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Analysis: Blockchain powered Web 3.0, Who’ll capture the most value?

Web3.0, blockchain, technology, stack

Imagine 25 years ago, If someone came up to you and said “there’s this new technology called the internet and it’s going to revolutionize the way we live by opening up opportunities for radically new business models…” you’d be very skeptical, to say the least. But it’s easier to conceptualize it right now, as we’re experiencing a paradigm shift in our economy, powered by Blockchain technology leading upto the Web3.0. 

Today, experts believe the state of Blockchain (really all Distributed Ledger Technologies) is still in its nascent stages. Much like how the internet was more than two decades ago. In this article, we’ll explore where the value will be created and who’ll capture most of it, in the nascent Blockchain technology stack.

The internet Vs Blockchain: Shared protocols and big business

In the internet era, a large portion of the value created by the shared protocols (HTTP, SMTP, etc.) was created and captured by the application layer of the technology stack. The internet stack is one of “thin protocols” and “fat application”. A concept introduced by Joel Monegro of Union Square Ventures.

As the markets matured, businesses that worked on application layers, continued to grow bigger. Just look at some of the most valuable companies right now — Alphabet, Facebook, and Amazon. These are all tech companies, primarily working on the application layer and not the protocol layer.

 
Web 3.0, Blockchain

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But in the Blockchain technology stack, it’s inverted. It’s the protocol layer that’s creating and capturing the most value. As explained by Monegro, we need only look at the top blockchain protocols. The Bitcoin Network is currently worth $188 billion but the companies built on it are roughly worth a few hundred million.

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Startups working in the protocol layer of the Blockchain stack have attracted a whopping $7.6 billion to date. Higher than any other application layer startup sector. So what are these startups doing?

These are pure tech startups developing Blockchain protocols, infrastructure among other technical advancements. More than a decade ago, Satoshi Nakamoto developed the first Blockchain protocol for the Bitcoin Network. 

Bitcoin’s product-market fit -

Although Bitcoin was created to become a global peer-to-peer payments protocol, in recent times, it’s increasingly being considered a good store of value. Especially since Bitcoin isn’t correlated with traditional capital markets. Some investors are even considering Bitcoin as a safe haven assets much like Gold, in times of economic wars and political unrest. That’s what is driving value for Bitcoin right now.

But the same can’t be said for other cryptocurrencies. For example, Ethereum, the driving force behind ETH is the usability of Ethereum’s platform for developing dApps. The success of Ethereum as a Blockchain protocol depends on the success of the applications built on top of it. 

So why is the protocol layer in the blockchain stack so important?

Blockchain protocol layer -

The protocol layer in the Blockchain stack is critically different from its counterpart in the internet stack because for the first time building, maintaining and improving shared protocols create value not just for applications built on top of it but also for its creators. How? Cryptocurrencies!

Historically, creators of some of the most commonly used protocols had little financial gain from their genius inventions but with blockchain protocol, a for-profit company can create a protocol and issue and retain some cryptocurrencies for themselves. If their protocol becomes widely used as with the case of Ethereum, the value of their token will appreciate and hence monetize on their hard work.

Further, cryptocurrencies are also a major driving force behind the adoption of Blockchain protocols. Once the price of Crypto token increases, people start noticing it and invests in it. They become financial stakeholders in its success. The entrepreneurs among the initial stakeholders might build applications on top of this protocol layer and as it could further appreciate the value of their tokens.

Quite interestingly, the market capitalization of the Blockchain protocol will always grow faster than the combined value of the application built on top of it. Imagine a situation where an application built on top of a Blockchain protocol becomes widely used and is successful in terms of adoption. This is because the success of the application layers, builds further speculation about the protocol layers, driving up it’s value.

 

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