A look at Web3, the technology driving an inflection point in the web's evolution and explore the latest data to see where we might be headed.
Quick Take
"Web3" has come a long way since last year, when it was still a fuzzy concept with varying definitions focusing to varying degrees on its technological or social aspects.
Since then, there has been some convergence in definitions, with most agreeing that Web3 refers collectively to the dapps it is composed of. But, it may still be hard to see how Web3 is more than the sum of its parts.
Here, we discuss a holistic framework of Web3 infrastructure that shows how dapps are constructed and accessed. We also look at some of the latest figures behind the Web3 economy to get a sense of how activity within Web3 has changed over the last year, both overall and in its subcategories.
State of Web3 in 2022
The buzz around "Web3" did not enter the mainstream until late last year, around the time we published last year's 2022 Digital Asset Outlook. At that time, Web3 was still a very fuzzy concept. Our main focus in that report was on how Web3 and Web2 differ at the level of client-server relationships and how differences in Web3's underlying data structures give rise to new user experiences related to decentralization, ownership, verifiability, and execution (DOVE framework).
A year has passed, and Web3 has developed along with our understanding of it. Here, we present the doors-applications-primitives-protocols (DAPP) framework of the Web3 stack to put it all together. The DAPP framework illustrates how Web3 is built, from the basic protocol layer up to the access layer. Web3's use of open and interoperable blockchain protocols and task-specific primitives set the foundation for use cases that could be considered uniquely "Web3," including NFTs, the metaverse, decentralized autonomous organizations (DAOs), and DeFi.
The DAPP framework highlights the importance of diverse infrastructure providers collectively supporting the various blockchain and peer-to-peer (P2P) networks underpinning Web3. In the near to medium term, these infrastructure providers will likely be vital for maintaining Web3 architecture, given the complexities and costs of self-operated infrastructure for both developers and regular users. This is evidenced by the prolific development of the infrastructure provider ecosystem, where we see significant traction and funding of both "traditional" hosted node networks and novel P2P node networks.
In this report, we first conduct a general survey of the Web3 economy. Then, we focus on the infrastructure and infrastructure providers of the Web3 stack, pointing to various challenges and opportunities moving forward.
The Web3 Economy
We take a look at the latest data on a few of the most pertinent metrics of the Web3 economy, starting at general figures and then specifically at NFTs, the metaverse, and DAOs. Note that while we exclude DeFi here, many consider it part of Web3. For details regarding the DeFi economy, see the DeFi section.
General Overview
First, let's look at Google search volume for the term "Web3." Search interest can be a useful way to track real-time economic activity across various sectors, which can be used for immediate forecasting or "nowcasting." As such, Google Trends data for Web3-related terms can give us some insight into the general Web3 economy by specific geographies.
Figure 220: Google search interest in "Web3" 2021 - 2022 Source: Google Trends
We can also look at active Ethereum addresses (i.e., count of unique sending and receiving addresses per day) as the Ethereum network generates most Web3-related revenue. Active Ethereum addresses give us insight into the Web3 economy as a whole insofar as it explains variance in other Web3 activity over time (e.g., on other blockchains and dapps). The main observation here is that active addresses on Ethereum have generally increased and steadied in recent years.
Figure 221: Active addresses on the Ethereum Network (7DMA) 2017 - 2022 Source: Glassnode
NFTs
NFTs representing unique digital collectibles, art, and profile pictures – as well as NFT marketplaces like OpenSea – are major drivers of Web3 economic activity. In 2021, news of celebrities purchasing NFTs and skyrocketing valuations of some NFT projects also drew much attention to this emerging Web3 space. Since then, many NFT applications were developed and diversified, with the potential to disrupt various sectors, including ticketing, monetization, music, domain names, and fashion/luxury goods.
While NFT trade volumes dropped significantly this year, weekly trade volumes are still in the order of $50 million per week.
Figure 222: Weekly NFTs trade volume by category Source: The Block Data Dashboard
Metaverse
NFTs also play an important role in the "metaverse" – an online world composed of various interconnected and persistent virtual spaces where people can meet, socialize, play, and work together much as they can do in the offline world. For example, in the two leading metaverse worlds – Decentraland and The Sandbox – people can buy pieces of these worlds as NFTs to create and monetize virtual experiences.
To get a sense of how the metaverse economy is doing, we can look at floor prices for the digital real estate of Decentraland and Sandbox. Here, we see that these prices peaked around the same time as NFT trade volumes, with Sandbox floor prices surging more than Decentraland. As of this writing, Sandbox floor prices are only slightly lower than that of Decentraland despite the relative scarcity of Decentraland land (90,000 LAND) compared to Sandbox land (166,464 LAND).
Figure 223: Decentraland vs. The Sandbox land floor price 2021 - 2022 Source: Data Analytics (@mausefalle)
Decentralized Autonomous Organizations
DAOs are also commonly associated with Web3. A DAO can be defined as a "collectively-owned, blockchain-governed organization working towards a shared mission." The backbone of a DAO is its smart contract which defines the organization's rules and holds the group's treasury. People can "own" a piece of a DAO by purchasing a piece of its governance power, much like they can own a piece of the metaverse by purchasing a piece of its land. Those with more governance power have more sway in collective decisions made through proposals and polling (e.g., decisions about how to use the DAO's treasury).
Figure 224 illustrates the total assets under management (AUM) controlled by DAO treasuries and DAO member counts, collectively. What is notable here is that, unlike the NFT and metaverse figures, DAO traction increased in 2022, with AUM holding around $10 billion and member counts rising more than threefold.
Figure 224: Monthly averages of DAO AUM and member counts in 2022 Source: DeepDAO
The DAPP Framework
The app categories discussed in the previous section collectively shape what is becoming known as "Web3." Web3 is an idea born of the dapps it is composed of. What makes Web3 unique is that it uses smart contract platforms to allow anyone to participate without monetizing their data. Moreover, smart contract platforms allow something that Web2 lost as it became dominated by companies providing services in exchange for personal data: decentralization.
While centralization helped onboard billions of people to the web, it also resulted in a handful of large companies having a stronghold on large swathes of the web with unilateral decision-making power. Web3 tries to solve this dilemma by embracing a decentralized ecosystem of apps that are built, operated, and owned by its users. As such, sometimes Web3 is called the "read-write-own" in contrast to Web2 (read-write) and Web1 (read-only).
The evolution of dapps is bringing new infrastructure requirements to the dapp development space. There are increasing demands for scalability, security, and decentralization, as well as a growing awareness to access, operate, and store both on-chain and off-chain data in a decentralized and trustless way.
However, while decentralization infrastructure to support next-generation dapps is developing at a rapid clip, there is still an over-reliance on centralized infrastructure. At one level or another of the Web3 stack, this presents centralization concerns that proponents of Web3 eschew in favor of decentralized and permissionless systems born from P2P and cryptographic technologies. It is only through these latter technologies that Web3 can be built, operated, and owned by its users – the hallmark of decentralization.
In light of the current situation, there are many opportunities for infrastructure providers in the near future. It is currently a technical and financial burden for developers and users to set up and run their own blockchain infrastructure. Developers would rather focus on building and shipping their products, and users prefer to avoid technical complexities when possible.
Here, we present the doors-applications-primitives-protocols (DAPP) framework of the Web3 stack to illustrate where and how dapps can decentralize their infrastructure, and the various opportunities for Web3 infrastructure providers to contribute to operations at each level of the stack. The DAPP framework is broken down into four major layers – starting from top to bottom:
Doors – Enable users to access and interact with Web3
Applications – Connect users with Primitives and Protocols via a user interface and experience
Primitives – The task-specific, interoperable building blocks for dapps
Protocols – Construct the foundational blockchain architecture of Web3
In this report, we dive into each layer and focus on prominent projects building at each layer to highlight how Web3 operates today, where the limitations and opportunities are for infrastructure providers, and what the Web3 of tomorrow may look like.
Figure 225: The DAPP framework of the Web3 stack Source: The Block Research
Protocols
Figure 226: Protocol layer under the DAPP framework of the Web3 stack Source: The Block Research
Starting at the bottom, the protocol layer comprises the blockchain architecture on which all Web3 applications are built. It includes L1s like Bitcoin, Ethereum, Solana, Avalanche, and BNB Chain; scaling solutions like Optimism and Arbitrum; and cross-chain bridge protocols such as Synapse and Multichain.
Base layer L1s may have additional protocols built on top of them that expand their capabilities. For example, Bitcoin's Lightning Network is a L2 payment channel network that enables faster and cheaper Bitcoin transactions. Ethereum also utilizes multiple scaling solutions, including rollups (e.g., Optimism, Arbitrum) and sidechains (e.g., Polygon) to offload execution from the Ethereum mainnet to faster and lower-cost environments, reducing congestion on the main chain. Polygon's general-purpose sidechain has become industry-leading, with over $1 billion TVL in over 300 apps in DeFi, gaming, and more.
Interoperability
With the rise of many L1, L2, and sidechain networks, there is a growing need for cross-chain communication and interoperability to bridge value across the composite network space. Cross-chain bridges aim to serve this purpose by enabling users to move value from one chain to another.
The most popular bridge implementation is the lock-and-mint design. In this design, the original assets are locked in a smart contract on the sending side (e.g., Ethereum), while the receiving network (e.g., Solana) mints a replica of the original token on the other side. Note that this means that ETH bridged to Solana via a lock-and-mint bridge is only a "wrapped" representation of ETH, not ETH itself.
The TVL in Ethereum L1 bridges bootstrapping liquidity on Ethereum alone reached over $55 billion early this year. Though, that value has since declined along with the value of assets held.
Figure 227: Value Locked in Ethereum L1 Bridges Source: The Block Data Dashboard
Furthermore, while the interoperability market has shown promise, it's not without its growing pains. Bridges introduce another layer of systemic complexity to blockchain architecture and introduce points of centralization where assets are bridged from one chain to another. Both technical vulnerabilities and centralized control over bridged funds led to several high-profile bridge exploits totaling over $1 billion cumulatively in the last year alone. Bridges are thus currently a major area of weakness for Web3 infrastructure, where there is a lot of room for improvement. See the Blockchain Interoperability Solutions subsection of this report for further detail.
Protocol Layer Interoperability vs. Modularity
As the protocol layer ecosystem develops, there has been a shift not only toward interoperability between chains, but also modularity, with different chains delegating different tasks. One of the big remaining questions about the future of Web3 is whether the protocol layer will be more about monolithic-and-interoperable blockchains vs. modular-and-stacked blockchains.
We present an example of a monolithic-and-interoperable Web3 where monolithic chains like Ethereum, Solana, or Tron handle the four major blockchain operations – execution, settlement, consensus, and data availability:
Execution – Execute transactions and produce new state commitments
Settlement – Establish transaction correctness and finality; facilitate cross-execution layer communication
Consensus – Reach agreement on transaction ordering
Data Availability – Attest to availability of transaction data and provide transaction data on demand
Figure 228: Example of monolithic blockchain architecture Source: The Block Research
In the monolithic model, chains talk to each other through communication hubs, but a single blockchain protocol handles the four core blockchain functions. Scalability may be achieved via advanced communications protocols (at "Layer-0;" L0) or sharding (at L1).
Next, we present an example of a modular-and-stacked blockchain system where different protocols handle different components and blockchain operations.
Figure 229: Example of modular blockchain architecture Source: The Block Research
In the modular model, different chains are responsible for different blockchain functions. For example, Ethereum may be responsible for settlement and consensus while "outsourcing" data availability to chains like Celestia and execution to chains like Metis.
The monolithic-versus-modular debate is central to predictions about which blockchains will have the most demand in terms of access and usage. For example, in a modular future where the primary data network and execution environment is Celestia and a Celestium, respectively, instead of Ethereum, there would be more need for Celestia infrastructure. To learn more about modular blockchains, see Blockchain Scaling Solutions section.
Primitives
Figure 230: Primitive layer under the DAPP framework of the Web3 stack Source: The Block Research
On top of the protocol layer is the primitive layer, comprising interoperable tools and building blocks that are designed for accomplishing specific tasks. These specific task domains already diversified from transactions to security, storage, computation, analysis, communication, social functions, governance, identification, and more.
Primitives have limited use on their own, but when combined, they act like LEGO blocks that a developer can use to build all sorts of potentially novel and useful user-facing Web3 applications. For example, the creation of Chainlink oracles brought about the possibility of lending and borrowing platforms like Aave and Compound that depend on high-quality, real-world data about asset prices. All three of these protocols are built on audited Ethereum smart contracts. These DeFi platforms allowed crypto investors to leverage their holdings to generate interest via lending, as well as to borrow collateralized stablecoins instead of selling their holdings and incurring a taxable event.
Next, we describe prominent businesses from each category:
Transactions. These tools are the financial primitives enabling various DeFi functions, including buying/selling, borrowing/lending, staking, insurance, and more. So far, in terms of the value held in smart contracts, the leading financial primitives in the Web3 application space center around the first three categories listed here.
Buy/Sell. Uniswap is a DEX built on Ethereum that utilizes AMM technology instead of a traditional order book where individual buy and sell orders are matched. Instead, users pool together two assets and trade them against the pool, with the price determined by the constant product market maker model, X * Y = K, where X and Y are the reserve quantities of two tokens and K is the constant product invarance that must be maintained.
Borrow/Lend. Aave is an open-source and non-custodial platform for users to earn interest on deposits and borrow assets with variable or fixed interest rates. Unlike its main competitor, Compound, Aave also supports flash loans which enable smart contracts of external apps to borrow assets without collateral as long as the liquidity is returned to the protocol within one block transaction.
Stake. Lido is a liquid staking solution for Ethereum that allows users to stake their ETH without having to lock assets or maintain staking infrastructure. It does this by exchanging staking derivative tokens representing the staked token at a 1:1 ratio while also providing daily rewards in those derivative tokens.
Transmission. Smart contracts cannot access information stored outside of the blockchain, so they must rely on "oracles" like Chainlink to bring off-chain data on-chain for smart contracts to use. One of Chainlink's main uses is providing price feeds for smart contracts to access real-world market prices of assets.
Security. Crypto and exploits have gone hand in hand since crypto's inception with no sign of slowing. As such, the Web3 stack needs to include a robust security infrastructure. Trail of Bits is one of the leading blockchain security firms, offering code analysis and recommendations, verification of code correctness, and code analysis tools. Other firms offer on-chain monitoring, identity verification, attack simulations, wallet tracing, and more. See the DeFi Exploits subsection to read more on DeFi-related hacks.
Storage. The metadata and hypermedia associated with NFTs (e.g., JPEGs, GIFs) have set a new precedent for storage requirements that typical blockchains are not built for. Consequently, a new generation of cooperative storage clouds emerged to meet the storage requirements of new Web3 applications. Filecoin and its complementary protocol InterPlanetary File System (IPFS) lead this space and utilize contract-based storage where buyers and sellers negotiate temporary storage deals in open markets. These protocols power NFT.Storage and Web3.Storage, popular options for storing the NFT metadata/hypermedia and Web3 files, respectively.
Compute. Ceramic Network builds on IPFS and other open storage standards to create a general-purpose protocol for computing and processing data. While persistence networks like Filecoin ensure data availability at addressing layers like IPFS, they lack advanced database-like features such as mutability, version control, access control, and programmable logic that enable the computation and state management capacities. Ceramic aims to provide developers with such advanced database-like functionality to complement their existing blockchain infrastructure.
Analysis. As dapps evolve, it is important to keep track of data-driven insights and current market trends. Dune Analytics allows anyone to create SQL queries on blockchain data and visualize the results in charts. Charts are assembled into dashboards that provide an overview of a project's key metrics. Dune users can then explore and share others' queries and dashboards, creating networked crypto analytics by and for the community.
Communication. Matrix is an open standard for interoperable, decentralized, real-time-time communication. It supports chat, Voice over Internet Protocol (VoIP), IoT, VR, augmented reality (AR), social, and more applications. Matrix is evolving to support more P2P functionalities, empowering users to have more autonomy and privacy over their data. For example, users can store their data in IPFS by embedding their own servers into their Matrix client. Matrix powers Element, a Matrix-based messaging app.
Social Networking. Lens Protocol is a composable and decentralized social graph, designed for "plugging in" social networking functions into Web3 applications. It defines core aspects of social networking platforms like users, followers, posts, comments, likes, and so forth for social media apps the next layer up to build on top of. The result is an open social graph on top of which various user interfaces and algorithms can be built. The vertices in this graph are users who mint a Lens profile NFT, while the edges are the social primitive functions. Lens is built on Polygon and was spun out of Aave development.
Governance. Voting is one of the core functions of organizations and governance in Web3, and Snapshot is a popular voting tool for Web3 apps. Most Web3 apps still use a form of coin voting governance – despite its limitations – for "vote signaling," the process of querying what a DAO's community thinks about a given proposal. However, signaling preference using tokens on-chain can incur prohibitive gas fees. Snapshot solves this by utilizing IPFS for off-chain, token-based vote signaling. By recording user votes on IPFS, vote data is stored and shared in a decentralized P2P network while avoiding the gas costs associated with on-chain voting.
Identification. There are promising beginnings of identity systems in Web3, such as the Ethereum Name Service (ENS) – a distributed, open, and extensible naming system based on the Ethereum blockchain. ENS maps human-readable names like "johndoe.eth" to machine-readable identifiers like cryptocurrency addresses, content hashes, and metadata. As all ENS names are ERC721-compliant NFTs, they are non-fungible but still transferable, limiting their use for trusted identification. To build networks of trust, researchers, including Ethereum co-founder Vitalik Buterin proposed soulbound tokens (SBTs) – non-transferrable attestations of identity information.
The kinds of apps that gain the most traction in Web3 will determine which primitives get the most usage. For example, if NFTs are linked to increasingly larger hypermedia, there will likely be increased demand to access and use the major decentralized storage networks like Filecoin/IPFS. If Web3 social networking apps are adopted by billions of users like current Web2 social networking apps, infrastructure providers will need to meet a massive demand to access the basic protocols (e.g., Polygon POS) on which the social primitives are built (e.g., Lens).
Applications
Figure 231: Application layer under the DAPP framework of the Web3 stack Source: The Block Research
At the next level up is the applications layer. Here, protocol and infrastructure layers combine into user-facing applications that prioritize user experience. The Web3 application space is already diverse and expanding, including applications specific to NFTs, gaming, the metaverse, streaming, content, social media, financial services, and more.
Gaming & GameFi
GameFi is a portmanteau of gaming and finance that has rapidly become one of the most talked about application sectors of Web3. While the mechanics and economics of individual GameFi games vary, they do share some common features, including (a) the use of a blockchain, (b) a P2E or play-and-earn (P&E) business model; (c) asset ownership; and (d) DeFi elements such as yield farming, liquidity mining, and staking.
GameFi made headlines in 2021 as the adoption of blockchain into gaming progressed rapidly, primarily through the introduction of in-game assets like NFTs and game tokens. These in-game rewards exhibit real utility for gamers and can be traded in free and open marketplaces, which led weekly NFT sales to flip from being dominated by arts and collectibles to gaming. As such, those building and providing Web3 infrastructure should keep apprised of which games are gaining traction, what chains the games use, and where the game's assets are being transacted.
Figure 232: Weekly sales of gaming NFTs Source: The Block Data Dashboard
Axie Infinity, a turn-based strategy game, was one of the early pioneers of GameFi along with the P2E gaming model. P2E is in many ways the opposite of traditional pay-to-play gaming models, where gamers pay before playing, receive no financial returns, and their in-game assets are controlled by the gaming company. In contrast, in the P2E model, gamers can play without incurring upfront costs (e.g., Axie Infinity Origin) and have ownership and control over their in-game assets, which they can choose to monetize both inside and outside of the game.
However, the P2E gaming model is not without its critics. Many criticize these games as unsustainable, where the profitability of the game centers around new players joining and earlier players cashing out at the expense of those new players. To make such games sustainable (as well as ethical), gamers and developers are advocating a move toward P&E gaming, where the reward of playing is not only profit but entertainment too. Providing real value to users beyond the hope of profit is one step toward solving the problem of retaining players. To know more about the state of the Web3 gaming market, please refer to the Gaming section of this report.
Metaverse. First mentioned in the novel Snow Crash, the metaverse transcends beyond digital asset ownership, P&E, and GameFi. Cryptocurrencies and other digital assets lend themselves to opening new capacities in the metaverse, such as digital economies and access control. Utility tokens like SAND in The Sandbox drive/underpin its metaverse economy and can be earned through gameplay and spent to play the game, customize avatars, buy land, trade assets, and vote in governance. NFTs like the Otherside NFTs providing claims to land ("Otherdeeds") in the Otherside metaverse raised over $300 million for the game's development while providing owners with the right to sell and rent their digital land. Further information on the metaverse market can be found in the Metaverse section.
NFTs. Buying and selling NFTs typically takes place in marketplaces like OpenSea, LooksRare, and X2Y2. While OpenSea remains the market leader, a new cohort of more decentralized NFT marketplaces like LooksRare and X2Y2 emerged to capitalize on growing discontent with centralization concerns over OpenSea.
Figure 233: NFT marketplace monthly volumes Source: The Block Data Dashboard
OpenSea has been criticized for frequent server downtimes, a major data breach, excessive centralization in handling supposedly fraudulent transactions, arbitrarily blocking accounts, front-running their own users, and pocketing all generated trading fees. LooksRare and X2Y2 take a more community-centric approach, handing back trading fees to their token holders and letting their token holders take the helm with governance via token voting.
Looking ahead, these trends highlight the importance of reliability, security, transparency, and censorship-resistance of Web3 platforms and their websites. Decentralized storage and computing protocols could help with improving uptimes and decentralization. Governance tokens can give users a vested interest in NFT marketplaces and put the future of the product in the hands of the community, supporting Web3 ideals, including censorship resistance and permissionless access. An in-depth look into 2022 trends in the NFT market can be found in the NFTs section.
Decentralized Streaming/Compute. Beyond finance, many expect the next major category for crypto applications to be in decentralizing the compute stack. There are reasons to believe that decentralized compute could see explosive growth in the coming years, as we saw in DeFi in previous years. For reference, DeFi grew from less than $1 billion to over $250 billion in value locked in less than two years (May 2020 – Dec 2021).
Furthermore, while some are saying the GPU supply shortage is over, demand is still up since pre-COVID-19 times, and there is a rising demand for GPU-intensive consumer applications like video streaming, and VR/AR, setting the stage for decentralized compute businesses to fill a potentially lucrative demand gap. Even if GPUs are not useful anymore on the Ethereum network following The Merge – which transitioned Ethereum away from GPU mining – they might be profitably repurposed in a new wave of decentralized compute networks. See Mining section for further information.
Projects like Livepeer (decentralized video streaming), Audius (decentralized music streaming), RNDR (decentralized GPU rendering), and Mediachain (decentralized data co-op) are leading the development of this emerging sphere of Web3. For example, Livepeer saw a steady growth in the usage of its video transcoding service – even during this year's market downturn, Livepeer network usage increased by 12% from Q2 to Q3 2022. Comparing Q1 2021 to Q1 2022, YoY network growth reached ~600%.
Figure 234: Minutes of video encoded by the Livepeer network Source: Livepeer Explorer, The Block Research
There are at least three major arguments for decentralized compute:
Censorship Resistance – A fully decentralized compute stack, including both file storage and GPU image rendering, does not have single points of control, such as centralized hosting providers that can arbitrarily shut down Internet services.
Economic Opportunity – Crypto networks can bring more resources (e.g., storage, GPUs) online by tapping into latent supply through P2P economic models like Airbnb or Uber.
Open Composability – The idea of reusable applications and a single or few global APIs enables mashups and interoperability that Web2 has eschewed. But, open-source code and sharing code freely and publicly has proven effective in making software development faster and cheaper. Rapid innovation is supported by the capacity for anyone able to build applications on top of decentralized compute protocols and improve the core infrastructure.
That said, there is a question about costs, as trust-minimization in decentralization incurs additional overhead costs. For example, reliable storage requires paying for multiple backups, service providers have to post collateral to discourage bad behavior, and scaling transaction throughput while maintaining security and decentralization is difficult. The use of open markets of service providers and network effects (e.g., aggregating latent GPU capacity) can help drive overhead costs down.
Livepeer has been able to maintain attractive economics while being trust-minimized by focusing on transcoding live and on-demand video. Transcoding – the process of taking a raw video file and reformatting it for different viewing formats and bitrates – uses a different and mostly idle part of GPUs. And currently, there are millions of GPUs already mining that could earn extra revenue from transcoding for Livepeer as well. Open market dynamics help drive Livepeer transcoding fees down potentially lower than AWS transcoding prices.
As Livepeer and other protocols employ latent GPUs scale, it will be important to track responsiveness and reliability. While Livepeer has seen steady growth, the hours transcoded on its network (roughly ~2 million annually based on Q1 2022 estimates) is still a tiny fraction of the 500+ billion hours of video being transcoded and streamed annually around the world. To increase throughput, Livepeer is working on a fastverification procedure to increase the efficiency of transcoding verification and dispute resolution over faulty transcoding. Such protocol upgrades and new infrastructure are needed to support a worldwide scale, where apps using Livepeer on the backend comprise potentially billions of users.
Social. This emerging area includes Mirror, a decentralized blogging platform that utilizes Arweave infrastructure to store data. All blog posts are available to access permanently on Arweave and are fully controlled by the author. Their site, Mirror.xyz, is one way to view this data in an organized way. So, if Mirror.xyz censors content or inserts paywalls, pop-ups, and so forth, users can simply switch to another client for viewing Mirror posts. Mirror also utilizes Ethereum infrastructure, allowing authors to get paid in crypto, often to their ENS domain.
Lenster is a fully open-source social media app built with the Lens Protocol social primitives. Users who minted a Lens profile NFT can comment, like, share ("mirror"), and curate ("collect") each other's posts on the Polygon chain that Lens Protocol is built on.
Financial Services. Yearn offers a yield aggregator that channels users' funds across DeFi protocols, including Compound, Aave, and Curve, to optimize returns. For trading, Matcha utilizes financial primitives, including Uniswap as well as many other DEXs across chains like BNB chain, Avalanche, and more. With smart order routing powered by 0x, Matcha finds the best prices across exchanges and merges them into one trade, helping users save time and reduce slippage costs.
Doors
Figure 235: Door layer under the DAPP framework of the Web3 stack Source: The Block Research
At the top of the Web3 stack is the door layer – comprising the "connect and ingest" component of the Web3 stack. These are the applications, services, and infrastructure that enable access to Web3 activities. Collectively, they try to solve a three-pronged problem:
A. How can data be brought efficiently from blockchains to applications?
B. How can data be conveniently accessed across multiple blockchains?
C. How to do A and B in a decentralized way?
Without the door layer, there would be no way to engage with any of the aforementioned applications nor the primitives and protocols that they are built from. This is because a user or dapp must set up a connection to a blockchain network to use any of its data. There are three ways to connect to any blockchain network:
Via a self-hosted node – The user or dapp connects to the blockchain network through its own full node. This option requires understanding client software, client settings, and hardware environments (e.g., local or cloud). It also puts maintenance demands in the hands of the user or dapp. However, there are few benefits and many disadvantages for a developer to go this route. The long-term costs of operating and managing a node may be significant, and then there is the potential for lost revenue (and social capital) in the event of any downtime.
Via a hosted node network – A third party provides blockchain infrastructure and the know-how regarding access optimizations and security. This option offloads blockchain maintenance to the third party and can benefit from better responsiveness and reliability, but still runs the risk of service failures by that third party. One of the major advantages here is that centralized decision making by the hosting company can bring about faster shipping of advanced prototyping and development tools.
Via a P2P node network – The newest of the three options, there are now decentralized blockchain infrastructure providers like PocketNetwork and Ankr that incentivize individuals to run full nodes for multiple blockchains. In this way, they can grow large P2P node infrastructure that benefits from increased decentralization and potentially higher reliability with lower costs, while also offering the convenience and simplicity of hosted node networks.
To access hosted and P2P node networks, one must use remote procedure calls (RPCs) – a communications protocol in distributed computing that enables a procedure call in one place to run in a different place as if it were a local procedure call. RPCs are crucial for Web3 activity as they enable wallets and applications to talk with blockchains, bridging Web3 architecture with Web2 architecture.
Figure 236: Web2 vs. Web3 architecture Source: The Block Research
For example, the popular wallet MetaMask acts as a doorway to Web3 by providing a simple way to access the Ethereum network. It does this via RPC calls to an Infura-hosted node by default. Because ConsenSys is the third-party company that owns and operates all Infura nodes, the company could choose to censor this access route to Web3.
However, MetaMask can be set up with a custom network RPC, so if ConsenSys were to force access permissions, for example, the user could choose a relatively decentralized and permissionless network RPC like Pocket Network or Ankr. Nonetheless, note that both Pocket Network's and Ankr's off-chain distributor mechanisms are currently centrally operated.
Figure 237 shows a comparison between hosted networks and P2P node networks. It illustrates how the main difference between these two access configurations is about who owns and operates the blockchain nodes. That is, for hosted node networks, a single company typically controls these nodes, whereas, in a P2P node network, the nodes are controlled by a distributed P2P network of smaller servers.
Figure 237: Web3 hosted vs. P2P node networks Source: The Block Research
After establishing a connection, one can start engaging with all sorts of Web3 applications, including DeFi, NFTs, P2E games, and more. If those applications require high bandwidth and frequent interactions with the underlying blockchain (e.g., a high-activity liquid DEX like dYdX or high-volume trading in a game like Axie Infinity), it is important that the infrastructure connecting wallets and application servers to blockchains is fast and reliable.
For example, in GameFi, there are both fully on-chain games like Dark Forest (all app logic kept on-chain), where every action triggers a blockchain transaction, and off-chain games with native exchanges for trading in-game assets like Axie Infinity and Aurory. The on-chain throughput requirements in these web-scale apps can be extremely large, so it is necessary for the access infrastructure handling the API request and responses to be scalable, responsive, and secure.
Furthermore, as P2E games require the player to first connect to a compatible wallet like MetaMask, we can expect that as the GameFi trend picks up speed, so will the adoption of these wallets and the usage of the access infrastructure they are connected to. It is no wonder, then, that the ecosystem of infrastructure providers has been proliferating to capitalize on this new Web3 trend and the opportunities it brings. We briefly touched on three superapp platforms, including wallets, that are working on a better onboarding journey.
Hardware Centralization Issues
We have only seen glimpses of the potentially disastrous effects of hardware infrastructure centralization, where major dapps have gone offline due to outages from cloud service providers. For example, dYdX stopped working when some parts of its exchange infrastructure went down due to an AWS outage, preventing them from canceling potentially erroneous transactions. Similarly, Infura faced a majoroutage that caused delays in price feeds in late 2020, leading Binance and other exchanges to halt ETH withdrawals temporarily.
Nodes hosted by blockchain tooling services are thought to make up an appreciable percentage of all nodes in some networks. For example, a recent study concluded that three cloud providers (AWS, Hetzner, and OVH) represent nearly two-thirds of hosted nodes for Ethereum and Solana. Also, according to 2018 estimates, Infura operated 5-10% of all Ethereum full nodes, servicing some 13 billion queries per day and supporting ~70% of the top Ethereum dapps.
Such cases highlight the importance of infrastructure distribution in the Web3 space to maintain a secure degree of decentralization, including both hosted and P2P node networks, as well as distributed computing across them. In the ideal case, all vital functions of a dapp would be supported by a distributed infrastructure that is unlikely to stop working all at once for any reason, be it technical failure, censorship, or service closure. In the event of an attack or technical breakdown, dapps would have emergency backup preparations in place to immediately remedy any loss of vital functions.
With regards to censorship resistance, it is also ideal for node infrastructure to be sufficiently decentralized to maintain a permissionless Web3 ecosystem. The RPC layer is particularly at risk of censorship, and therefore, dapps should be built out in a way that protects the RPC layer from any single entity controlling it.
Outlook on Web3 in 2023
The DAPP framework enables one to holistically assess how access to Web3 is instantiated and the variety of factors that impact relative levels of decentralization.
On the one hand, the newest trends in Web3 like gaming, streaming, and social media point to a future where achieving decentralized data access, operation, and storage is more challenging than ever. Decentralized infrastructure requirements for maintaining responsiveness and reliability for such web-scale dapps are a pressing challenge. And for developers, the cons of self-hosting their own infrastructure generally outweigh the pros.
On the other hand, there is a rich and expanding ecosystem of hosted infrastructure providers and P2P infrastructure networks developing to meet the market demand. No solution is perfect, with hosted infrastructure providers potentially creating single points of failure and other centralization concerns and P2P infrastructure networks lacking in terms of devops and tooling. However, both solutions have so far demonstrated excellent reliability under normal conditions.
With massive value stored and transacted in Web3, it is of utmost importance to find ways to ensure security while also maintaining decentralization and scalability – in other words, solving the blockchain trilemma. In the ideal case, the Web3 stack will be supported at all levels by an infrastructure cooperative, where hosted and P2P nodes support each other in blockchain access and operations.
Where infrastructure is most needed will depend entirely on which Web3 applications gain the most traction. For example, if popular Web3 apps demand data availability and integrity of NFT metadata and hypermedia, there may be a significant increase in demand to access and use Filecoin/IPFS infrastructure and other decentralized storage solutions. If computation-intensive application spaces like GameFi and streaming keep gaining traction, we can expect demand for infrastructure that can handle greater loads responsively and reliably. The value or potential value to secure is also a major factor. For example, frequent low-value transactions of in-game items may prioritize infrastructure providing throughput over security, whereas high-value lending and borrowing transactions may prioritize security over throughput.
Storage and computation requirements will likely keep increasing globally. Current trends indicate accelerating digitalization on the horizon, as well as increased demands for 56 mobile communication, IoT devices and infrastructure, and metaverse and GameFi products. All of this points to a deluge of data with no end in sight that will demand not only more storage but also more and more sophisticated storage infrastructure.
For Web3 to flourish, the importance of meeting infrastructure needs cannot be overstated. While Web3's core activity happens at the level of basic protocols like Ethereum, these protocols need more than developers and crypto enthusiasts to thrive. They also need infrastructure providers to make it easier and more economical for both general consumers and enterprise users to ensure reliable and secure access to dapps.
Beyond providing technological support for foundational protocols, infrastructure providers also support a better Web3 experience. User experience is often seen as the final step for unlocking general mass adoption of Web3. Mass adoption would benefit consumers and producers alike via increased revenue, liquidity, and networking effects – major drivers of the Web3 economy as a whole.
