Explain in detail what kind of infrastructure is worthy of attention in the Web3 infrastructure framework?

The Internet has fundamentally changed societies, individuals and economies. As a tool to unlock unprecedented knowledge transfer, it ushered in the information age as the foundational platform underpinning applications, networks and services.

Explain in detail what kind of infrastructure is worthy of attention in the Web3 infrastructure framework?

The web has evolved over time and will continue to evolve – today we are moving from “Web2” to “Web3”, the next evolution of the Internet. Ask 10 people to define Web3 and you’ll get 10+ different answers, but the Internet is changing as a result of multiple technologies maturing, globalization, and societal shifts.

Web3 embodies many principles – but it promises to be a more decentralized and collaborative internet of data and value. Blockchain and encryption are at the core, but only one of many technologies that this new internet will employ.

The explosion of blockchain and crypto experimentation has demonstrated novel structures and business models: strong network effects, more trustless coordination of stakeholders to achieve common goals, aligning incentives, shifting governance models, defining agreed-upon ownership, Perhaps most importantly – there is value in connected data, all done in a digitally native way.

While blockchain and crypto help create new applications and businesses, it’s important to emphasize that Web3 is an evolution of front-end applications/UX as well as back-end technologies. Web3 highlights greater composability and smarter networking in the technology stack. Whether through smart contracts or machine learning-driven decision-making, upgraded computing networks are better suited for automating and managing high-throughput analytics or surveillance technologies (NLP, computer vision, IoT) and data-intensive use cases (AR/VR, autonomous driving) ,Smart City). Parallel to the explosion of bandwidth in the 2000s to support a growing Internet, 5G deployments and edge computing on the hardware side will converge as processing power (whether through extended blockchain-driven computing and/or next-generation cloud) provides applications and Services open up new possibilities.

Another point that needs to be emphasized is the cultural and social shift (i.e. timing) that is integral to the success of new technologies. A number of trends have been supported over the past few years, accelerated by the COVID-19 pandemic. We have seen significant growth in digital transformation, cashless payments and migration to the cloud. As a society, we are increasingly accustomed to transacting and experiencing our lives digitally. Cryptocurrencies have entered mainstream culture and have grown into a true (though still nascent) asset class. After so many years of talking about “when will the institution enter”, now the institution has finally entered.

Today’s “Web3” is still clunky and full of friction. The next steps are onboarding experience, better UX/UI, proper governance, and superior or novel use cases. However, it would be foolish to bet on a technology as it stands today. There’s a lot of groundwork being done to lay the groundwork. Start with the appropriate building blocks first.

The past 2 years have seen an explosion of innovation – from teams building layer 1 or scaling protocols, new applications and projects, and novel governance or token models. Wherever talent and innovation go, capital will follow. In 2021, $25 billion flowed into blockchain-based projects. Of these projects, those classified as “infrastructure” are the most critical.

So why is infrastructure the key today, not applications?

As Signal founder Moxie aptly pointed out – no one wants to run their own server. As Web3 matures, as with other iterations of the Web, abstraction complexity is a key driver of growth. Managed services and tools enable teams to leverage their strengths and innovate without devoting significant resources to the backend (security, reliability, scalability). When the next billion users join Web3, most people won’t have to care what blockchain or token standard the protocol uses, or jump through hurdles (and fear!) to interact with applications. This is why proper infrastructure, architecture and tools are key. The prospects for this in Web3 are vast, so in conclusion, we can use the framework of the Web3 infrastructure as a mental model of what’s going on.

The evolution of the web and the principles of Web3

Explain in detail what kind of infrastructure is worthy of attention in the Web3 infrastructure framework?

Overview of Web Evolution

Before we dive into infrastructure, it might be useful to talk a bit more about Web3 principles – after all, that’s what all these projects are built for.

  • Digitization: Today, we are in a state of transition from physical information and assets to digitization. Web3 exists in the age of data streams. Physical data can be measured, combined and acted upon with digital information. Backend computing will process information from a variety of sources – AR/VR, IoT sensors and autonomous devices, to name a few.
  • Convergence and maturation of emerging technologies: No technology exists in a vacuum. Crypto and blockchain technology is a key part of the architecture and values. But other technologies are maturing — 5G, AI, edge computing, IoT. Combining more efficient and smarter processing of larger data sets, flexible infrastructure and new business models such as tokens will provide a foundation for the next generation of applications.
  • Ownership of data and assets: Web3 will enable true ownership of data, assets and work. Blockchains are revolutionary because they can track and prove digital ownership. Digital assets—whether fiat, cryptocurrencies, or NFTs—can be user-controlled through wallets. Traceability (and zero knowledge of privacy) allows for the measurement and control of assets or individual contributions. Combined with digital identity, this is powerful.
  • Increased Decentralization of Control and Governance: Cryptocurrencies and blockchains are fundamentally based on issues of decentralization, trust, and coordination. Tokens represent not only assets, but often voting rights or membership cards. Decentralization will always be the scale at which a scoped entity exists. Centralization has its own benefits, but with the first iteration of DAOs, new models of corporate governance, network control, and distributed decision-making are taking shape. More decentralized control will enable platform builders, operators and users to own and have a say in platform development.
  • Composability: Before the Internet, all we had was walled intranets. This is also happening more and more with blockchain, with interoperability being the focus. With open source code, Web3 is built with composability in mind. This means teams can take existing projects or initiatives and build on top of them. This allows for faster development and communication (interoperability) across applications and through technology stacks.

A more mature Web3 will lay the foundation for transforming the relationship between data, value and ownership on the web. Companies, users and networks can share or interact with data or transfer value more freely. So Web3 has a lot going for it, and today we’re looking at a space that’s in the throes of growing pains. That’s why people care about the infrastructure services that lay the necessary foundation for Web3.

So, what is the importance of infrastructure?

Infrastructure is the cornerstone of development. Today, we see it as roads, bridges and utilities, as well as the “digital infrastructure” at the core. “Digital infrastructure” refers to the pipes and services of today’s Internet. Over the past few years, digital infrastructure has evolved from hard assets such as cell towers or fiber optic networks to “upper layer” technologies such as cloud, data centers, and hosted network software.

For Web3, we now define infrastructure as the tools, services, and architectures that allow Web3 applications to be deployed, built, and used at scale. After all, both enterprise and retail must use Web3 in a smoother and more scalable way. Web3 infrastructure comes in many forms – especially one in the decentralized context. A large portion of Web3 projects are inherently decentralized. That is, using tokens or community-based governance. However, decentralization is a scope, and for good reason – there are tradeoffs in funding, user experience, and operational efficiency. Within the Web3 infrastructure, projects and teams are building areas, many of which are using a centralized approach, raising capital through traditional equity financing.

Some features of Web3 infrastructure make it attractive to builders and investors. More predictable revenue, similarity to existing platform/software, more experienced management team, and mission criticality to the ecosystem. This has resulted in funding from Web3 Native/Crypto Capital, as well as growth or venture capital from traditional financial players. So, starting in 2021, these Web3 infrastructure tracks are already starting to take shape.

Guiding Questions for the Framework

When we look at Web3’s infrastructure, there are few guiding questions to support the framework as a way of thinking about the landscape as it evolves:

  • What Web3 services and tools do project teams typically use (“architecture”) and what data, storage or computing (“core infrastructure”) systems support these?
  • What are the operational challenges for builders or agencies in Web3? What “mission critical” or solutions have been developed to abstract unnecessary complexity?
  • What infrastructure services have been and need to be built for certain use cases (e.g. DeFi, NFTs) to be successful at scale?
  • What capabilities are existing companies and projects investing in resources—whether through M&A or organically?
  • How do the components of the Web3 “infrastructure” interact with each other? How well established is each component (i.e. number of projects in the domain, common standards, maturity of the solution)?

Explain in detail what kind of infrastructure is worthy of attention in the Web3 infrastructure framework?

In Web3, one can consider digital infrastructure in three categories of services and products on top of the underlying computing (blockchain) layer – data, value/liquidity, and Interplayers/blockchain enabled services.

Computational Layer (Blockchain and Blockchain-Inspired Technologies): The foundation of Web3 is the Computational Layer. This includes blockchain and blockchain-inspired networks (layer 1, subnets/sidechains, and scaling solutions) on which everything else is built. Since there are many blockchains today, cross-chain/full-chain protocols and on-chain messaging projects have emerged to allow value and information to be exchanged from one chain to another. This is an important point – blockchain networks interweave the transfer of data and value between various stakeholders in a more trustless manner. There is a lot of information about this compute/blockchain layer under development, but arguably this is where a lot of time has been spent and will continue to be invested.

On top of the base blockchain layer, we can divide services, tools, architecture and infrastructure into three categories:

  • Data Contributor: Provides core infrastructure, architecture, and tools for teams to build and operate Web3 projects
  • Value and Liquidity Participants: Building blocks for capital to flow between Web3 applications and participants with less friction (ie high gas and slippage fees)
  • “Interplayers” or blockchain enabling infrastructure: the stakeholders who support and maintain the blockchain/computing network

Note that there are endless nuances in how applications and projects leverage or build web3 infrastructure, but we’ve kept it high. (See Appendix 1 for more in-depth content)

Data infrastructure: Web3 will be an evolution of semantics. This means that machines and computers will need to analyze, send and compute massive amounts of data.

For data infrastructure, there are more “core” or established data infrastructure and “emerging” services and tools that make up the architecture of the development team. Data infrastructure here includes the various tools, services and components that make blockchain data easy to consume or build on.

A brief overview of these data-centric building blocks:

  • Core data infrastructure: management of nodes and API providers for interacting with the blockchain, decentralized data storage, block explorers for tracking transactions, and indexing/querying services for efficient access to data
  • Emerging/adjacent data infrastructure: tools and managed services that interact for developing applications; this includes everything from developer environments to assisting with code delivery, code auditing, SDKs (e.g. privacy/zero-knowledge toolkits), and digital identity services
  • Tools and hosting services to assist with Web3 use cases: NFT-related and DAO/community-operated services. Examples include NFT analysis or low-code NFT creation, organizational financial management, voting platforms, and community onboarding tools.
  • Value and Liquidity Infrastructure: A key innovation of Web3 is linking information with value at the most basic level – possibly due to agreed and verifiable ownership.

For Web3, value is intertwined with the core functions of operating the network, whether through governance, security, or utility token incentives. But the value without liquidity is not worth much. For all types of capital flowing into Web3, value needs to be protected, in and out, distributed, transformed, accessed, and allowed to flow through the ecosystem without too much friction (i.e. gas, slippage, or royalties should not affect activity extremely destructive).

Therefore, many players provide the building blocks of “value or liquidity”:

Today’s “core” value infrastructure includes:

  • Wallet: Gateway to Web3, wallet is the main interface for users to interact with blockchain, tokens and applications. Recently, we’ve seen wallets become more like “browser”, which is a good step in onboarding
  • Custodians protect (institutional or large retail) capital, exchanges convert value across ecosystems and tokens, and on- and off-ramps for existing payment infrastructure (e.g. fiat, credit cards)

Emerging value and liquidity infrastructures include:

  • Dashboards and analytics for portfolio management; DeFi or exchange aggregators to enhance liquidity and institutional trading infrastructure for efficient markets
  • Assist with adjacent services in capital operations – primarily tax, compliance, regulatory and cybersecurity (to preserve value) services
  • “Interplayers” and Blockchain-enabled infrastructure: We have emphasized that the core tenant of Web3 is the combination of value and data that blockchain technology allows. Therefore, there is the infrastructure to support the blockchain computing layer, which drives the ability of value and data services to be successful.

Interplayer / Blockchain supporting infrastructure includes several subcategories:

  • Network maintenance: Cryptocurrency miners (for proof-of-work networks), staking services, and validator services allow for easier network support or maintenance; these facilitate transaction processing, voting (via delegation), and network incentive sharing (e.g. block award)
  • On-chain analytics: These services are popular today for compliance or transactional use cases, providing dashboards and tracking for activity in the compute layer. Very helpful for the numerous hacks or security breaches in today’s cryptographic applications.
  • Emerging Supporting Infrastructure: On-chain communication and messaging protocols are receiving increasing attention, as highlighted in EthCC 5 this summer, as they continue to evolve, we can include Omnichain protocols or bridges here device.

Combining each other – Illustrative NFT project:

Using this mental model on a Web3 infrastructure, let’s see how everything fits together through an illustrative example of a community-managed NFT project. (For the more technical reader, a more in-depth look at the components of the framework is in Appendix 1)

  • First, let’s choose the Ethereum network to start the NFT project. Miners and staking providers are used to secure and support the network by processing transactions.
  • Now, we need to build the NFT. The team might use the NFT’s developer kit or write their own smart contracts in a standard development environment. They will utilize a data storage provider like IPFS to store the actual NFT information. If this is a large or complex project, a smart contract audit firm may be hired prior to launch. At launch, the team will be looking to offer the collection in markets such as Opensea.
  • Community participants will need a wallet to store NFTs and pay with ETH. They might go into an exchange or pay with a card through another entry point such as Moonpay. Note that cryptocurrency exchanges, wallets, and marketplaces utilize block explorers and API providers to communicate with the Ethereum blockchain (for example, when you exchange ETH for NFTs).
  • Finally, community and governance. NFT project teams may use MPC or multi-signature wallets or custodial solutions as their vaults. Operational tools such as counts can be used to manage their community vote proposals. Meanwhile, sophisticated players may leverage on-chain or NFT analytics to measure activity, create dashboards, and manage their own portfolios.

Concluding thoughts:

It may not be obvious today, but even looking back a few years, the rate of growth and innovation in Web3 is incredible. Over the past few years, we’ve embraced a whole new asset class, with some of the brightest minds, biggest companies and massive amounts of capital joining the innovation. Mass adoption will improve regulation, onboarding, new applications (with real revenue), business models, social structures, and technological infrastructure.

For the critics, we’re not there yet. But there’s a lot being built and exciting. We are experiencing the development of a new industry in real time and interacting in the digital age as society learns. Criticism is definitely needed. But as builders tackle every iteration from privacy to scalability, we’ve seen experimental results in new governance models, digital or physical hybrid businesses, and the power to incentivize aligned networks. Now is the perfect time to build and I’m excited to see where things are going.

Author’s Note: See Appendix 1 for more details on the Web3 infrastructure framework, and Appendix 2 for useful reading on the subject.

About me: Tech investor from NYC, currently based in San Francisco. I first fell down the Web3 rabbit hole in 2016; this turned into co-founding and leading one of the first university organizations focused on blockchain education, development and research in 2017 – Cornell Blockchain. Previously, I was an investment banker at Evercore, focusing on communications and digital infrastructure, where I helped the company enter the Web3 space and spent some time investing in credit at KKR. Passionate about supporting the development of the network.

Appendix 1: Web3 Infrastructure Framework – Deep Dive

Data Infrastructure:

Core data infrastructure:

  • Nodes and API infrastructure: At the core of Web3 application functionality, node providers provide APIs and RPCs (remote procedure calls, allowing programs to talk to the blockchain) through a usage-based revenue model. Example: Alchemy and Infura
  • Data storage: Many types of data do not make sense to put on the blockchain for efficiency and cost reasons (eg video and most front-end content). Decentralized storage solutions and services built to support extended usage fill this gap. Examples: IPFS and Arweave; Pinata and Ceramic
  • Data Flow – Queries, Indexes and Oracles: Data is distributed among nodes in the blockchain. Querying and indexing protocols are critical to making this data readily available through APIs. Likewise, oracles feed data from external systems to the blockchain (e.g. weather data, token prices, etc.), acting as an on-chain API for smart contracts. Example: The Graph, Chainlink
  • Block Explorer: A blockchain explorer is a search engine for data showing the flow of funds or the status of transactions in a blockchain network. Wallets like Metamask will use API calls to prevent browsers from displaying items like recent transactions. Example: Etherscan, Blockchain.com

Emerging data services and tools:

  • Developer Platform/Toolkit: Developer tools help teams create, test, and debug their software. This includes tools that make it easier to develop applications such as SDKs. Although more developer environments have been established for EVM-compatible chains, these chains use similar tools as developers build applications on non-EVM chains. Example: Hardhat, Truffle, Aleo
  • Smart Contract Auditing: As a critical part of the blockchain development process, auditors are relied upon to ensure the robustness and security of code prior to public deployment. Example: Open Zeppelin, Trail of Bits
  • Digital identity: The core tenants of Web3 depend on digital identity – which may include key attributes such as KYC or permissioned access. Projects here are building services such as single sign-on (SSO) with wallets or Web3 identities such as “.eth” domains. Example: ENS, Spruce
  • NFT tools and services: As NFT use cases have grown, a wide variety of tools and services have emerged to support the ecosystem. Projects range from analytics to developer studios, NFT toolkits, aggregators and marketplaces. Example: Opensea, Rarity Sniper, NFTrade, LooksRare
  • Community building and operations: With the growing popularity of DAOs (Decentralized Autonomous Organizations), many have encountered logistical and operational challenges. Several projects have emerged to help with collaboration, discovery, operations, money management, launch and analysis. Example: Coordinate, RabbitHole, Snapshot, DeepDAO, SuperDAO, Tally

Value and Liquidity Infrastructure:

Core Value Infrastructure:

  • Wallet provider: As the main interface for most of Web3, wallets can not only store value (digital assets), but also realize on-chain identity and interaction with dapps (such as DeFi). There are several types based on specific needs in terms of security and user experience. Example: Metamask, Rainbow, Coinbase Wallet
  • Custodians: Qualified custodians are essential for widespread adoption of digital assets. Trusted custody, record keeping and management of assets is an organization’s first step into Web3. Example: Anchorage Digital, Fireblocks, Gemini, Qredo
  • Exchanges and Markets: Value cannot be maintained without liquidity. Exchanges and markets are essential. There has been a lot of mergers and acquisitions in the exchange space as companies seek to build a suite of asset management products. Example: Coinbase, FTX, Uniswap
  • Fiat on-ramp: Many users on-ramp through centralized exchanges (ie, exchanging fiat for crypto), but as Web3 grows, the fiat and crypto tracks must become more seamless. Today’s platforms provide integrations for dapps, allowing actions such as purchasing NFTs with credit cards. Example: Moonpay, Wyre

Emerging Value and Liquidity Services:

  • Liquidity and Defi Tools: DeFi has gone through many iterations, and the importance of proper liquidity and portfolio management in the ecosystem cannot be overstated. Projects range from dashboards to decentralized exchange aggregators to trading infrastructure. Example: 1inch, Bloxroute Labs, Talos
  • Tax Services: With the development of tax guidelines, accurate tax and accounting tools for Web3 or Defi activities are essential for any organization. Example: Koinly, Taxbit
  • Compliance: Especially important for DeFi, projects here focus on transaction monitoring, KYC, AML, and regulatory compliance. Example: Elliptic, Coinfirm
  • Security: Current cybersecurity services in Web3 are still in their infancy, mostly bounty platforms or crowdsourced threat detection. Example: Immunefi, Polyswarm

Interplay Infrastructure (Blockchain-enabled infrastructure and architecture)

  • Cryptocurrency mining and staking providers: Infrastructure that supports the computing layer (blockchain and similar technologies) in Web3. These process transactions and verify them through mining or staking to help secure the network. These providers run node infrastructure and allow users to participate in staking rewards by distributing funds. Example: Core Scientific, Foundry, Whinstone, Blockdaemon, Figment
  • On-chain analytics: Blockchains contain vast amounts of data that provide useful information to all participants in the ecosystem, from governments to traders. Metrics include transaction data, wallets, and user activity. On-chain analytics services aggregate useful metrics and provide dashboards to visualize blockchain data for due diligence, discovery, market sentiment, and more. Example: Chainalysis, Nansen, Dune Analytics
  • Cross-chain bridges, on-chain messages, and full-chain protocols: In traditional Internet infrastructure, “message/network” is a key concept. Since Web3 may encompass a multi-chain/computing future, protocols that allow blockchains to interoperate are the foundation of a unified ecosystem. This could come in many forms, from single-chain bridges, to multi-chain bridges, to interoperability protocols. On-chain messaging is also under development (e.g. between wallets, combining transactions with direct messaging for use cases like reconciliation). Example: Wormhole, CCIP (Chainlink), Layer Zero, WalletConnect, EPNS (Ethereum Message Notification Service)

Appendix 2: Useful Additional Resources and Frameworks

Posted by:CoinYuppie,Reprinted with attribution to:https://coinyuppie.com/explain-in-detail-what-kind-of-infrastructure-is-worthy-of-attention-in-the-web3-infrastructure-framework/
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