At Zee Prime we were one of the first who formalized and published the middleware thesis back in early 2021 and followed up in 2022 with part 2. The middleware included everything that was not an app or the base protocol. In other words everything in between.
Another word for middleware is infrastructure and apparently, this is the promised land these days. All of this magic space between L1 and the application is the thing we should be excited about. Infrastructure is the future. Alongside AI and ZK…and modular stuff and you know…more buzzwords.
Lots of big VCs these days have to justify their existence while amassing large AUMs from those who understand very little about the space. The fact is, there is very little creativity in crypto and innovation is in short supply. That’s why infrastructure is a default response. It’s an easy way out - a developer purgatory.
As there are very few users in crypto besides airdrop-hunting bots, crypto redeems itself in a B2B narrative. It is hinting at a warmly familiar thing that makes money in Web2 - B2B SaaS. You don’t sell to users (as there are none), you sell to other businesses (of which there are plenty).
So as the boardrooms of pension funds learn that homomorphic encryption is actually not a scientific term for closeted gay, everyone gazes towards the coldhearted technobabble that this is the infrastructure. Follow the money they say.
Selling Shovels
There is a small problem with the crypto B2B concept in the introduction. There are plenty of businesses in crypto selling services to other crypto businesses - but who are the customers of the other crypto businesses? You guessed it - the other other crypto businesses.
One thing is missing and that is money.
There’s no B without money. Unless, there are VCs with a bunch of money (that can’t be shoveled anywhere else) ready to subsidize the thriving developer-to-developer ecosystem, or as we call it - dev2dev.
This however cannot last forever BUT it can last for a while. Say 2 years? Right on for the 4-year cycle (for those who believe in astrology). It’s risky but it has worked in the past.
Acronyms and buzzwords sell well because they can mean anything. In other words; you can technobabble yourself to the point where no one actually knows what you’re talking about. This is how you end up with an inward-looking developer circlejerk pumped by institutional dollars.
If you don't see the actual product then the chances are you are the product. So at this point, in Web3, devs are the product with a perfect product/market fit for VCs who can allocate capital and then raise new funds because “we need new infrastructure” also “building infra is hard and takes time”.
What we end up with is the same as the self-referential token yield feedback loop but this time it's a “composable” infrastructure self-referential dev2dev ecosystem. It is expected that in the end the retail normies buy tokenized devs.
Resources vs Creativity
Infrastructure indeed needs improvements. But it’s questionable whether it should be built top-down before the users come. Amazon was the first user of AWS which was built for internal use and only by coincidence, rather than a design, it became the core Web 2 infra.
Those who own the users are in the best position to build downstream. I hate to burst your ETH-maxi decentralization bubble but if Metamask funnels its own order-flow exclusively into its builder they build every single block (could have already happened, maybe check the chain?).
It’s not in Lex Luthor's interest to inspire a rebrand of a certain deep-tech media company to Metamaskless so this re-centralization attack vector is unlikely to materialize anytime soon. But this gives you an idea of how fragile the decentralized stack/infrastructure narrative is.
Nonetheless, the disingenuous infrastructure narrative remains a seemingly conservative bet. It’s a great analogy from the big tech era, boomers are receptive to it because it’s a familiar concept. So if you bundle a sexy buzzword of ZK with the infrastructure SaaS analogy - the institutional investors are biting.
The predictable returns of selling picks and shovels look so good when served hot in the corporate boardroom. This is how the trickling-down institutional narrative meets the unimaginative developers and serial founders looking for lifestyle business wrapped into a technobabble moonshot.
The big VCs will hardly sell doubling down on this past cycle’s crypto insanity to their LPs. Also, it is cheap to fund creativity. Great ideas usually do not require heavy investments. That is why VCs will obsess about resources and to them developers are resources that need to be funded.
What I expect is that the next innovation trigger will be funded by 1% of the capital that has been flowing into crypto startups in the last few years, meaning the majority of money funneled into resources will be outperformed by very little capital backing creativity.
The truth is money is not an issue of innovation in crypto - ideas (+ execution) are.
Although in funding infra (and the heavy resources this requires) one finds the most competition, the high stakes games today are not played at the infrastructure level. Sayre’s law applies here:
"In any dispute, the intensity of feeling is inversely proportional to the value of the issues at stake."
This is embodied in a quote often attributed to Henry Kissinger; “The politics of the university are so vicious precisely because the stakes are so low". When the objective differences are small you need to compete ferociously to maintain a difference of one sort or another. The difference is often more imaginary than real so here are twenty L2s and ZKbs that need to be funded.
After all, VCs maxed out the L1 narrative. They squeezed all the juice from that lemon and more. Today they refocus on the infrastructure while avoiding the most important question; where are the users? Along the way, they conveniently overlook existing infrastructure projects that have been building for a while.
Infrastructure Arbitrage
How to creatively leverage dumb money backing the technobabble? Are there infrastructure projects that are actually worth backing? - There are exceptions that will test the generalization I put forth. There are certainly interesting and important efforts in building the Web 3 infra.
As I have mentioned before, on the investment side at Zee Prime we have been active in the infrastructure in the past years and most of what we see today is just recycling the old ideas and products or shoehorning to fit current trends (ZK, L2, etc.). The difference is; that they are gated and not freely available on the secondary market.
While attending Token 2049 I noticed that the free alpha vendor and people’s champ Arthur Hayes was subtly shilling Filecoin. This made me realize that playing the infrastructure game on the secondary could be a solid arbitrage. The private rounds infra bets are banking on novelty that is mostly illusory.
The novelty often comes with a high price tag borne by big VCs only to then race to the bottom once the unlocks materialize. There could be an alternative way to play the infra game. Whether it’s storage or decentralized RPC (something we actually need), account abstraction, indexing, and much more.
The early winners of the 2020 DeFi summer were not teams manufactured by VCs but projects that have been around innovating and executing for some time, whether it was Synthethix or Aave.
If digging deep one can find well-funded teams with heavily discounted tokens on the secondary market. Not to mention much more favorable distribution to its private round equivalent. It’s a risky bet but it would not be the first time the publicly traded market outperformed the VC benchmark.
When the shiny new toy in fact is not that shiny and it comes with heavy VC bags attached, maybe one could avoid it. After all, the opportunity to fund great tech companies was never a matter of a few private rounds, nor a couple of months. It was at minimum a multi-year opportunity.
If you must bet on infra, maybe consider the experienced and bear market-harden teams that have been building for years. After all, Hayes has much bigger traps than most VCs and you know big traps equal alpha.
Thanks to Jakub, Kpop Luffy, Rap, Dermot, Ivan, Catrina, and Evan of Portal Ventures, for conversations, proofreading, and useful comments.
Disclaimer: Zee Prime has invested in many infrastructure/middleware projects including Filecoin, Pocket Network, Biconomy, Subsquid, etc. so this represents a biased view.
Great article Matti!
Its always been my issue with the crypto space. Infra upon Infra when 99% of the internet don't even use crypto apps. And the few who do stop at centralised exchanges. Clearly the focus should be on getting users. Axie did this excellently in my opinion.