats: Centralizing costs and externalities unaccounted for by the protocols
Scale of costs acts as defensibility because it makes it very expensive for competitors to catch up
Could delegation be an example here?
Another example: Externalities that Coinbase captured: fiat exchange and custody
Vertical Integration: Amassing enough users to“become their own supply,” e.g. supply-siders like miners who service their users directly
User Staking: Leveraging tokens to distribute value and upside to users. Users stake an amount of an application’s own token to unlock benefits like discounts or rewards; innovation is in design of token models that allow users to profit from the application’s growth(beyond marginal benefits like discounts)
Question: How can we take this model further into the mainstream?
Is there promise in projects like profit-sharing tokens?
Thin Applications by Joel Monegro