Research | The Value Capturer after the Fat Protocol Era——Middleware Protocol

Source: IOSG , Author: Jocy & Ray, editing proofreading: Judy, Scarlett


Based on our understanding of the middle layer protocol, we made a classification and combing of the specific subdivision direction of the middleware protocol in the encrypted network.

1) We believe that middleware projects can integrate network resources through compatibility with many underlying blockchains like the HTTP protocol of Web 2.0 , while creating value for many DApps .

2) The middleware project itself can be sandwiched between the top-level application and the underlying blockchain architecture: connecting the top applications, integrating the underlying encrypted network resources, and finally achieving resource sharing, function sharing, and DApp developers Provides great convenience.

3) There is a lot of interoperability and composability potential between the protocols and protocols in the financial middle layer, which can allow some derivative application scenarios to emerge. Sinking, combinable and modular. Their greatest value in the future is to provide a basic framework and basic business logic for many top-level applications.


Viewing the middle layer protocol from the perspective of traditional Internet value distribution


Recalling the Internet stack of Web 2.0, the application layer protocol (Application layer protocol) is located at the top of the Internet protocol stack and directly combined with the application program interface to provide common network application services. We also call these application layer protocols as middle layer protocols ( Middle layer protocol). The most typical example is the "Hypertext Transfer Protocol (HTTP Protocol)", which provides the transmission method for the pictures, animations, audios, and other information on the network we now see. Based on the HTTP protocol, a large number of excellent Internet business models such as Facebook, Amazon, and Google have emerged. The application layer protocol is based on the underlying Internet TCP / IP protocol and provides file transfer, file service, e-mail, virtual terminal and other services for a variety of application terminals, completely unlocking the value of the Internet.
Exhibit 1 Application layer protocols (especially the HTTP protocol) have created the greatest value in the Internet stack. Source: SesameOpen
Compared with the Web 2.0 technology stack, we believe that there are also various middleware stacks designed for the top-level application layer in the Web 3.0 technology stack. But what are the differences in value capture between the middleware stack of Web 3.0 and the middle layer protocol of Web 2.0?

On the one hand, although most of the value of Web 2.0 is created by middle-tier 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, the unique creation of Token completely subverted the value delivery model: the native Token in the middle stack gave them the ability to capture value.

On the other hand, Web 2.0 mainly relies on the huge HTTP protocol 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 top-level applications. The reason for this difference is that the main applications or business areas in the encrypted network need their own unique Token economics design, so they need a unique protocol to integrate the Token economics of the application.

2.0 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 thinking to understand the middleware stack in encrypted networks. We believe that Web 3.0 middleware is a module between the bottom layer protocol (layer1 / layer2) of the blockchain and the application program, which enhances or improves the decentralized collaboration capability or the efficiency of token value transmission.

Exhibit 4 Middleware in the eyes of IOSG (2020). Source: IOSG Ventures

Exhibit 5 The middleware considered by IOSG in 2019. Source: IOSG Ventures


3.0 IOSG VC modular reconstruction of the middleware stack

3.1 Technical service middleware
Some practitioners of traditional Internet origin believe that the Web 3.0 middle-tier protocol industry will have a similar existence to the Internet 2.0 middle-tier protocol platform and services (PaaS) in the Web 2.0 era. We believe that the greatest value of these technical service providers is to improve the ability of all network participants including: nodes, developers, and users to conduct decentralized collaboration.
Source: IOSG Ventures
I. Development Framework

Representative projects: Solidity, Substrate, Reach Platform

The development framework is almost the most important part of technical middleware. In addition to the most popular Solidity language-based Ethereum development framework, the most popular Substrate framework in this field and the newly emerging Reach Platform are all more modular. The automation method greatly reduces the threshold of developers and attracts more people to join the encryption network ecosystem. 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 just done, that is, it abstracts and modularizes all specific issues, which greatly improves development. The efficiency of the developers allows them to focus all their energy on how to make blockchain application products with better UX / UI and better business logic, and no longer need to care about the underlying architecture and logic of the blockchain (Because the underlying architecture of different public chains are completely different).

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 (simple key-value storage and implementation of PatricaMerkle Tree to support lightweight Trustless interactions between clients, network connections, transaction queues, and consensus engines (such as PoW, Aura (Authority Round), and Polkadot consensus).

II. Node Service Operator (NaaS)

Representative projects: Infura, QuikNode, BlockDaemon, Alchemy, DAppNode

The main function of the node service operator in the encrypted network is to provide developers with cloud-based nodes for development and production solutions, thereby saving the developer ’s effort to operate the node and sharing the basic operating system and System management of the node software itself, such as patches and updates .

For example, Ethereum Infura 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 mainnet.

III. Data Index and Query API Service (Data Query and API)

Representative projects: The Graph, Dune Analytics, Dfuse, Infura

Blockchain data indexing and query API services make DApp data access easier and faster . The pain point in the past is 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 Data query API services such as dfuse on EOS provide this approach.

lV. Smart Contract Development Tools

Representative projects: Moonbeam, Edgeware, truffle, ganache

Moonbeam and Edgeware are parallel chains of smart contracts on Polkadot, allowing developers to easily create smart contracts on the Polkadot network. In addition to creating smart contracts, these two platforms also provide smart contract migration services, such as migration from Ethereum-based systems to Polkadot. Truffle, ganache will be used as a smart contract development tool on ETH2.0, the purpose is also to reduce the difficulty of developing smart contracts in ETH2.0.

V. Mining & Staking as a Service

PoW representative projects: Poolin, F2pool,

PoS representative projects: Everstake,, Wetez

The common feature of these two types of services is to obtain value by lowering the threshold for ordinary users to participate in the encrypted network. At the same time, encouraging more users to actively participate in the network can not only improve the security of the entire network, but also enhance the network effect and create richer value.

The mining pool under PoW connects the physical computing power of the individual mining machine to the address of a blockchain mining pool, and then realizes large-scale and simple mining and reduces the mining threshold. The Staking as a Service service provider of PoS also lowers the staking threshold: one is the professional threshold (maintaining the normal operation of the node); the other is the threshold of economic costs (not lower than the lower limit of the number of pledged tokens or unable to participate).

3.2 Financial service middleware
Source: IOSG Ventures
We believe that the middleware of the open financial stack in the encrypted network serves as the value transfer of the original tokens of the bottom network security dimension and the top user application interface and brings an important role to add value to the entire ecology. Among them, the stablecoin protocol and decentralized exchanges play the role of decentralized value transmission. On this basis, there are various financial primitives (Primitive).
3.2.1 Decentralized value transfer
I. Stable currency

Representative project: MarkerDAO

In our opinion, since the current open financial ecosystem is almost on the Ethereum network, it is no exaggeration to say that DAI is the cornerstone of open financial and the most important middleware. The reason is that MakerDAO generates stable currency DAI through ETH provides a persistent foundation for the open financial ecology of many current application scenarios such as: token transactions, commodity and service transactions, long-term savings and other encrypted networks, similar to the traditional financial world. The existence of "fiat money". The system endorses the underlying native asset ETH of the blockchain as a stable currency such as DAI, and reflects the value of ETH and other native encrypted assets on the DAI, so that users in the encrypted network can use stable currency for more application scenarios From this perspective, DAI really acts as a value-added adhesive connecting the bottom encryption network and the top application. MKR as Maker's native token MKR captures value by playing an important role such as "stability fee" to maintain the price stability of DAI.

II. Decentralized transaction agreement

Representative projects: 0x Protocol, Loopring

Figure 6 0x Protocol ecological diagram. Source: IOSG Ventures
0x Protocol and Loopring assume the role of middleware because they allow developers to directly use the matching trading system in the protocol to build a decentralized exchange on top of it. As an open protocol for decentralized transactions, it allows transactions (conversions) between different currencies to be completed more quickly without incurring commissions. Some current exchanges such as: DDEX, Radar, Ethfinex, dEX, imtoken, etc. use the 0x Protocol matching system. In addition, on top of the 0x Protocol, there are other projects that have developed higher-level protocols based on this, such as dy / dx, dharma (see Figure 6).
3.2.2 Provide more financial services on top of value transfer
I. Synthetic Assets (Synthetic Assets)

Representative projects: Synthetix, UMA

Compared with the traditional financial industry, all active financial business scenarios in the financial industry in the encrypted network are still dominated by stablecoins. For some of the more complex financial products similar to the traditional financial industry, such as equity instruments, Put / call options, futures, insurance, etc. are still lacking . And asset synthesis tools such as UMA and Synthetix lay the foundation for a more complex DeFi ecosystem. In the future, we look forward to more financial products like SwanDAI based on synthetic asset agreements.

UMA is a decentralized financial protocol based on Ethereum. It is a business agreement that connects both bulls and bears. UMA provides a smart contract template that allows anyone to create a synthetic asset that tracks the price of any value subject. Its mechanism is very simple, anyone can create tokens that track the price of anything in Synthetic Token Builder based on UMA Protocol, from foreign exchange rates to stock prices. A successful case is currently based on the stable currency tracking index SwanDAI created by Synthetic Token Builder. SwanDAI is a synthetic asset that tracks the deviation of the price of DAI from its US dollar in an exponential growth mode. 100 times up), the contract will be delivered at the exponential price when it expires, so it can let people hedge the risk of DAI decoupling the dollar.

II. Forecast Market Agreement

Representative projects: Augur, Erasure

Augur is one of the most complex technical projects deployed in the Ethereum financial ecosystem. But it has always had problems such as slow loading, clumsy UX, no push or email notifications, long billing time, and no mobile payment. Although it does not provide services to users seamlessly like Web 2.0, its technical agreement itself is extremely valuable. Projects like Veil and Guess have developed user interfaces (UI) based on Augur protocols to improve the user experience (UX) .

Erasure Protocol is a protocol developed by the hedge fund competition platform NUMERAI. The protocol has a series of key primitives with a wide range of application scenarios, including record tracking, payment and recourse . These three economically formed primitives are deployed on the Erasure basic template , Anyone can use it when building web applications. So far, Erasure has developed two applications, Erasure Quant and ErasureBay, based on the agreement.

III. Decentralized Insurance Agreement (Insurance)

Representative projects: Etherisc, Opyn

Etherisc has built a universal decentralized insurance application platform that allows developers to quickly develop new insurance products using this platform. The Etherisc core team has developed some general insurance infrastructure, product templates and insurance licensing as a service, allowing anyone to create their own insurance products. The current scope covers flight delay insurance, hurricane insurance to crypto wallets and loan mortgage insurance.

Opyn's ERC20 option agreement Convexity Protocol provides users with financial insurance services using the concept of financial instruments. We believe that the credit default swap agreement and option agreement they have launched are very likely to serve as the middle-tier agreement in the field of DeFi financial insurance. Derived a wider variety of end-user financial insurance products.

IV. Token Package Agreement (Baskets)

Representative projects: Set Protocol, Bskt, Neutral, Crypto Baskets

Set Protocol From a technical point of view, Set Protocol is a set of smart contracts and an interactive interface. It is based on the Ethereum ERC-20 standard, which is abstracted by a smart contract, fully collateralized, convertible, and combinable. As a token collection infrastructure service, Set Protocol can provide a protocol foundation for usage scenarios including digital currency index funds, exchange-traded funds, and multiple token payment services.
3.3 Social service middleware
I. Decentralized Autonomy (DAO)

Representative projects: ARAGON, DaoStack

We use Aragon as a middleware agreement because it is actually a DAO project that is more focused on providing a secure and universal backbone network for the formation of general organizations, rather than building products around specific decision-making mechanisms. By leveraging the foundation established by the Aragon team, end users only need to use the tools provided by Aragon to quickly form an organization that meets their own specific specifications (see Figure 7).

Figure 7 General design of Aragon organization stack Source: Aragon Github
II. Identity & Credit Scoring

Representative project: Bloom

Bloom Protocol is an identity authentication protocol based on Ethereum, which can be used to develop credit-related products such as identity verification, risk assessment, and credit scoring.

4.0 Value attributes of middleware: network resource integration, token value transmission and protocol composability


In the investment perspective section, we first summarize the changes in IOSG's understanding of blockchain middleware last year and this year. Finally, we will explain in the end why our middleware has the potential to play the role of the largest value capturer in the entire blockchain stack.

On the one hand, based on our understanding of the middle layer protocol , we made a classification and combing of the specific subdivision direction of the middleware protocol in the encrypted network. With the Web 3.0 we did at the end of 2019, our understanding of the middle layer stack Some important updates have been made:

1) Reclassify the on-chain and off-chain protocols among the middle-layer protocols . The purpose of this is to abstractly classify the complicated and complex protocol functions in the middle layer protocol, so that developers can stand in a higher dimension to think about the problem.

2) Separation of on-chain protocols and off-chain services We can more clearly see that many on-chain protocols are composable , which is particularly evident in the open financial ecosystem of Ethereum. These middle-tier protocols related to open finance are not involved in the Web 3.0 technology stack in 2019.

On the other hand, on the basis of the fat protocol theory , we believe that the middleware protocol can absorb the value of network security through the compatibility of many underlying blockchains like the HTTP protocol of Web 2.0, while creating application value for many DApps. The reasons are as follows:

1) The emergence of interoperability protocols (such as Polkadot, Cosmos) enables state and value to be interoperable on different blockchain platforms . Because middleware is not limited to a single blockchain, it can steal value from compatible blockchains. Although the blockchain protocol is fork-free (because most protocols are open source), the mentality and network effects of all users may not be able to migrate to a brand-new protocol in a short time (the new fork protocol cannot be The network effect of completely inheriting the original agreement in time, according to history, in most cases can only be the inheritance part). So when the middle layer has visibility, brand and users on a certain blockchain, if it is newly compatible with a blockchain and provides services for it, then its network effect on other blockchains (awareness, brand, users) Etc.) may give it some advantages in the new chain.

2) The interoperability and composability of the protocols and protocols can potentially lead to some derivative protocols . For example, we can see that on the basis of 0x Protocol, there are also protocols like dy / dx, dharma. We found that most of the DeFi protocol projects have played a more and more sinking, composable, and modular role in the open financial ecosystem. Their greatest value is not in providing user-friendly UX and UI directly. Instead, it provides efficient product development logic for the top-level End-user Interface level Dapp on the one hand, and on the other hand, due to the Lego-style composability between modules, some new application scenarios have been spawned. All of these have led to the "protocol" projects that have actual use scenarios, which have great value for investment.

3) There are quite a few protocols in the middleware stack that play an important role in "token value transmission". These middle-tier protocols all bundle value with their native tokens through methods such as mortgages, commissions, and royalties (such as in MakerDao Mortgage the underlying asset ETH to obtain the stable currency DAI, and then need to pay Maker's native token MKR as a rate to stabilize the DAI price). The economics created by this incentive and differentiated middle-tier protocol may be much larger than the economy created by the bottom layer of the blockchain driven by calculation, in other words, the tokens in these middleware protocols are captured The huge value of will far exceed the tokens of any blockchain.

5.0 References


[1] Chris Burniske. The Defensibility of Middleware Protocols [EB / OL].,2019-02-14.

[2] Lang U., Gollmann D., Schreiner R. (2001) Cryptography and Middleware Security. In: Qing S., Okamoto T., Zhou J. (eds) Information and Communications Security. ICICS 2001. Lecture Notes in Computer Science, vol 2229. Springer, Berlin, Heidelberg

[3] Maurizio Canton. Why Middleware is the Vital Link for Blockchain Success [EB / OL]., 2017-03-23.

[4] Henry He. Blockchain in 2019 will be all about the middle-layer protocol [EB / OL].,2019-01-26.

[5] Howard Yuan. Web 3.0 develops a new engine: These Layer 3 middle-tier blockchain companies deserve attention [EB / OL]., 2019-12-12.

[6] Clayton Roche. Why is DeFi Crazy for Synthetics? [EB / OL].,2019-09-25.

[7] FlatOutCrypto.The Open Finance Series Part 1: MakerDAO [EB / OL]., 2018-09-12.

[8] Kyle Samani.On Value Capture at Layers 1 and 2 [EB / OL].,2019-03-14.

[9] David Hoffman.Ethereum: The Digital Finance Stack [EB / OL]., 2019-07-25.

[10] Kai Wähner. Blockchain – The Next Big Thing for Middleware [EB / OL]., 2016-12-12.