Martin Saps

The Invisible Protocol Thesis: Tomorrow’s Crypto Unicorns

October 8, 2019


Following the introduction of any new disruptive innovation, there is always a speculative phase to a technology cycle as the market tries to size and time the market opportunity. This is typically accompanied by a period of frenzied experimentation fueled by loose capital. In crypto, this has lasted 5 years since the world realised ‘blockchain’ was bigger than just Bitcoin. Now we are moving into a new phase where until there is real and sustained demand of protocols, and their tokens become productive, there will be no meaningful growth of the underlying asset class. Those that effectively ‘cross this chasm’ will however go on to define the internet as its new bluechip tech stock equivalent.


Invisible Protocols

When people talk about mass adoption they typically mean 99% of consumers. But for that to happen there need to be DApps that not just compete but improve upon Web 2.0 Apps: faster, cheaper, experientially better and possibly more private. But ‘more decentralised’ today is only a necessary quality and compromise in a handful of limited use-cases where either regulatory arbitrage is critical ie gambling, porn, dark markets, capital flight or at the edge of experimentation in DeFi and possibly catering to the micro-transactions of financially excluded, in The West young gamers.

“Any sufficiently advanced technology is indistinguishable from magic.” – Arthur C Clarke

I recently saw a presentation by Casper Labs which paraphrased Arthur C. Clarke saying we needed to make Web 3 ‘seem like magic’. To build on that, mass adoption will only come when we have found ways to abstract away the complexities of web 3’s protocols, and their respective token economies, making them invisible to the average user in the same way HTTP, SMTP etc just make the internet work.

But today, 99% of developers do not use Web 3 protocols either because they don’t know how to, they don’t care to due to constraints and shortcomings or there is no commercial imperative. The hard facts are sub 1% of all developer activity on Github is even remotely related to DLT. This means no real and meaningful dapps are coming anytime soon perhaps excluding a handful of instances such as the browser category ie Brave where a superior product where privacy is a feature compared to the current alternatives is delivered at scale.

So when we talk about a ‘demand led cycle’, we mean demand first coming from developers and then the end users they onboard. At Outlier, we believe this ‪starts with dIaaS (decentralized Infrastructure-as-a-Service) and dPaaS (decentralized platform-as-a-service) with time evolves through to a more decentralized form of BaaS (Blockchain-as-a-Service) resembling and competing with today’s SaaS markets. This will be pragmatic and piece-meal over at least a 10 year cycle as we unbundle The Cloud bit by bit and decentralise the platforms that dominate Web 2.

Let’s call this ‘the invisible protocol thesis’ for the sake of memetics.


Stacking Stacks

One way of making protocols invisible is by providing developers with an end-to-end stack. Some projects are trying to do that centrally with plug-and-play modular based solutions, leveraging a singular general-purpose protocol, and reintroducing accessible and commonly used languages. Others are targeting enterprise through the deployment of out-of-the-box web 2.5 with comfortable, and perhaps comforting, levels of centralisation.

As new developers move into the blockchain space, they are faced with a choice of which ecosystem to join with all major crypto software stacks presently falling into one of two paradigms: horizontal or vertical. Some stacks such as Hyperledger scale horizontally: with parallel ledgers being added to grow capacity in the network and others such as Ethereum, Blockstack, Corda and Hashgraph scaling vertically, with developers restricted to build on the one chain within its specific tradeoffs and limitations.

At Outlier we believe in a third more open and inclusive alternative. One in which developers can leverage an ecosystem of configurable solutions with the freedom to integrate at any layer and on any chain, including their own. And furthermore, one that scales all the way down to hardware providing a bundled set of services to make deployment easier across several functions of say identity, storage, off-chain compute. This proposes to mirror the Application Infrastructure and Middleware (AIM) market with Service-Oriented Architecture (SOA) and microservices. Flexible and adaptable infrastructure that can be easily integrated and reused.

However, in the end, we believe the world needs a mix of approaches for the industry to ‘cross the chasm’ and each can co-exist serving a different niche or segment of the world’s 99% of developers. In many instances these stacks will often be blurred; for example, our CStack (The Convergence Stack) includes Sovrin, which is also part of Hyperledger, which also is exploring interoperability with Ethereum, which is also part of our stack at the Ledger Layer. So, in reality, a stack is just one possible mental configuration of a growing population of technologies with greater or lesser degrees of interoperability.

Today, whilst we definitely don’t have all the protocols we need to fully realise the complete vision for Web 3, which will be a generational project much in the way WAMP or LAMP has been, we probably have come close to the limit the market will bear at this point, especially at the ledger/settlement layer. There are also certain characteristics to ‘money’ as faith in its soundness increases proportionate to time which make it hard for any new entrant to compete with BTC and ETH in that context. However to date both have shown they don’t work as a settlement layer for more specialist, yet fundamental problems, like identity. Nor do we believe should they.

At this stage in the cycle, we believe there simply isn’t the capital left in the system for many new big multi-year infrastructure plays any time soon. This may be more true in The West than in The East, and may change as capital is unlocked from several big projects launching their networks in Q4 of 2019, but on the whole, the principle likely still stands. It is our belief, for any new protocol to succeed it needs to be coming to market directly speaking to a gap in, and becoming an integral part of, a stack already with momentum in order to succeed.

This is why our CStack is open and collaborative growing to over 20 protocols this year and representing over 50m lines of open source code.


The Next Crypto Unicorns

This ‘crypto’ cycle that followed the expansion of financial value in a handful of assets such as BTC and ETH has largely been based on speculation, further fueled by the innovation of the ERC20s, and has been dominated by value capture from intermediaries such as exchanges and wallets acting as distribution channels to onboard new capital into the asset class.

If we think of the consequences to the staking services industry you can see how powerful these unicorns have become in controlling the direction of the proof-of-stake networks themselves, not just the general flow of capital and issuance of new assets.

The unicorns for our next phase will be those that onboard real demand for the intended or unintended utility of networks much in the same way wallets and exchanges did for speculation. Think ‘Red Hats for crypto’; the recent $34bn acquisition of IBM that has helped make the Linux open source initiative the success it is today. These types of organisation will provide middleware that makes stacks easy to use but also a financial layer which allows for stable SaaS business models to emerge on top, and the invisible protocol thesis to manifest. They will likely wholesale the supply of the underlying token as digital commodities to meet the demand they create with innovative new business models and over time replace exchanges as primary distribution channels for genuine utility.

Today, this market is both nascent, often still at pre-seed / seed stage (at Outlier Ventures we are seeing it represent 15% and growing of inbound investment leads), and as a consequence highly fragmented. This means there will inevitably be huge consolidation in this space over the next 3–5 years to create organisations that can scale to meet the demand, in particular of large enterprise customers. Expect leaders like Microsoft and IBM but also Accenture, Deloitte or Oracle to join the party and participate in massive M&A deals.

One important fact that likely accelerates this thesis is seemingly the only venture capital still deploying in this space has what can be referred to as ‘token fatigue’ now demanding more conventional revenue-generating equity businesses either before, alongside or in place of token networks. And in the absence of cash-rich crypto natives financing the big vision web 3 protocol plays these guys will increasingly call the shots.


Bluechip Tokens

So what does all this mean for ‘alts’. Well firstly, it will become increasingly clear to others, not just us and our partners, that many token networks aren’t alternatives to Bitcoin at all.

Demand oriented fundamentals for productive assets will emerge which will better track price to network health like any other commodity as the capital markets around them mature. This will eventually lead to a ‘bluechip’ class of crypto assets whose ecosystems ‘cross the chasm’ into sustainable demand or new revenue-generating commercialisation strategies, subsequently detaching from the rest of the market and cryptocurrencies.

As such we expect indices to emerge to track and make sense of this divergence, with increasing amounts of capital consolidating around them and bringing in new institutional money into the space without their always having to take direct exposure.


So what’s next?

This was really a flag in the sand as we synthesize what we are seeing in the market around us. So please do comment away and politely tell me why I’m wrong.

It has already begun to inform our investment strategy and we have several new investments to announce in the coming weeks which will bring it to life…

In the background, I will be working closely with our Head of Research, Lawrence Lundy-Bryan, over the coming months to further develop this into a proper body of work hopefully on par with our Convergence Thesis paper, and will be qualifying some of its assumptions at Diffusion Dev Con in a couple of weeks time…

On the later, if you haven’t already make sure you RSVP and book your flight to come and join us and 350 developers to bring the Invisible Protocol Theory into being by hacking and making usable and interoperable The CStack of 20+ protocols at Diffusion Dev Con in Berlin on the 19th / 20th October.

Disclaimer: This is not investment advice. Do your own research.

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