Original author: Matti, Zee Prime Capital Original translation: Kaori, BlockBeats
At Zee Prime, we were one of the first teams to formally propose and publish the middleware thesis in early 2021, with the second part coming out in 2022. Middleware includes everything that is not an application or a base protocol. In other words, everything in between.
Another word used for middleware is infrastructure, and obviously that’s the promised land today. All that magical space between L1 and applications is what we should be excited about. Infrastructure is the future. Parallel to AI and ZK is modularity and so on… there’s a lot more industry buzzwords.
Related reading: "Web3 Middleware and Infrastructure Panorama Overview"
Today, many large VCs have to prove their worth while raising large amounts of AUM from those who know little about the space. The reality is that creativity in crypto is very limited and resources for innovation are scarce. That’s why infrastructure has become a default response. It’s an easy fix — a developer’s purgatory.
The crypto space has very few users outside of airdrop hunters, so it wants to redeem itself through the B2B scene. This hints at a warm and familiar thing about making money in Web2 - B2B SaaS - you don't sell to users (because there are no users), but to other businesses (of which there are many).
So when pension fund boards learn that homomorphic encryption isn’t actually a scientific term for “closeted homosexuality,” all eyes turn to the cold technical jargon this infrastructure represents, but they say “Follow the money.”
Selling shovels
There’s a small problem with the crypto B2B concept at the beginning. There are a lot of crypto businesses selling services to other crypto businesses — but who are the customers of other crypto businesses? You guessed it — other crypto businesses.
One thing is missing, and that is money. Without money there is no "B".
Unless there is a VC firm with a lot of money that can't be invested elsewhere and is willing to fund a thriving developer-to-developer ecosystem, or as we call it - dev2dev.
However, this can't last forever, but it can last for a while. 2 years? Right into the four-year cycle (for those who believe in astrology). It's risky, but it has worked in the past.
Acronyms and buzzwords are popular because they can mean anything. In other words, you can use technical jargon so that no one really knows what you are talking about. That's how you end up in a world of mutual adulation fueled by institutional money and focused only on internal developers.
If you can’t see the actual product, then you are most likely the product.
So in Web3, developers are the ones who have perfect product/market fit for VCs, who can allocate capital and then raise new funds because “we need new infrastructure” and “building infrastructure is hard and time consuming”.
What we end up with is the same self-referencing token yield feedback loop, but this time a “composable” infrastructure self-referencing dev2dev ecosystem. It is expected that eventually retail investors will buy into the tokenized developers.
Resources and creativity
The infrastructure does need improvement, but it's questionable whether it should be built from the top down before users arrive.
Amazon was the first user of AWS, which was built for internal use, and by coincidence, not design, it became the core infrastructure of Web 2.
Those with users are most likely to move downstream. I don’t want to burst your ETH-maxi decentralization bubble, but if Metamask exclusively brought their order flow to their builders, then they would be building every single block (which is probably already happening, maybe check the chain?).
Lex Luthor isn’t going to inspire some deep tech media company to go Metamaskless, so this re-centralization attack vector is unlikely to materialize anytime soon. But it gives you an idea of the fragility of the decentralized stack/infrastructure narrative.
Still, the insincere infrastructure narrative is a seemingly conservative bet. It’s a good analogy from the big tech days, and the older generation is interested in it because it’s a familiar concept. So if you combine the sexy buzzword of ZK with the infrastructure SaaS analogy, then institutional investors are attracted.
The predictable returns from selling picks and shovels look very attractive in corporate boardrooms.
BlockBeats Note: In the crypto venture capital space, "Selling Shovels" means companies that engage in infrastructure and services related to cryptocurrencies, blockchain, and other technologies, rather than investing directly in cryptocurrencies. These companies may provide trading platforms, wallet services, blockchain technology development, etc. This phrase emphasizes that companies that provide infrastructure and tools for the entire industry may be more profitable than investing directly in cryptocurrencies.
This is how the drip-drip institutional narrative combines with unimaginative developers and serial entrepreneurs looking for lifestyle businesses wrapped in tech jargon.
It is difficult for large VCs to sell the crazy doubling of cryptocurrencies over the past cycle to their limited partners. In addition, funding creativity is cheap. Great ideas usually do not require large investments. This is why VCs are obsessed with resources, and to them, developers are the 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 flowed into cryptocurrency startups over the past few years, meaning that most of the funds being directed will be outstripped by the very small amount of capital supporting creativity.
The truth is, in crypto, the question of innovation isn’t money, it’s ideas + execution.
Despite the fiercest competition to invest in infrastructure (and the vast resources this requires), today’s high-stakes games are not being played at the infrastructure level. Sayre’s Law applies here:
"In any controversy, the intensity of the feelings is inversely proportional to the value of the issues involved."
This is captured in an oft-quoted line from Henry Kissinger; “University politics are so vicious precisely because the stakes are so small.” When objective differences are small, you need to compete tooth and nail to maintain some kind of difference. That difference is often more imaginary than real, so here are 20 L2s and ZKbs to fund.
After all, VCs capitalized on the L1 narrative. They squeezed all the value out of the space and more. Today, they are refocusing their attention on infrastructure while avoiding the most important question: where are the users? In the process, they are also ignoring existing infrastructure projects that have been building for a while.
Infrastructure Arbitrage
How can stupid money be used creatively to support technology? Are there any infrastructure projects that are truly worth supporting? There are certainly exceptions to the generalization I’ve made, and there are indeed some interesting and important efforts in building Web 3 infrastructure.
As I mentioned earlier, in Zee Prime’s investment space, we have been active in infrastructure for the past few years, and most of what we see now is just recycling old ideas and products or shoehorning them into current trends (ZK, L2, etc.). The difference is that they are gated and not freely available in the secondary market.
While attending the Token 2049 event, I noticed that free alpha provider and "folk hero" Arthur Hayes was quietly promoting Filecoin. This made me realize that playing the infrastructure game in the secondary market could be a solid arbitrage. Infrastructure investment in private rounds mainly relies on illusory innovation.
Innovation often comes with a high price tag, borne by large VCs, and then quickly reduced in price once unlocked. Whether it’s storage or decentralized RPC (something we actually need), account abstraction, indexing, etc., there may be another way to play the infrastructure game.
The early winners of the 2020 DeFi Summer were not teams built by VCs, but rather projects that had been innovating and executing over the long term, whether it was Synthethix or Aave.
If one digs deeper, one can find well-funded teams on the secondary market and buy tokens at a significant discount. Not to mention the allocations are more favorable compared to private rounds. It’s a risky bet, but it’s not the first time the public markets have outperformed VC.
Maybe avoid it when the shiny new toy isn’t actually that shiny and comes with a heavy VC baggage attached. After all, the opportunity to invest in great tech companies is never a matter of a few rounds of private placement or a few months. It’s at least a multi-year opportunity.
If you must bet on infrastructure, consider those experienced, bear-market-hardened teams that have been building for years. After all, Hayes has bigger traps than most VCs, and you know big traps mean alpha.
Disclaimer: Zee Prime has invested in many infrastructure, middleware projects including Filecoin, Pocket Network, Biconomy, Subsquid, etc., so this article represents a biased view.