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Grayscale parent company DCG: Why is 50% of the new portfolio middleware?

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Reasons to be bullish on this niche track.

Source: Digital Currency Group

Original title: Building Web 3.0

3. Beat Blockbeats

Apart from the "greyscale effect" that has quietly formed in the wake of the surge of institutional investment in cryptocurrencies, the actions of greyscale's parent company, Digital Currency Group (DCG), are also attracting attention. Founded in 2015, the company is a diversified holding and investment group that has invested in CoinDesk, Kraken, Coinbase, Blockstream, eToro, Zcash, Dune Analytics, Coinlist, and many other well-known teams and projects, in addition to creating Grayscale investments.

On March 2, 2021, DCG unveiled a new focus on "Building Web 3.0," which addresses the important role middleware plays in the ecosystem. In addition, DCG also disclosed for the first time that seven of its 13 new investments between the second half of 2020 and the first quarter of 2021 include middleware projects. The following is the original translation of the Rhythm Blockbeats. See the link to the original English version at the end of the article.

The crypto market is growing so fast that it's common to hear "There's too much going on! ", however, we prefer "There's too much building going on!

Mental models are useful for assessing the status quo, and they can help early stage investors relate industry progress to portfolio strategies and prospects. Here is our three-tier model of decentralized networks:

How has the decentralized stack evolved?

Settlement layer: a year for compacting the foundation

In 2020, Ethereum's dominance of the transaction settlement layer will be further consolidated. Currently, there are over 3,000 DEFI applications running on the Ethereum blockchain, which is more than 10 times the number of the second largest blockchain. Ethereum's dominance is likely to be further cemented with the scalability, Layer 2 performance, user experience, and even stronger network effects that the ETH2 upgrade brings.

"With better middleware solutions, developers can embed secure, high-quality development results into their applications, deliver faster, while also focusing on a superior user experience."

The middleware layer: a year of experimentation and growth

In 2020, middleware projects saw a high growth rate. Middleware sits above the settlement layer, acts as a bridge between data and interoperability, and supports the role of application development.

The emergence of middleware is a typical characteristic of industry maturity. They become more efficient as specialist service providers enter the market, allowing for less vertical integration. With these new Lego components, commercialization speeds up and business expansion becomes easier. The golden age of Web 3.0 middleware is at hand as technical expertise begins to pave the way for richer end-use applications.

Of DCG's 13 new investments between the second half of 2020 and the first quarter of 2021, seven were in decentralized network middleware.

API3, for example, is a middleware protocol that allows decentralized applications to access real-world data off the chain. Consider the Defi loan app, which uses the current market price of assets for settlement, and competitive games that need to synchronize data with professional athletes. While other projects have also bridged the gap between blockchain and non-blockchain data, API3 has pioneered a way to improve the experience for developers and data API providers.

The "Prophet Machine" is a mechanism for external data to communicate with the blockchain. Whereas blockchain previously only worked with third-party intermediaries running nodes to connect nodes to dApps smart contracts, API3 allows data providers to connect directly to dApps by running an "airNode" -- a serverless, lighter touch prophesier node. With no middlemen, blockchain has complete control over its own data, making the stream more accessible and reliable, which is a good thing for developers.

Another middleware solution that we are excited about is the Ceramic Network, which enables application developers to easily access distributed data and identity. Any application that wants to retrieve user information from different sites and synchronize user identities across devices needs a data solution.

For example, when you connect to the MetaMask wallet, it displays information including account names, contact lists, past transactions, Settings, token watch lists, and more. To provide such a service, MetaMask needs cross-platform access to user data, but they (and users, of course) don't want that information stored on centralized servers. Through Ceramic, developers can easily access identity indexing, which allows users to traversal decentralized networks with their identities without leaving a data trail.

In the past, developers had to run their own nodes and data queries and create their own identity solutions, which was a huge waste of time and resulted in some crude or non-generic products. With a better middleware solution like Ceramic Network, developers can embed secure, high-quality development results into their applications for faster delivery, while also focusing on superior user experiences.

"If 2021 is a golden year for middleware, it could well be a turning point for Defi to go mainstream."

Interfacial layer: still in its early stages

Today, very few companies are successful in user interfaces. Today we might laugh at the Netscape or Ask Jeeves browsers of the 1990s, whose interfaces were not bad, but whose designers had no taste, the latter originating from an imperfect middleware. As decentralized network channels continue to improve, user experience (UX) friendly, complex interfaces will emerge, pushing DeFi and DApps into the mainstream.

Figure: From the Internet

As an investor, our challenge was to find the interface companies that most effectively absorb middleware development. We invested in Slingshot, a Smart Order Router (SOR) for Defi that supports access through a user-friendly front end and API.

We believe that the business and teams at the forefront of Defi can integrate new middleware better than most companies, and as the sedimentation layer expands and the middleware layer improves, Slingshot's capabilities will continue to iterate -- perhaps beyond what its current interface recognizes.

As middleware grows, leading hosting and hardware wallets (such as Luno and Ledger) and portfolio management tools (such as Zerion) will continue to improve the user experience and leverage their product development expertise to develop higher-order functionality.

If 2021 is a golden year for middleware, it could well be a turning point for Defi to go mainstream. It took developers years of hard work in an HTML-only environment to make the leap from CSS to Flash, kick-start the heyday of Web 2.0 and drive the development of modern Web frameworks. Similar iterations (in blockchain) will occur among developers, users, and entrepreneurs.