Which Web 3 Protocols Are Most Likely to Succeed? A VC Suggests a Common Thread

The existent Web 3 stack is an evolving canvas of composable protocols, each wholly unfastened root and susceptible to competitory projects forking their code. The easiness of gathering a look-a-like task successful the Web 3 abstraction (a mentation of the net that incorporates concepts including decentralization and token-based economics) tin marque it hard to decipher which protocols volition go much invaluable successful the agelong term.

Yet, it is not strictly a protocol’s popularity that increases its semipermanent worth but a operation of its popularity and defensibility. While popularity is casual to measure, defensibility is much complicated, presenting itself successful assorted forms. After evaluating dozens of protocols, I judge the astir desirable signifier of defensibility is usefulness that cannot beryllium easy forked by a competitory project.

Parker McKee is simply a main astatine Pillar VC, wherever helium focuses connected crypto and Web 3 investments.

I telephone this prime a project's “unforkable utility.” Unforkable inferior reflects the hard-to-replicate worth to a protocol user.

To admit unforkable inferior much easily, I identified its six astir communal forms and paired them with examples for context. Interestingly, each six types autumn nether the broader umbrella of web effects. I americium inactive processing this framework. Here is my reasoning successful hopes others tin critique oregon physique upon the ideas.

1. Protocol collateral/liquidity (capital)

2. Protocol liquidity (content)

3. Critical wide of web participants (app layer)

4. Scaled worth + captious wide of web participants (security)

The archetypal benignant of unforkable inferior is collateral and liquidity successful the signifier of capital. By capital, I mean assets on-chain that assistance marque a marketplace run efficiently. For example, the lend/borrow protocol Aave’s beforehand extremity and astute declaration functionality tin beryllium forked easily, portion the project's collateral and liquidity are overmuch harder to replicate.

The borrowers’ collateral connected the protocol forms 1 broadside of the marketplace. The liquidity from the proviso broadside forms the different broadside of the market. Both collateral superior and liquidity superior are unforkable, and paired unneurotic they make unforkable inferior to the user.

At the clip of writing, Aave, the best-known lend-borrow protocol, had the astir collateral/liquidity of each lending protocols, with $11 cardinal successful full worth locked (TVL). As a result, a idiosyncratic that takes retired a indebtedness volition successful mentation beryllium utilizing the best, astir businesslike marketplace for executing ample transactions. The ratio of scaled collateral/liquidity serves arsenic the protocol's unforkable utility.

Similar to superior liquidity, a protocol tin besides spot liquidity successful the signifier of content. Similar to Aave, LBRY (Web 3 Youtube) is simply a two-sided marketplace, but alternatively of borrowers and lenders, LBRY connects contented creators and viewers.

Unlike Aave, though, LBRY’s unforkable authorities is lone recovered connected 1 broadside of the marketplace with the contented creators and their content. A reflector transcript of the LBRY protocol and GUI could beryllium created but the caller task would request to person the contented creators to people their contented connected the caller protocol.

History shows that viewers favour platforms with the astir contented and arsenic a result, the heavy room of contented acts arsenic the unforkable utility. There is besides a affirmative loop astatine play with much contented starring to much creators, who nutrient adjacent much content. Other examples of Web 3 contented liquidity are Mirror and Audius.

A celebrated machine technologist named Bob Metcalfe erstwhile surmised that the worth of a networked instrumentality is proportional to the quadrate of the fig of its users. Hence, the much participants connected a communal network, the much invaluable web entree is to each user.

The champion illustration of this successful Web 3 is simply a hypothetical decentralized messaging protocol (someone delight physique this!!). As the fig of participants connected this protocol grows, truthful does the inferior to each user. After a fixed web reaches a captious mass, adjacent if an incrementally amended protocol is created, the delta successful inferior betwixt the web with each the participants and the protocol with nary participants is truthful large it’s improbable a migration volition occur.

In the lawsuit of the messaging protocol, the unforkable inferior is successful the corporate radical of web participants. Another illustration of this would beryllium a decentralized payments network.

Another benignant of unforkable inferior is the web information spurred by scaled web worth and a captious wide of web statement participants. Whether it is simply a proof-of-work (POW) furniture 1 (base) concatenation similar Bitcoin oregon a proof-of-stake concatenation (POS) similar Algorand, the web becomes much unafraid arsenic worth increases owed to the increasing outgo of executing a 51% attack. Moreover, the much statement participating users determination are connected the network, the much analyzable it becomes for immoderate azygous idiosyncratic oregon radical of users to execute specified an attack.

As Kyle Samani, highlighted successful his portion connected L1 worth capture, “The much unafraid [a furniture 1] is, the easier it becomes for the adjacent marginal idiosyncratic to warrant storing their wealthiness successful that chain.” The logical inference from this affirmative loop (more worth leads to much users starring to much value) suggests determination should lone beryllium a fewer furniture 1 chains that are highly invaluable and exceptionally secure.

Similar to the explanation of “currency,” an plus tin person unforkable inferior if it’s “generally accepted astatine its look worth arsenic a method of payment.” In the crypto abstraction determination are galore assets similar USDC, USDT, etc. that conscionable this definition. Their task teams and communities person scaled their organisation and acceptance to the constituent wherever astir radical volition judge the plus without questioning its value.

For example, if idiosyncratic is fixed Solana USDC, it is much utile to the idiosyncratic if they tin find an speech that volition instrumentality the plus oregon a merchant who volition judge it. This situation is adjacent much acute for caller task tokens. In the lawsuit of an asset, unforkable inferior tin beryllium recovered successful its acceptance by different parties, ecosystems and applications.

The much ecosystems and applications successful which an plus is liquid, the much utile that plus becomes. Using the Wormhole Solana-Ethereum span arsenic the example, erstwhile a idiosyncratic brings an Ethereum ERC-20 token to Solana utilizing Wormhole, they are fixed Wormhole wrapped ether (wwWETH). This is simply a Solana autochthonal plus that represents ETH connected Solana. This caller asset, weWETH, is neat but a cardinal origin successful its inferior is whether oregon not determination is liquidity for it.

If determination is small liquidity for the asset, a idiosyncratic is constricted successful however they tin usage it. When launching a caller plus similar weWETH, creating liquidity is captious successful the aboriginal days, adjacent if that involves partnerships and reward incentives. For an asset, unforkable inferior is successful its extent of liquidity and the fig of locations wherever that heavy liquidity tin beryllium found.

I anticipation the examples supra beryllium that wholly unfastened Web 3 protocols tin execute important semipermanent worth contempt predominant forking attempts. Unforkable inferior is hard to achieve, but has an tremendous imaginable upside.

Still, brushed forms of defensibility similar assemblage and marque that often person proven palmy successful generating worth are besides important to highlight. There are galore Web 2 and Web 3 examples of this phenomenon. I judge that implicit the coming years we volition spot the precise champion projects usage these brushed forms of defensibility paired with the much mechanistic forms of defensibility supra to make highly invaluable protocols.