One component of our general fund thesis is that innovation will move up and down the Web3 technology stack. The smart contract space is generally crowded, and operating systems tend to form into oligopolies due to the economies of scale involved in developer libraries, documentation, etc. That being said, the L1 token valuation framework is well understood, which makes it less risky.
This is similar to the fact that once the operating systems(Linux, Windows, Macintosh) in web2 were adopted at scale, applications generated a majority of the value from internet based innovation.
In crypto, it is likely something similar will play out over time. Besides Layer 2 scaling solutions on ETH, we believe the next crucial pieces of web3 infrastructure that are needed likely exist at the layer zero level. The killer blockchain applications that we want to see come to life require additional capabilities and infrastructure beyond smart contract platforms. These are technologies that will power the metaverse; they make blockchains cheaper, faster, more secure, and more usable.
Let’s take NFTs as an example. NFTs need to be stored for long periods of time with high availability.
One great example here is the Arweave blockchain that is purpose built for data storage. Layer 1 platforms are not designed to store large amounts of data; they are designed for computation of smart contract logic. So what should Layer 1 platforms do? They should integrate with purpose built layer zero/web3 infrastructure. That is exactly what the Solana blockchain did with Arweave. Today, the Arweave blockchain is being utilized by 70% of the Layer 1 platforms.
So what is the status of layer zero infrastructure today?
The first movers in this space are Polkadot and Cosmos. These chains allow applications to be built that are homogeneously composable with one another. This is a step in the right direction, but does not solve the problem of interoperability and cross chain communication at scale.
We are actively investing in these types of layer zero infrastructure solutions, and we are very intrigued by Constellation Network’s heterogeneous layer zero composability solution that can integrate and validate data from any data source.
Only then, will the application layer of the web3 stack become a ubiquitous and viable investment play. There are of course exceptions to this, which we will further explore in a subsequent post specific to DeFi. We believe these types of layer 2 utility token investments are still in their earliest iterations, and investors should heed caution. The infrastructure and L1 trade is far from over.
