Between DeFi, play-to-earn games, and the NFT ecosystem, it is clear that crypto is emerging with real use cases, broad-based appeal, and both utilitarian and entertainment value. There is no arguing that decentralized app (“dApp”) and Web3 adoption, regardless of how niche the nature of that adoption feels, is a monumental step for the crypto ecosystem - something we should all celebrate.
However, Web3’s dApp layer is still riddled with adoption friction due to an underdeveloped infrastructure layer. Here’s an example. Your favorite artist is dropping a new set of NFTs, but you’ve never used crypto before. Oh, don’t worry, it’s an easy process:
- Create Coinbase/Gemini account
- Link bank account or card
- Buy ETH with fiat
- Wait 4-5 business days for ETH to settle in your account
- Create Metamask wallet
- Transfer ETH to Metamask. If you don’t copy the wallet address properly, *poof* your ETH is gone
- Access Etherscan and connect Metamask wallet
- Somehow figure out minting on Etherscan because it looks like it was made in the early 2000s
- Get stuck in a gas war and end up paying 6 times the NFT’s mint price
- Congrats you made it to the promised land of NFT ownership!
Given these deficiencies in infrastructure, the reality is that the majority of new dApp adoption is driven by those who already have had significant crypto gains. Those who aren’t crypto native or tech savvy are lost somewhere in the above steps.
Remember the first step from above when buying an NFT? That single step was probably composed of its own 10 steps before Coinbase recognized the difficulty of buying/storing crypto and abstracted away the complexity. Coinbase has since onboarded ~70M new crypto users and $180B of assets. Clearly, unlocking access is valuable. Let’s extend the Coinbase analogy to the current state of Web3. In order to unlock the next wave of Web3 users, we need to further abstract away complexity through infrastructure improvements that bridge non-crypto to crypto. I call this the Crypto Bridge.
Before we get into the Crypto Bridge, let’s do a quick refresher on the Web3 Stack. Multicoin Capital first wrote about the Web3 Stack in July 2018 then released a revised version 18 months later in December 2019. Multicoin includes an incredible amount of detail (you should dive in if interested), but for our purposes I have simplified the Web3 Stack to four primary layers: the dApp Layer, the Middleware Layer, the Infrastructure Layer (base layer and layer 2), and finally the Internet Protocol:
The Crypto Bridge:
The Crypto Bridge serves as a bridge between existing centralized entities and the fully decentralized Web3 Stack, largely intersecting at the dApp Layer. As of now, the majority of these layers are composed of centralized companies, but over time I believe that they will become fully decentralized. For example, KYC could eventually become a self identity solution where tokens are used to access each individual’s verified identity NFT. Once that solution becomes decentralized, it will shift from the Crypto Bridge Stack to the Web3 Stack as a Base Layer Protocol.
Over time, as the Web3 experience improves, the layers of the Crypto Bridge Stack will be consumed by the Web3 Stack until the entire functionality is driven off of intraoperative and decentralized protocols. The fully decentralized Web3 future is many app-infrastructure-app cycles away and the infrastructure currently required to increase crypto adoption is actually infrastructure within the Crypto Bridge.
The current Crypto Bridge Stack is composed of six different layers:
- User Interface: User experience is extremely important for adoption. Big crypto outcomes won’t feel like crypto at all. Decentralized interfaces have made step function improvements, but many still aren’t comparable to centralized alternatives.
- Fiat-First Payment Rails: While much of crypto volume is via crypto wealth appreciation, the large market expanding outcomes will pull new users into crypto (think Axie). To do so, users will need to convert fiat to crypto—currently a 10+ step process, in which you set up three wallets, two transfers, and pay a bunch of fees along the way. Embedding payment rails directly into Web3 experiences will allow users to sign up for the native app, buy the tokens needed to play, and start playing all in the same place.
There are a number of start-ups building in this layer, but competition could come from the existing large crypto native companies (Coinbase, Gemini) or even large payment processing companies being acquisitive (Nuvei buying Simplex). - Regulatory Requirements: In order to transfer fiat, a company needs to be licensed as a Money Services Business with FinCEN (US) and FINTRAC (Canada), have Money Transmitter Licenses on a state-by-state basis, have a BitLicense for NY State, and have an e-Money License in the EU. If a company accepts crypto as payment or has crypto on its balance sheet, it will need to pay taxes on any gains when crypto is sold for inventory or transferred to another cryptoasset.
- Liquidity Access: Buying, selling, and exchanging tokens in a Web3 experience requires access to exchanges. Initially, liquidity access is important for onboarding - do I have the right tokens to use this application? But as apps become more decentralized, each component will run using its respective token (FILE for storage, ETH for compute, etc.). It’s easy to see how complex liquidity becomes within the Web3 architecture.
- Custody Solutions: To interact with Web3 applications, users need to store and control their own tokens. Many solutions are available off the shelf. As we see more businesses start to interact with Web3 applications or infrastructure, multi-user custody solutions with delegated authority will become necessary to reduce the risk of theft or nefarious activity.
- KYC / Fraud Solutions: Fiat-to-crypto exchanges are required to perform KYC user verification and comply with in the same way as traditional financial institutions. Users are required to verify their identity with ID cards, proof of address, and photo verification. Monitoring for fraud is very important; once assets are transferred in a fully decentralized ecosystem there is no way of retrieving them. Leveraging fraud detection software will be critical to building a secure Web3 user experience.
We are seeing the Crypto Bridge flourish to support Web3 applications with a number of companies in each category. As new users adopt Web3 experiences, we will see progress shift back to infrastructure (likely decentralized infrastructure) to further support Web3. Crypto development will continue in this cycle until the fully decentralized Web3 Stack is complete.
I’m excited to see the ultimate development of the Web3 infrastructure. Web3 promises to bring transparency to the internet, ultimately allowing end users to understand each party’s incentives, which is done by integrating transparent economics directly into an application. The Crypto Bridge will be an important part of the journey to increase adoption. I am spending quite a bit of my time researching the space and am excited to connect with those that are building the Crypto Bridge or meditating on the space.
Notes:
1. I am a personal holder of BTC, ETH, AXS, YGG, XYZ and other tokens which aren’t relevant for this post. Canaan Partners is an investor in Rally, Forte, Paxos, Skale Labs, y.at, and Commonwealth.
2. Thoughts condensed through conversations with Bela Pandya at Rally.io, Taylor Monahan at MyCrypto, Edward Woodford at ZeroHash, Jonathan Kelfer at NYDIG, Asad Khaliq at Acrew, Eric Ong at Lightbank, and my colleagues Jared Newman and Brendan Dickinson. Special thanks to John Necef for editing.