For most of my time running Web3 Labs and building Enscribe, I largely stayed clear of our codebase and left it to our engineers. I’d give requirements, review direction and make product decisions, alongside my other strategic roles.

I knew touching our codebase was a time sink to avoid.

This boundary has changed somewhat this past month, though, and I think what I’m sharing is especially important if you’re working with engineers in any capacity.

My own inflexion point

Our website isn’t core infrastructure. It’s important, but it’s not the product. So when it needed updating, I’d been handling small tweaks myself — partly to keep the work off my engineers’ plates, partly because it was the one part of the stack I could engage with without causing damage.

The original site was built quickly using v0 by Vercel, then integrated with Docusaurus so we could host docs, blog, and website in one framework without external CMS dependencies.

That integration turned out to be non-trivial. For months, updates that should have been quick weren’t. I was using AI to help, but still working manually through the problems such as prompting for specific fixes, reviewing outputs, debugging things when it didn’t work. The AI was useful, but I seemed to still be doing the work.

A couple of weeks back, after speaking to a friend of mine who highlighted the big changes that have happened in GPT Codex and Claude Opus, I decided to give it a go and I handed the repo to Claude Opus with one instruction: rebuild our landing page based on our documentation and blog posts.

What came back worked. Dark mode, light mode, structured correctly, pulling from our actual content and creating a much better landing page. No debugging was required by me, I preovided my instructions and the work just got done.

That was the first clear signal that something had shifted, not in the model’s raw capability, but in what the interaction could now look like.

The bigger shift: engaging with the product itself

The website result made me curious about what else was possible. The main Enscribe application codebase had always been off-limits for me. It was too complex. In a former life I was a Java backend engineer, not a Typescript developer. Product direction was my job and I left the implementation to the engineers.

But I had a clear vision of where the product needed to go, and I’d been carrying it in my head for over a year without the bandwidth to execute it. So I handed Claude the application repo alongside our documentation and blog posts, described where I wanted the product to go, and let it work.

It scaffolded a new platform experience that reflected the vision I’d been unable to articulate in code. The backend integrations such as authentication, smart contract connections, live infrastructure still needed an engineer to run with them. But the gap between the idea and a working prototype closed in a way it never had before. I could see my ideas materialise and actually put it in front of people.

What changed wasn’t that I became a better engineer. It was that the model understood the intent well enough from the codebase and docs to act on it without me needing to write a line of code.

The conversation I’ve had to have with my team

This changes what I expect from my engineers, and I’ve told them directly: you’re not in the business of writing code anymore. The agents write the code. Your job is direction, judgment, and review.

That’s not a comfortable message. Engineering identity is built around the craft of writing good code. But the honest reality is that the models write working code faster than most engineers, and the value has moved to the person who can direct the agent clearly and review its output critically.

That judgment is more important now, not less. For production backend systems, engineers need to watch the changes closely — the agent doesn’t always take the best approach, and in critical infrastructure the cost of a wrong choice is real. For a marketing website, the tolerance is higher. Knowing which context you’re in, and calibrating accordingly, is itself a skill that takes practice.

The engineers adapting fastest are treating this as a change in what the job is, not a threat to whether the job exists.

My personal belief is that good, productive engineers will become more valuable as businesses wake up to how much they can now get done with their help. Outstanding technical debt and backlog tasks that once took weeks can, in some instances, be cleared with a single well-directed prompt.

What this means if you’re leading a team

The gap between teams that have made this transition and those still working the old way is already measurable and it will widen.

The questions worth sitting with: how much of your engineers’ time goes to work an agent could do? What would change if that time was freed? And who is going to lead that transition in your organisation, because it doesn’t happen without someone pushing it.

I’m a founder who spent years on the wrong side of my own codebase. That constraint is gone. If that’s possible for one person without a dedicated engineering role, the implications for a team with real infrastructure and budget are significant.

In the past couple of years, I've published over 150,000 words of content on web3.

Not everyone agreed with what I wrote, but I believe it's important to externalise the ideas and perspectives you have, either through conversation or writing. The good ideas you can refine further, whereas you move on from the bad knowing they aren’t worthy of further explanation.

My writing began with The Blockchain Innovator's Handbook and continued with these weekly posts which commenced in January 2022.

Until I wrote my book, I had never been a keen writer. I enjoyed being a consumer of books, but going through the process of writing, and then publishing a book helped me to appreciate the craft of writing.

It’s invigorating to capture your ideas and thoughts in their rawest form through writing — writing is the simplest and purest form of expression.

Writing My First Book

It was in 2021 that I decided to write the Blockchain Innovator’s Handbook. By this point, I’d already spent a number of years working on blockchain technology and wanted to externalise the knowledge that was sitting idle in my mind.

Neil Gaiman refers to this as the seed for your story. Once planted it needs to be tended to, cultivated and to grow into something magnificent over time.

I had my seed, and created a structure for the book. The next stage was writing.

I set myself a goal of writing 1000 words per day, five days per week. This enabled me to commit the first draft down in a relatively short space of time. I actually found this process liberating, where I blocked out 2-3 hours per day to get my words done.

I didn’t edit on the fly, I just kept writing until I hit my word quota. The important thing was to get into a state of flow each day, where I was committing words to the page as quickly as they were coming to me.

Remarkably I managed to hit my target of 30,000 words, but now the real work commenced. Many months were spent refining this draft, working with reviewers and editors to produce something worth publishing.

It was liberating when I received the first copies of the book for review. The tact then shifted toward promoting its release.

One of the really fun events along the way was a having a book launch. I had no idea how to do one, but thanks to some great help from the Web3 Labs team, we held an official launch at the end of 2021.

In addition to giving away signed copies of the book, there was even a book-shaped cake for everyone to enjoy!

Writing as an Outlet

In the months that followed the book’s release, I found myself missing the process. I was yearning for that creative outlet and the feeling of accomplishment that came with producing written content.

This notion of producing a creative piece of work gave me something that was missing from running Web3 Labs. As a business owner, you're constantly being thrown balls from different directions and you try to keep as many of them in the air at once as you can.

As a result, from one week to the next your focus is constantly shifting between putting out fires, working with customers, your teams and strategic thinking.

This can at times leave you feeling like you're not being as productive as you'd like. This is where writing can be therapeutic, and give you the feeling of accomplishment, even when you've been jumping from one thing to another with your work.

Publishing this weekly newsletter filled that void and allowed me to share my thoughts each week on web3 and where I believe it to be heading.

In the 7-plus years of focussing on this domain, it has evolved in ways I would never have imagined, but providing a balanced opinion is important.

Writing Versus Programming

As someone who spent 15 years as a developer, there are fascinating parallels between the process of writing and the process of creating software. Of the two, I find writing harder than programming. Non-programmers may find this hard to appreciate, but programming languages are simpler than natural languages.

Programming languages each have their own syntax which defines the combination of symbols that can be used to define computer programs.

When you write code you have a compiler that validates what you've written makes sense. It then turns it into machine code that a computer runs for you. The code compiles successfully and runs or it fails along the way.

It's black and white in these respects. You have rules to follow which produce an output that either works or doesn't as far as the author is concerned.

Writing is far more nuanced. Unlike programming where you are providing instructions to a machine, when you write you are communicating to others.

You not only need to write in a cohesive manner that makes sense but also tap into human psychology to ensure that your audience is compelled to read what you have written.

This has become increasingly challenging given the vast number of information sources that people are exposed to on a daily basis. Once it was only adverts, but now you have tiny nuggets on multiple social media platforms all vying for people's attention.

This has further shifted the type of content that people write, but in some respects made it simpler for content creators on social media platforms. The more sensational the content, the easier it is to draw people in.

Regardless of the type of content being written, being able to resonate with your audience is key. In software development, your target audience is the end-users of the software.

Both require you to invest serious hours in your craft and are incredibly satisfying when you get comments from your audience that things are working or resonating for them.

Most of the people consuming your work will not make you aware they have read or used it. This makes feedback or comments all the more valuable.

Having spent so much time coding, it has definitely influenced my writing workflow. Like with writing a program I sketch out parts of an article before I write it, providing some loose structure.

Then I write using the excellent iA Writer editor in which I use Markdown for writing which I can easily export into a Word document.

Writing in Markdown is the most paired-back format I have found. It's just you and your text, with no formatting menus, everything is achievable via the keyboard. I consider it the closest there is to using a typewriter, but with magical formatting options that make it straightforward to format text as you wish.

The Impact of AI on Writing

Even with the abundance of content across the different social media platforms, we have now entered a new phase of content creation driven by AI.

Prior to the emergence of ChatGPT, the only way for long-form content to be generated was via copywriters of transcription services. We're now entering a new phase in the evolution of content where essays can be generated with ease.

This does mean that we are drowning in ever more content, making it harder than ever to surface the nuggets of information among it all.

From my own personal perspective, I don’t write my content with AI. But, I have embraced AI tools to sharpen what I write. I see AI assistants such as ChatGPT as akin to junior staff members. They can provide additional perspectives and fix aspects of what you've written, but they need to be watched closely, and definitely not trusted blindly.

The way I see it is that we need to have humans continue to write quality content that will be used to further train the AI.

We may be at a disruptive point in the evolution of content creation, but at its heart, machines at best can only simulate humans and our writing. As such, I don't see a need to stop writing any time soon.

In writing as with code, nothing is ever perfect, it can continuously be improved upon. Hence there will always be a need for humans to make machines better. And this coupled with the mental clarity that comes with writing is motivation enough to keep going.

That being said, in the coming months I am going to take a break from publishing the weekly essays. There’s still plenty to write about in web3, but there’s also a lot I need to share on Web3 Labs products and services which continue to grow. I’ll be continuing to put out content via web3labs.com, but these essays will be more sporadic.

What defines the right blockchain network for your project? I spent some time recently thinking about this off the back of some work we were doing. My big challenge was thinking about how best to convey this information to a more layman audience with understandable metrics.

Blockchain networks are just another tool in the arsenal of technology solutions. However, several useful metrics can help establish how widespread their adoption is.

These are not infallible, but used collectively they do provide a helpful picture of the state of a number of them.

There are a couple of important caveats. It's worth understanding early on if you're targeting a public or private blockchain deployment, and if you want compatibility with the Ethereum Virtual Machine (EVM).

These two considerations will greatly influence the size of the potential candidate platforms. The majority of blockchain activity takes place on public networks. Hence if you have to have a private network it will significantly narrow the potential candidate list.

At the current time, the most compelling options are under the umbrella of the Hyperledger Foundation, specifically Besu. However, we'll presume that you're interested in public networks as that is the majority use case.

The other consideration is whether to work with an EVM-compatible network. The EVM is the dominant platform on which the majority of smart contracts are deployed. It is the closest thing we have to a universal standard for smart contracts.

I liken the EVM to being the TCP/IP of web3 due to its widespread adoption. But there are other options, such as using the programming language Rust as is used by Solana and Polkadot's Substrate.

The choice of which comes down to if you're happy to be tied in very closely with a specific ecosystem such as Solana, or would rather have optionality and support for the widest possible number of blockchains as you have with the EVM.

For comparison, none of what follows affects the decision on whether or not to go with an EVM-compatible blockchain. Although many of the alternative layer one networks have a level of traction that is not dissimilar to leading Ethereum layer two networks.

The categories I find most useful follow.

Developer Community

The community is the lifeblood of any project. Given the open nature of blockchains, it's relatively straightforward to obtain some metrics on these communities.

Most important of all is their developer community. They keep things running and moving forward. This work typically resides on GitHub, however, more recently Electrical Capital have migrated its annual report to its own website. The annual Developer Report is the most comprehensive analysis of open source crypto developers and provides insights on the developer communities around various blockchain networks.

This report provides an invaluable view of development activity on various blockchain networks, making it simple to compare them with one another.

User Community

The user community of these networks is best ascertained from the various social media channels in which their users hang out.

The number of followers on X provides an indication of a project's reach. But to see how active these users are, it pays to see the size of their community across the channels in which they interact with each other.

These are likely to be combinations of Reddit, Telegram and/or Discord.

The types of topics being discussed across these communities will be insightful too. If they are heavily focused on the prices of a network token, it’s not likely to indicate a committed community of builders. Whereas if they are busy discussing projects with the real utility on the network, the motivations are likely to be better aligned with creating a sustainable ecosystem.

Traction

Beyond social media platforms, there are on-chain data points that are instructive demonstrating real activity on the network.

These include the number of active accounts who aren't just using the network as one-off events, but continuing to make use of it.

Coupled with the number of transactions taking place on the network you can get a useful picture of real traction.

Additionally, market capitalisation, as well as the size of the assets locked on the network via the total value locked (TVL) metrics are useful in understanding how comfortable the DeFi community is with keeping assets there.

These metrics are available from Coinmarketcap and DeFiLlama for a number of leading blockchain networks.

Costs

The cost of the network is also a consideration. The Ethereum mainnet is considered too expensive by most users these days. This is why they are being encouraged to use layer 2 networks instead which cost a fraction of the price.

Understanding fees is important especially as it will have ramifications for how much you or your users must pay to transact with the network.

I am not currently aware of a resource that consolidates users costs among a large number of networks, unfortunately,

Other Assets

Finally, it’s instructive to see what other well-known projects have launched on the network.

• Are stablecoins such as Circle's USDC or Tether's USDT available on it?

• If the network is EVM compatible, have Uniswap, Aave or other notable projects launched on it?

And while you may not be interested in these specific projects per se, their existence is indicative of the presence of real users, whom these DeFi projects want to support on these networks.

Getting Started

With all of the different blockchain networks available, the decision process of where to start for any project can be tough.

This list is not exhaustive. But if you start by identifying:

1. If you are looking for a private or public network to work with

2. If EVM compatibility is required

You will have a starting point for further exploration. From here by pulling together the various metrics I have outlined, you will have a good idea of some of the tradeoffs between working with different public blockchain networks.

This is a post that I wrote back in 2021 at the height of the NFT mania. The essence of it still holds true in my mind which is why I decided to share it this week. Some of the projects mentioned may have burned (such as Jack Dorsey’s tweet), but the idea still resonates with me.

NFTs still need to mature to the point where when you say NFT, people don’t think about frothy overpriced JPG images, but instead a digital asset that represents something tangible. Writing is probably not exciting enough to provide that change, but it’s fun to think about what could be done, as I unpack below.

The internet is awash with ideas and information that people communicate in text and visual formats, and we saw a huge explosion in 2021 of NFTs for digital art spanning pixelated images such as Nyan Cat at one end of the spectrum to Beeple’s Everydays: The First 5000 at the other.

But something that has yet to be popularised is NFTs for the words people have written on a page. Stephen King said that writing is the purest form of art—you are trying to capture thoughts in your head and externalise them in prose before they vanish back into the neural pathways from wherever they came, potentially gone forever. This leads me to question why anyone isn’t already doing this.

Text in the written form could nicely lend itself to NFTs of:

• articles

• poems

• short stories

• novels

• ideas

There is already an incredibly buoyant market for first editions of books, so surely there are collectors who would be interested in owning the first manuscript of books by well-established authors.

Even more powerfully, when someone has what they believe to be a breakthrough or innovative idea, why not create an NFT of this thought on the page? In some respects this is analogous to creating a trade mark or patent, but without the need to work with a third party. Someone can simply capture their idea, create an NFT of it, and then forevermore prove that they were the first person to capture the idea.

There have been some related ideas for text-based NFTs that are being created. Jack Dorsey, co-founder and CEO of Twitter sold an NFT of his first ever Tweet recently for $2.9m, which was signed by him virtually with his private key. Also, Ethereum developer Nick Johnson has started creating Amulets which are short (64 characters or less) sentences which when hashed exhibit certain properties, stored as an NFT.

There is the Mirror platform which tokenises pieces by authors whereby individuals can invest in an article or story proposal by an author, and then once written have fractional ownership of the finished piece. Simon de la Rouviere has also provided some thoughts.

However, my view is that we can go both bigger and simpler—we need an NFT format that supports any input text file, it could be a small tweet-length piece, a short story or even a novel. Like how with the current crop of art NFTs, the asset in question is an image file, for text, the asset in question should be a text file.

Just imagine if you could have an NFT of the Bitcoin Whitepaper signed by Satoshi, or the original Ethereum Whitepaper signed by Vitalik, or the first draft of a novel written by Stephen King, Neal Stephenson or J.K. Rowling, these are true collector’s items. But it extends more widely. This post is being authored in Markdown, so I can create an NFT of it to capture this idea being written at source.

Getting into the specifics—how do you settle on a format for the source text of these NFTs? If we want to keep as close to the source as possible—the typewriter equivalent, and the source work is just words, I would argue this is Markdown.

Markdown is already very widely used in writing circles and many of the leading modern writing toolchains provide first-class support for it - Scrivner, Ulysses and iaWriter which this post is being written. In using Markdown, not only are you using a format that has simplicity at its heart, which can easily be rendered into PDF, HTML, Word or Google Docs, Latex and many other widely used formats; but you’re also capturing the words in what can be considered as close to a raw format as possible.

The nice thing about Markdown is that, unlike plain text, it provides just enough formatting to meet the needs of most writers—bold and italic emphasis, footnotes, headings, numbered and unnumbered lists.

If Markdown is not possible as the raw format contains diagrams or more sophisticated markup, then PDF is a likely candidate as it is already the most widely used digital format for documents on the web. Although originally a proprietary format from Adobe, it transitioned into being an open standard in 2008, so provides a sensible standard for NFT documents, much like JPG and PNG do for images.

So this is all nice in theory, but art-based NFTs are visual and people can show their ownership, this doesn’t work with a text file. Additionally, what if they have pictures, images or charts that need to be represented? These are all valid considerations.

PDF is an open format that could be used, however, like with visual content, multiple toolchains can be used to generate them, each producing a slightly different digital document. Whereas words in a markdown file can be considered the information coming straight from the author in their rawest form (fortunately without all of the typos).

Regardless of which format is used, creating NFTs of this work can be considered a form of intellectual property registration using the blockchain. When someone creates a new work in any format and generates an NFT of it, they have a way in which they can prove they were the original person to register that IP, which for creative individuals is a way to attribute ideas officially to themselves.

But we mustn’t lose sight of the fact that ideas are just one part of the wider process of innovation, how people choose to execute those ideas is what turns them into a reality, but at least you can be clear on where they originally came from.

Last week saw a couple of major announcements coming from enterprises with their blockchain initiatives. These are changing the face of TradFi.

First, we had Fnality close a £77.7m funding round led by Goldman Sachs and BNP Paribas.

Then J.P. Morgan announced their latest milestone with project MAS, where they tokenised funds with alternative asset manager Apollo Global.

Both of these announcements demonstrate that enterprise blockchain initiatives are showing no sign of abating. The ongoing work by both of these firms in the space has significant implications for blockchain in TradFi, which both deserve greater discussion.

How Fnality is Building New Rails For Wholesale Payments

Fnality is one of the longest-running enterprise blockchain initiatives. The project was conceived back in 2015, by a consortium of the world's leading banks. It was initially named the Utility Settlement Coin or USC project and spun out into its own dedicated company, Fnality in 2019.

The goal of Fnality has always been to be a real-time wholesale payment system for a number of the world's leading currencies, including GBP, EUR, USD, JPY and CAD.

Since its inception, the focus of Fnality has been on launching its platform for GBP payments. At present, GBP payments are due to be going live before the end of 2023. These GBP payments represent wholesale payments between regulated financial entities.

This is effectively payments between the accounts of regulated banks held at the Bank of England.

Fnality has a special type of account referred to as an omnibus account with the Bank of England.

The omnibus account is used to represent funds on the Fnality network, which uses a private Ethereum deployment, with GBP represented as a fungible, ERC-20 style token.

If it sounds similar to CBDC's, you'd be correct. The Fnality payment system is considered a synthetic CBDC.

This latest investment of £77.7m is the second major funding round by Fnality. It closed its £55m series A round in June 2019.

When you refer to the investor list of this latest round, it's clear how significant the institutional appeal of their product is. The round was led by Goldman Sachs and BNP Paribas, with participation from DTCC, Euroclear, Nomura and WisdomTree. There were also additional investments from Series A investors Banco Santander, BNY Mellon, Barclays, CIBC, Commerzbank, ING, Lloyds Banking Group, Nasdaq Ventures, State Street, Sumitomo Mitsui Banking Corporation, and UBS.

For a project to have been running for 8 years, raised over £130m in funding and still not live may raise eyebrows. However, these numbers are illustrative of how challenging it is to bring blockchain-based systems into the highly regulated financial markets.

The technology for Fnality has been available since its inception. It has improved since then, but the ability to run a private Ethereum network and develop a tokenised version of GBP is not where the main challenge lies.

It is in the legal frameworks required to operate the network. Significant portions of the investments in Fnality will have been apportioned to working with regulators to enable the payment network to operate. The creation of the omnibus account with the Bank of England is one such example. No doubt there were many more.

Wholesale payment systems are of critical importance to central banks. Bringing in a new type of payment system needs to be performed in a highly risk-averse manner. With this in mind, it's no wonder that the project has taken this long to go live.

However, Fnality's investors will be aware of this and the significance of what it has managed to achieve thus far. Which is why they continue to get behind the project.

J.P. Morgan and Apollo are Tokenising Funds

Just one day after Fnality's announcement, J.P. Morgan announced they had undertaken a proof of concept exercise with tokenising funds.

Working alongside Apollo Global as part of the Monetary Authority of Singapore's (MAS) ‘Project Guardian’, funds were tokenised and transferred between several different blockchains.

The project is the second to come out of J.P. Morgan as part of MAS's Project Guardian. Last year, working with DBS Bank they undertook a regulated DeFi trade using the Polygon network.

The goal of Project Guardian is to use cross-industry pilots to establish policy guidelines and a framework for regulated DeFi. Core areas of focus include interoperability, tokenisation, and establishing trust anchors.

In this latest initiative, the focus was on how by utilising tokenised assets on blockchains, the technology could enable a portfolio manager to seamlessly manage a large number of discretionary portfolios, comprised of an array of tokenized traditional and alternative investments across various blockchains, all whilst preserving unique investor-level account customizations.

Fund vehicles from J.P. Morgan Private Bank, Apollo and Wisdom Tree were tokenised on several permissioned blockchain networks.

It came as a surprise to see J.P. Morgan working with so many other participants on this project. Rather than simply requesting everything being done on just their own Onyx Digital Assets network, they also used a private Provenance Blockchain using Cosmos and an Avalanche Supernet.

Interoperability solutions from Axelar and Layer Zero were also used to transfer assets between blockchains.

This approach of using tokenised assets with smart contracts can drastically simplify the portfolio management process and bring greater liquidity to alternative assets. Numbers stated by the report include:

• It could create a $400m revenue opportunity for alternative fund managers as well as increase access to alternative investments in more traditional portfolios.

• Rebalancing of opportunities could go from being a process consisting of 3000 steps to requiring only a few clicks.

• The need for 3% held in cash in most portfolios could be almost entirely reduced with real-time settlement

The numbers are impressive, and the idea of tokenising funds and portfolios is a no-brainer opportunity for blockchain technology.

However, it's important to keep in mind that all of the blockchain networks used were private permissioned networks and that this was a proof of concept. Public networks will likely be applicable to parts of TradFi long term, but it will depend on what type of assets are being tokenised and who the end users are.

Stablecoins and native crypto assets will remain on public networks, but large wholesale transactions within clear regulatory jurisdictions could well remain on private networks.

The Long Road Ahead

This latest proof of concept by J.P. Morgan is one of a long list they have undertaken in the past 7 years. Whilst they will help to propel the space forward, it's important to keep in mind that there's still a long road ahead for these technologies.

Fnality was built off the back of proof of concept exercises that commenced in 2015 and it’s just about to go live 8 years later. Regulation needs to adapt and change to support these projects. And whilst it's fantastic that you have regulators such as MAS working alongside J.P. Morgan and others, it’s important to be prepared for the long road ahead.

Regulated finance will not be replaced by public blockchain networks, but there will be ways in which it can leverage them. It will take time and effort, but if these latest announcements demonstrate two things, firstly, it's that change in the provision of financial services underpinned by blockchain technology is happening now, and secondly that there's no shortage of opportunities for it to bring greater efficiency across the industry, its just that it takes time.

Further Reading

For more on Fnality, you can listen to my discussion with their CEO, Rhomaios Ram. We also hosted their CTO, Adam Clark where he gave a very insightful presentation on their technology platform.

For more information on this latest phase of Project Guardian, you can read J.P. Morgan and Apollo's report.

For more on J.P. Morgan and their work with blockchain technology, you can listen to my conversation with Tyrone Lobban, Head of Onyx Digital Assets and read J.P. Morgan's Long-Term Bet on Blockchain.

The World Wide Web was once just like Web3.

It was abundant with open-source, decentralised protocols with developers and engineers at the forefront of this new frontier. Over time the success of social networks, cloud and other big tech initiatives shifted the landscape in favour of a handful of incumbents, whose platforms came to service the majority of internet users.

It's easy to see how a similar playbook could play out with Web3, and quickly in today's climate.

Web3's Identity Problem

Web3 is currently flying under the radar of most established businesses. It's associated by most people with speculative cryptocurrencies and NFTs. Your average person on the street is likely reeling from having dipped their toe in the water and got burnt, or relieved that they stayed clear and didn't lose money like some of their friends.

Enterprises are investing in initiatives using blockchain technology, but your average person doesn't care about this.

This lack of demand keeps the web3 industry as is, relatively small. Large corporates are investing in innovation initiatives, and fintechs are finding ways to integrate with crypto assets, but the market demand isn't large enough for technology companies to invest properly in this segment.

Google, Microsoft and AWS have active initiatives, but they're taking a wait-and-see approach rather than trying to drive the space forward significantly like the entrepreneurs in web3 are.

Some of the earlier initiatives we saw, such as Microsoft's Blockchain as a Service initiative on their cloud were sunset. The reason is that the demand for such a service wasn't large enough on the Azure cloud. Large organisations such as Microsoft, require tens or even hundreds of thousands of deployments for cloud services to be worthwhile for them.

It's different for startups and smaller firms, where a user base of tens of thousands, can create a highly lucrative business.

This attitude is good for builders, as it provides them with an opportunity to create products without trying to compete directly with the well-funded incumbents.

There is however a tipping point for scale that changes platforms from being a small irrelevant business to being seen as a potential threat or competitor to an incumbent. These competitors are then swiftly acquired.

A few examples that come to mind include Google with its purchases of YouTube, Android and Deepmind, Facebook with its purchases of WhatsApp, Instagram and Oculus, and Amazon with its purchases of Twitch and Ring.

These purchases enabled these companies to establish significant market presences with key web technologies that they hadn't developed in-house.

These large companies have near unlimited funds available for acquiring other companies, and it's only legislators that can prevent these deals from happening.

Google, Facebook, Amazon, X and LinkedIn were all products of the World Wide Web. Apart from Microsoft and Apple who managed to reinvent themselves, they all emerged at a time when there weren't existing large web firms scouting for acquisition opportunities.

It's different with web3 because there are so many large web tech firms who at the first opportunity could deploy vast sums of capital to absorb successful upstarts.

We haven’t seen this happen yet, in part due to the fact that majority of the firms that have gained significant traction in web3 are in the digital assets arena. Due to a lack of regulative clarity and the perception that some of these assets are likely securities, big tech would be unlikely to purchase these crypto firms.

However, other parts of the landscape could emerge as far more attractive.

Appchain Acquisitions?

Many of the infrastructure firms that service the web3 industry, with enough scale could become natural acquisition targets for big tech.

We have firms like Alchemy, Infura and Thirdweb providing cloud-like API services for launching and developing blockchain applications.

There is also a significant number of companies offering services to launch blockchain networks and more recently appchains. These include Zeeve, Altlayer, Gateway.fm and Chainstack to name a few.

Although it’s not currently clear how large the demand for appchains will be, should they come to be as widespread as some believe, they could represent a significant footprint across the web3 ecosystems.

If they reach a threshold of having hundreds of thousands of them, or even millions, it could be the catalyst that pushes major cloud infrastructure providers to look to offer their own services.

I don't envisage AWS, Google, Azure standing by and ignoring them in such a scenario. They will likely go shopping and acquire some of the leading firms.

Especially when you consider cloud providers are already responsible for powering significant swathes of public blockchain infrastructure.

Some of these firms may be decentralisation purists, with ambitions to move toward a fully decentralised service. But it's doubtful that they all are. After all, an exit is good for founders and investors.

It's hard to envisage a future where such a playbook doesn't play out if web3 has the impact many of its proponents expect.

Especially as the economic climate has also shifted in the favour of large businesses with healthy balance sheets, who can earn healthy risk-free returns on their capital.

For the past 15 years, we had a historically low interest rate environment, resulting in cheap capital for venture firms to invest in high-risk startups. There's no longer so much capital available for startups, stacking more of the odds against their success. This will make it harder still to challenge the dominance of big tech.

Reaching Critical Scale

Against this backdrop, to prevent web3 from being absorbed by web2 firms, web3 protocols and applications need to establish themselves at scale and reach critical mass quickly.

Coinbase is one firm that has established itself in this manner. Brian Armstrong is trying to grow the web3 ecosystem through initiatives such as their wallet and the Base network. We're not likely to see Coinbase acquired by any TradFi firms.

It’s fortunate too that the settlement rails that have been built for web3, such as the Ethereum network have managed to establish themselves as internet-scale utilities and reach a size where it cannot be owned outright.

Whether new infrastructure firms will be able to do this is less clear. Those that are looking to decentralise their service will rely on volatile utility tokens and cryptocurrencies which are a significant barrier to entry in these respects.

People don't want to pay for AWS compute using Amazon shares, and without the adoption of better stores of value such as stablecoins, it’s a barrier for many people.

Learning From History

It's important not to overlook that the first generation of the web was much like web3 is now. With a lot of open, decentralised protocols and people building amazing innovations on top of it.

Over time much of the web shifted away from a number of the protocols that were written and replaced with proprietary protocols and platforms.

Web3 does come with its own payment rail and token incentives that projects can choose to adopt. However, the original web was not surrounded by well-capitalised companies who were already internet natives and recognised the value of such a platform for its reach.

In this respect, web3 has a more formidable challenge to stay true to its origins.

No doubt some of the core infrastructure such as the larger blockchain networks, have managed to establish themselves in this respect. But many of the upstarts building services for these networks could find themselves being absorbed in the coming years by big tech.

This would result in a landscape that doesn't look that different from what we have currently with web2. It wouldn't be a failure but would come as a surprise to many of the builders, who had altruistic goals of truly decentralised services.

The internet does not exist in a vacuum, some laws and regulations have significance for companies once they reach a certain size or offer a certain class of service. As we've seen in the US market, these can hamper businesses. Hence it’s important to remember that web3 may not play out as cleanly as everyone hopes.

During 2022 through 2023 we saw a lot of progress being made in scaling Ethereum via layer 2 networks. Optimistic-based rollups such as Arbitrum and Optimism were joined by rollups utilising zero-knowledge technology used by Polygon ZK-EVM, Linea, ZK-Sync, Scroll, Starknet and others.

All of the providers of layer 2 networks are aware that scaling blockchain networks doesn't end with layer 2, there is an additional layer to the stack — layer 3 or appchains which many consider the scalability nirvana for blockchains.

Appchains or application-specific blockchains offer greater speed, lower transaction costs and are customised to serve particular use cases, unlike public layer 2 blockchain networks.

Many of the teams who have launched layer 2 networks have recently announced dedicated stacks for building appchains that sit on top of their layer 2 networks.

The Appchain Stacks

At the time of writing, all of the following appchain stacks have been announced by the major layer 2 teams:

• Polygon's Chain Development Kit

• Optimism's OP Stack

• ZK Sync's ZK Stack

• Arbitrum's Orbit Chains

• Starknet's Starknet Stack

Linea and Scroll are absent from this list, but this is likely due to them having launched their layer 2 mainnets later than the other teams.

Outside of the Ethereum ecosystem, you have appchain toolchains for many other blockchain networks including Polkadot (Substrate), Avalanche (Subnets) and Cosmos (Zones). These all offer EVM support too to piggyback off the Ethereum ecosystem.

Rollups as a Service (RaaS)

In addition to the teams building these appchain stacks, you have companies who traditionally offered blockchain as a service (BaaS) deployments extending their offers to include rollups as a service (RaaS).

The terms rollup, appchain and layer 3 networks are being used somewhat interchangeably when referring to these types of networks. Also, Appchains as a Service is unlikely to catch on given its acronym… 🤔).

Private Blockchain 2.0

In some respects, this sounds like history repeating itself. Five years ago when BaaS offerings were first being offered, companies were launching private blockchain initiatives left, right and centre.

Since that time the narrative has swayed more toward public blockchains being the future over private. Private networks still have a place, but they're harder to bootstrap, govern and maintain than public networks which for all intents and purposes are akin to a utility.

It wasn't just the overhead of running private networks, many projects simply didn't warrant moving beyond a proof of concept.

Organisations that are investing now in web3 initiatives are wiser than they once were. They understand the domain and many of them now recognise the reach that is available via public networks.

They still face challenges on public networks, such as the fact they are competing with all other users of the network and that transaction costs may be higher than they like.

The Appeal of Appchains

Launching a dedicated appchain could be appealing to them for these reasons and others.

By launching an appchain, they are able to control certain components of the network, but inherit security provided by a layer 2 network without having to bootstrap the trust themselves.

This means that the creator can specify the network configuration that best suits their use case. Some of the options include:

• The cryptocurrency or token used to pay for transactions on the network. Whether it's the currency of the underlying network such as Ether, or the network’s own token. They may even choose a gasless network

• The block size. If the network is going to be processing large volumes of simple transactions, a smaller block size could be used to increase throughput. Conversely, if transactions are more complex, a larger block size could be specified.

• Restrictions on what wallets can transact with the network such as only those that have gone through a KYC process.

• The frequency with which transaction or proof attestations are rolled up onto the underlying network it is using.

Additionally, the lifetime with which rollups are required varies. Unlike blockchains, rollups can be ephemeral or temporary.

Ephemeral Chains

In his excellent talk at EthCC earlier this year, Amrit Kumar of Altlayer discussed these ephemeral rollups (he covered a number of other topics which is why you should definitely watch his full talk).

He highlighted how when you have large amounts of on-chain activity that needs to happen over a short period of time, such as an NFT mint or a virtual land sale such as Yuga Labs did, an ephemeral rollup would be ideal.

The blockchain-heavy activity can take place on a dedicated rollup, which once complete, the rollup can be retired, with all state changes maintained on the base network.

When someone wishes to subsequently append to this rollup state, such as transferring ownership of a minted NFT. They can undertake this operation on the network used by the rollup, as a full history of the ephemeral rollup is forever stored on the network it was secured by.

How Many Appchains Do You Need?

With all of the activity by layer 2 teams in launching their appchain stacks and blockchain infrastructure providers scrambling to support them, we're going to see more and more appchains being launched over the coming months.

The question that is on many people's minds is how big the space is likely to grow. Opinions vary greatly, with some viewing there being a future of only hundreds of appchains, whereas others, hundreds of thousands of them.

It's beneficial for the larger number to come to fruition for the sake of layer 2 teams and infrastructure providers, but not all investors are as convinced of this at present.

Until we have the next wave of growth in web3, being driven by new sets of problems being solved by this technology, we don't know how big a part appchains will play in this. It's also likely that there will be consolidation in the number of appchain platforms as winners start to emerge.

Universal Settlement Layers

Appchains are a crucial piece of plumbing in helping blockchains to scale. They move the execution of decentralised applications onto their own dedicated networks to better serve their needs, rather than overloading the underlying blockchain network.

This allows base layer networks such as Ethereum to transition toward being universal settlement layers, which given their lower throughput and higher costs is a much more appropriate role for them to play for web3.

Many new appchains will launch over the coming months. Unlike standalone blockchain networks, they exist as part of a broader ecosystem as they settle transactions on an underlying network.

These ecosystems will strengthen the propositions of many of them. However, it’s still going to take time for this landscape to establish itself and the true winners to emerge. Especially when there are so many layer 2 networks to choose from and a need for greater product-market fit in web3.

I was recently in San Francisco for the Hyperledger Members Summit, an intimate, excellent event for Hyperledger member firms to connect with one another.

With Web3 Labs’ ongoing contributions to Hyperledger Besu, the summit was a great opportunity to connect with other companies that are using Hyperledger Besu and other enterprise-focused blockchain clients.

The Case for Private Blockchains in an Open World

Although many believe that the future of blockchain is everything happening on public networks, there is still room for permissioned enterprise-focused blockchains to thrive.

With the rise of the web during the noughties, we saw many companies embrace the public internet, but it didn't do away with private computer networks. Much of the wholesale financial services industry uses private networks, and this is a trend we'll continue to see even with web3.

Computer networks that are of systematic importance to a specific jurisdiction such as central bank-issued currencies will not end up on public blockchains.

With this context in mind, a number of different highly regulated financial infrastructure providers and central banks are working with and evaluating enterprise blockchain networks.

When I wrote my book, The Blockchain Innovator's Handbook, I discussed the enterprise blockchain landscape at the time which included:

• Hyperleder Fabric

• Hyperledger Besu and Quorum

• Corda

In the couple of years since its release, the dominance of the Ethereum Virtual Machine (EVM) in public blockchain networks has influenced enterprises too, with Hyperledger Besu emerging as the most compelling option for firms looking to deploy new networks.

For more on why, you can refer to my recent post. Given how widespread the EVM is, coupled with Hyperledger Besu being designed for both enterprise and public network deployments, it’s by far the most battle-tested and future-proof technology to use.

However, whilst Besu is becoming more entrenched with enterprise, it doesn't solve some of the privacy challenges which companies have.

These privacy challenges are not unique to enterprises. Activity on public blockchain networks takes place using pseudo-anonymous identities, where on-chain activity is fully transparent to all network participants.

There is an expectation, like with most of the technical challenges in web3 that they will be solved in the near future, but it seems unlikely in the next 12 months.

The Cutting Edge of Privacy in Web3

The solutions tend to involve using fully encrypted blockchain networks such as Obscuro and Aztec. Both of these are layer 2 networks being built on Ethereum — Obscuro relies on SGX enclaves, whereas Aztec uses its own zero-knowledge technology (ZK-ZK rollups as they refer to them).

Other approaches utilise zero-knowledge technology for smart contracts that issue shielded tokens, as EY's Nightfall project has done.

None of these approaches are seamless, and they are all at varying stages of development.

Enterprise-Specific Needs: Identity and Data Security

Users of public blockchain networks are mainly driven by asset speculation, and don't mind if their activity is potentially visible to others should their pseudo-anonymous identities be revealed.

For enterprises, there are two crucial considerations that limit what they can do with public blockchain networks. Firstly, they need to be sure of whom they're dealing with. If you're a bank, you better be certain of who your customers are,

Secondly, you need to ensure that data, be that customer or commercially sensitive activity is not readily available for anyone to consume should they so choose.

This is where an enterprise has challenges with all on-chain activity being shared with all participants of the network.

Although it's limited to transactional data on-chain, having everyone able to see which parties are entering into every transaction is far from ideal and privacy is required to address these shortcomings.

Quorum's Privacy Model: A Case Study

J.P. Morgan's Quorum blockchain technology emerged back in 2016 to address this lack of privacy for Ethereum networks. They modified the Go-Ethereum client code base (support was subsequently baked into Hyperledger Besu too) and added a private state database and a secure enclave for storing private transaction payloads.

Quorum added a private transaction capability to blockchain networks. When you submit a transaction to a node on the network, you can mark it private for that node. The node then encrypted the transaction payload and propagated it only to the participants it was intended for.

Those who could decrypt it, then applied the appropriate updates to a private state database, ensuring that the transaction had taken place as far as they were concerned.

The transaction was stored in the secure enclave ensuring there was a means by which the transaction could be recovered.

This approach did work, but it was brittle, and many companies found it complex to deploy as not only did you need to have the blockchain nodes, but you also had to configure the enclave instances and ensure they could all talk to one another. This added significant overhead to the deployment.

There were also challenges with bringing new participants into transactions after the fact, and challenges with high availability. These factors have resulted in the Quorum-specific functionality being phased out of Hyperledger Besu, and few companies working with what was referred to as Quorum.

However, although the Quorum approach to privacy suffered from its own challenges, there is awareness that blockchain networks need a way whereby a subset of participants can transact with one another in a secure manner where no information about this activity is leaked to any additional participants.

Potential Pathways

In both public and private blockchain networks, this is a challenge for which an elegant solution does not yet exist.

The Enterprise Ethereum Alliance has specifications for privacy approaches for networks. But, they are no longer actively maintained.

Zero-knowledge proofs come up as candidates for a potential solution. However, the current focus with them is on zero-knowledge rollups which are for scaling blockchain networks, not providing privacy.

Other enterprise blockchain technologies such as R3's Corda and Hyperledger Fabric have their own approaches to privacy. Fabric has parallels with the approach used by Quorum. But increasingly, companies want to be able to utilise Ethereum technology in their blockchain networks to piggyback on all of the development being undertaken on it. The EVM is the closest thing we have to TCP/IP in web3.

Privacy as a Catalyst for Growth

Alongside identity and interoperability, privacy is one of the key features blockchain networks need to provide. During the past year, great inroads have been made with scaling blockchain networks, it is my hope that teams now start to focus more on the remaining challenges, especially privacy.

Having these challenges addressed on public networks won't necessarily bring enterprises onto them, but it will give them a mechanism they can incorporate into highly regulated environments.

This will drive further adoption of blockchain technology in these companies. With the right privacy measures in place, the surface area of potential opportunities will grow increasingly larger which will be beneficial for all.

When I created the Web3j library for Ethereum, I had the naive worldview that creating a successful open-source library would naturally transition into a commercial success.

Nothing could be further from the truth. Recently Web3j passed the 7-year-old mark. To mark this momentous occasion, here are 7 things I wish I’d known before I started the library.

1. Monetising Open Source is Hard

Open source software (OSS) is no different to any business venture in this respect. Finding a solution to a problem, and a solution to a problem that people are willing to pay for are two different things.

The open-source software movement has been a victim of its own success. Programmers don't expect to pay for software they use to develop applications.

If you can demonstrate how an application you've built with open-source software solves a problem, then you can charge for this. But if your target audience is developers, as is the case with Web3j, it's hard to get them to pay for the software on its own.

Two common models we see with commercialised OSS are the open-core model and hosted deployment models.

The open core model is more applicable to enterprises as they deploy software themselves and have the appetite for paying for additional integrations such as single-sign-on capabilities.

Hosted deployment models are by far the most popular approach, where OSS is made available as a SaaS platform. This model works where you have a stand-alone technology such as a database or analytics platform, whereby you host the software on behalf of organisations, who pay you for this service.

There are successful startups that have managed to thrive by commercialising open source. However, recently we’ve seen projects that started off using a permissive license such as Apache 2.0 or MIT move towards the Business Source License (BSL).

The Business Source License is not an open source license, but a source available license which allows anyone to view the code. However, it cannot be run in production without the explicit approval of the creator.

MariaDB created the BSL in 2017, and more recently Hashicorp adopted it for their products. It's even being used in web3 by Uniswap to prevent clones of their service from spinning up.

The decisions by Hashicorp and Uniswap to embrace BSL demonstrate just how challenging monetising true open-source software is.

Often projects end up reliant on grant funding to keep them going. This has been the case with Web3j, where we fund some of the development through the commercial activities of Web3 Labs, but have also received a number of grants for the project.

2. It's Great for Opening Doors

Creating useful OSS is a great conversation starter. It gives you something to present at conferences, write articles for and just talk about with people.

Having a project you can permanently have your name associated with as creator makes you stand out from other developers as there's a very public place where people can see your work.

It can also lead to opening doors with new customers for other types of work such as consultancy, or invitations to conferences.

One of the most remarkable things that happens is that you often meet people at events that have used your software. This has happened countless times for me with Web3j, speaking with both startups and large enterprises!

3. People Won't Tell You They're Using it

The best metric of success for OSS is lots of downloads but not lots of bugs. If people are using the software and it just works, they won't tell you that.

They're most likely to get in touch when there's a problem with the software and they need to create an issue against the project. Or if you're lucky, they submit a pull request to add new features or fix bugs improving the software for everyone.

With Web3j on a number of occasions, we have done our own research to see who's using the project. Sometimes it entailed examining Android binaries, and other times searching GitHub and software release repositories. We had to get creative.

But it gave us useful insights into where it was being used.

4. Companies Love Consuming it, But Don't Expect Them to Pay for it

It's stating the obvious, but no one expects to have to pay for free software. Most users of OSS have an expectation that issues will eventually be fixed as no one wants to leave bugs in their software.

Depending on your target for the software, you may have a number of companies using it too. They will often be even more tight-lipped about their usage of it than users due to their commercial nature.

When they start using your software in production, they may decide that they need a professional support agreement to cover it. But this is in the minority of cases.

Most companies will consume your software and give you a pat on the back or high-five as a thank you. This isn't a bad thing (see the previous point about opening doors), but it is important that you appreciate that just because a big name is using your software, it doesn't mean you'll profit directly from it.

5. The Development is the Easy Part, Promoting is Hard

There are few things more satisfying than greenfield development. Where you create a project and are writing all of the code from scratch.

Most of the time, developers are importing other libraries or frameworks to do the groundwork. But it's incredibly invigorating when it’s you and your laptop churning out software from scratch to fulfil your vision.

Unfortunately, this part of the process doesn't last long. As soon as you put your first release out, you need to figure out how to get users.

This doesn't happen without letting people know about your project — the problem it solves and how to use it. You need to start writing documentation, blog posts, and giving talks, as well as sharing it with communities on Reddit, and figuring out SEO and other things.

This takes time and is a never-ending process. You have to start selling or marketing your project to get users. It doesn't matter how good the code is, without this effort, it's unlikely anyone will ever find it.

You need to find time to do this and keep doing it!

6. Keep the Project Focused

It may be tempting to expand the project by creating spin-off projects. I did this with Web3j where I created additional projects for generating OpenAPI endpoints for smart contracts and support for additional frameworks such as Spring Boot.

The challenge with this was it increased the number of projects I needed to maintain and support. At the time it was tempting to expand the project as there was grant funding available to do this. But in the long term, it meant that there was even more work to do maintaining these projects.

If I was back in this situation, I likely would have focussed on sharpening the documentation and fixing more of the bugs instead of trying to expand the project prematurely.

7. Be Prepared to Commit to it for 10 years

As anyone who has run software in a production environment knows, once it's out there it has to be maintained for the long haul. This is very much the case with OSS.

There's little point in creating an open-source project and walking away from it after a year or two unless there are zero users.

Software is like a child that you need to nurture and support for the long run. It's important to think seriously about how long you're willing to commit to it.

Perhaps I’m just stubborn, but I do think you need to be prepared to invest in it over a 10-year time horizon.

If you're not willing to make a serious long-term investment in it, perhaps it shouldn't be created in the first place as a public good.

What's the real reason for creating it? Be honest, is it solving a real problem for people or is it a vanity project you want to use to boost your own profile? It's okay to be doing it for vanity reasons, provided you're prepared for the commitment it entails.

Start With Why

The decision as to whether to start an open-source project isn't one to be taken lightly. Commitment aside, it's important that you appreciate the underlying reasons for why you are doing it.

When I first wrote Web3j, being aware of the things I listed above would have helped me. I'm sure the library would still exist, but it would have made me question the path I was planning on taking further before I embarked on the journey.

Developer activity on web3 protocols is at lows not seen since the end of 2020. The news cycles for months on end have been dominated by speculation about the Bitcoin ETF and SBF's trial. Both of which we hope to have closure on before the year's end.

This repetitive news cycle isn't great for inspiring people to get involved with web3, but crypto is the most mainstream part of web3.

Outside crypto, teams continue to build and focus on scaling blockchain networks, whether it’s Ethereum via its layer 2 networks or the alt-layer one Ethereum killers. But arguably too much of the web3 community is focussed on crypto or infrastructure technologies.

Web3 has yet to find true product market fit, which brings with it hundreds of millions of new users. Finding this market fit should be the primary focus of new projects. We don't need better layer one networks with new tokens. We need teams figuring out ways of bringing new people into these ecosystems that have been built during the past 8-plus years.

Real utility tokens

My own belief is that the speculation needs to be taken out of on-chain assets and their value should be represented by the real-world asset or utility that they represent.

This would imply that the value of many tokens on their own should be zero. Instead, they have utility for the users they were intended for. For instance, if you have an NFT that is used as a hotel room key, this will only have utility to someone who wishes to access the hotel room it is tied to. It's worthless to most people.

Likewise, an in-game item represented by an NFT will be worthless to all but players of the games it can be used in.

With these examples, NFTs are providing additional utility to something that already exists. What sets them apart from the NFT frothiness that we saw in 2021-2022 was many people piled or aped into NFT purchases based on an idea. This was similar to how people piled into initial-coin offerings in 2018, they were speculators, not users.

It's important to look forward to a time when tokens are ubiquitous in our society. Where owning or using a blockchain-based token is no more complex than making a movie purchase using Apple or Google Pay on a phone, or sending funds using Paypal.

Tokens in this context will be everyday items that people use. Their primary value will be based on their utility, and the vast majority will have no intrinsic value as they will be ubiquitous much like RFID cards.

For those that do have intrinsic value, it will be based on their value to the owner. This could be in the form of art or collectables, but more commonly because they have sentimental value. They may have been obtained through a game the holder played, a concert they attended or have been a gift from a dear friend.

Financial tokens that represent securities or currencies will retain their value, but the value is tied to the underlying, as they are ‘collateralised stablecoins’. For their holders, they are a more convenient asset to hold than the physical representation which is always an alternative.

Finding Product Market Fit

Getting from our current infrastructure-focussed ecosystem to seeing widespread adoption of tokens is the biggest challenge facing web3 now.

Finding the problems that compel people to engage with tokens is hard. The best examples that come to mind are in the developing parts of the world.

For citizens living in countries subject to hyperinflation, holding a stablecoin such as USDC on a cryptocurrency exchange appears like a safe alternative.

In addition, due to the significant charges levied by remittance payment providers, cryptocurrencies do provide a compelling alternative.

Outside of these use cases, most of the activity has been driven by price speculation.

The corporate world is acutely aware of the threats and opportunities provided by this technology. Some of the world's largest finance companies are investing heavily in it. They are well-positioned to create an array of stablecoin-based products such as tokens representing deposits, fiat currencies and securities.

If they can execute well on this premise, the convenience of being able to self-custody or trade these assets 24/7, especially in the case of securities is compelling.

Outside of financial use cases, convenience, and ease of use will be crucial. The big breakthrough we saw this year in AI was due to the sophistication of large language models, which gave AI platforms a human-like interaction prompt.

Prior to ChatGPT, AI was associated with self-driving cars and personalised recommendations used by social networks and online retailers.

It wasn't clear that LLMs (Large Language Models) like ChatGPT would be the innovation that brought AI front of mind into the public's consciousness.

When native web3 assets are considered safe enough for everyday people to use, Google and Apple will provide native support for them.

I, like you have no idea when this will likely happen. But there are web3 projects which are gradually building momentum which could be very impactful down the line.

A couple of interesting examples which have created loyal communities, but are not associated with financial incentives are:

Proof of Attendance Protocols (POAPs) are NFTs which are generated at events and shared. POAP.xyz is the leader in this category, and you find many exhibitors at web3 conferences using their technology.

Lens Protocol is a decentralised social graph for web3. On this social graph, people can create accounts and connect with other people on Lens. Lens doesn't provide a platform beyond the social graph contracts, which leaves it up to the community to build applications on Lens.

These projects are both interesting to engage with, but for more ideas, I encourage you to attend web3 conferences, as they are packed full of teams demonstrating the latest and greatest innovations they have come up with for this technology.

Who knows, it may happen to be one of those teams that build the next breakthrough application for web3, that onboards a billion users.

Michael Lewis's latest, much-anticipated book "Going Infinite" came out last week. Chronicling both the life of FTX's founder Sam Bankman-Fried (SBF) and the events leading up to its collapse, the book has already generated a lot of controversy.

The book's release date coincided with the start of SBF's trial, and plenty has been written about it in the past week.

Michael Lewis is the world's best-known financial journalist and author, responsible for many classic books including "Liar's Poker," "Moneyball," and "The Big Short".

During the FTX collapse last November, it emerged that Michael Lewis had been shadowing SBF for months, as he was the subject of his next book. He ended up with a ringside seat in the events leading up to and post-collapse of FTX.

There is no other writer you would want to have on board given the events that unfolded.

What's been interesting following the book's release is how much criticism has been levied against it by both the mainstream and crypto press.

The flavour of the criticism is that Michael Lewis got too close to SBF and painted a picture of him as a flawed character, rather than being a fraud and the orchestrator of one of the world's largest Ponzi schemes, as is being reported.

I came away from the book with useful new perspectives on the FTX debacle. I did not believe that Lewis was overly sympathetic to SBF. He painted a story of someone who got so far out of their depth with FTX that it all imploded in a spectacular fashion.

An Entrepreneur’s Perspective

As an entrepreneur, I can relate to this idea of getting out of your depth. There is always far more in your head that you need to do for your business than you have time to do. However, it is your responsibility as a business owner to prioritize those items that are of critical importance over those that can wait.

The difference between being a business owner versus an employee is significant here. Employees will have someone chasing them for urgent items; business owners often don't. They're aware something needs doing, but it's down to them to externalize them if they're important and find a way to complete them.

A Litany of Errors

SBF failed massively in this regard. Due to challenges that FTX faced with respect to establishing banking relationships, he relied on his existing entity, the hedge fund Alameda Research, to provide deposit accounts for customers.

What this meant was that throughout the life of FTX, all customer funds were held with Alameda rather than FTX, where they should have been.

In addition, in the early days of FTX, Alameda Research had been the primary market maker for FTX. The risk controls that applied to all other participants on FTX hadn't been applied to Alameda and never were.

Finally, you had FTX's exchange token, FTT, which was controlled and majority-owned by SBF and his businesses and was used for collateral left, right, and centre.

This combination of factors meant that customer deposits were flowing between FTX and Alameda, without good risk controls in place. However, none of this was an issue while the FTT token price remained strong, and more could always be generated to magic funds out of thin air.

The Collapse

It all came to an end when Coindesk published a report suggesting that the majority of Alameda Research's balance sheet was made up of FTT tokens.

Binance's founder CZ then subsequently started a run on FTT by announcing they were going to unwind their remaining FTT position.

This created a run on FTX, and it stopped being able to honour customer withdrawals due to not having those deposits on hand, which it should have (FTX was an exchange, not a bank). Everything collapsed from here.

Lewis does not attempt to hide any of these facts about FTX; instead, he paints a picture of SBF being incredibly naive and someone who simply didn't pay enough attention to critical operational details.

I don't find it hard to imagine how a young man in his twenties can end up behaving in such an irresponsible manner. From the description in "Going Infinite," SBF is different in his outlook on the world.

He sees life as a series of trades, with the goal of being able to provide the greatest impact to humanitarian causes via the effective altruism movement. The behaviour of others involved in this movement doesn't appear to be as selfless as one would expect.

Ineffective Altruism

Many of the effective altruists associated with Alameda Research give considerable weight to things such as job titles—more than the other employees who are just motivated by financial reward, which doesn't paint a great picture of the movement.

SBF claims that his goal was to have the largest possible impact on society, but I consider his actions influenced more by his worldview, as opposed to putting altruistic motivations first.

Michael Lewis chose to release the book before the SBF trial had started. It would have been better to wait a few months until his trial had finished to round off the conclusion.

This would have likely reduced much of the criticism about the book being too favourable towards SBF. I don't think this is the case; Lewis simply reported what he saw. The biggest difference between what the critics are saying versus Lewis is that they say SBF cannot have been this naive, but Lewis indicates SBF could have been this naive.

He was a twenty-something-year-old who was incredibly lucky with his timing of entering the crypto market. Sure, he was clever, but based on the early history of Alameda Research, it doesn't sound like what he achieved was that different from what a successful trading firm could achieve in its early years.

FTT to the Moon!

It was the FTT token that facilitated much of Alameda and FTX's growth. And SBF didn't prioritize creating a clear separation between its entities. This is something he should have done and will likely be his downfall, as it was his responsibility.

The problem was that the money started flowing, and it's amazing how few people care about the details when they're being paid astronomical funds left, right, and centre.

Venture capitalists, celebrities, and politicians all appeared willing to embrace SBF and FTX during the good times. Their willingness to do this without asking hard questions along the way makes them partly responsible for the whole debacle.

The customers of FTX were sold a lie and have paid a heavy price for their belief in SBF.

The Inevitability of It All

It’s hard to imagine SBF wasn’t aware he was sitting atop such a fragile structure, however, many young businesses have an Achilles heel. If reporting from Coindesk or tweets from CZ hadn't caused the run on FTX, there likely would have been another event that did due to its over-reliance on FTT.

"Going Infinite" unpacks events well, and while it would have benefited from being published after the SBF trial to round off the story, it's worth reading to form your own opinions of SBF and FTX's collapse.

For Lewis' perspective on the book, I encourage you to read the Guardian's recent article on him.

One of the goals at the heart of web3 has always been to create a decentralised internet, which is not controlled by incumbents.

We had this with the World Wide Web, however, during the rise of web2, it became somewhat more centralised — controlled by large entities such as Google, Facebook and others that became the jumping-off points for a lot of activity.

Web3 is meant to offer a different path as it has a built-in incentive mechanism for internet protocols — the token. The first iteration of the web didn't offer an incentive for its users in this respect.

Hence, many web3 communities believe that tokenised incentives will help us avoid the same fate of centralisation that happened to the first iteration of the web.

This idyllic outcome appears less realistic in my view, in part due to classic human weakness — greed.

Instead, projects should be focusing on tokens for established real-world assets and issuing security tokens to value their project.

A Tale of Three Tokens

Fungible tokens in web3 projects usually fall into one of three categories:

• Utility tokens

• Governance tokens

• Security tokens

Utility tokens provide utility for their holders on a specific blockchain network or protocol. Paying Ether to transact with the Ethereum network is one example.

Governance tokens provide holders with the right to participate in the governance process of a network or protocol, often via a DAO. The Ethereum Name Service (ENS) or Uniswap tokens are examples of this.

Finally, security tokens are like traditional securities. They represent investor shareholdings in a protocol or project and can potentially yield dividends, and their value is tied to the valuation of the underlying project.

As the security industry is tightly regulated by various financial regulators, creating security tokens is a potential minefield for many projects and they have yet to become a prominent feature of web3.

The creation of each of these types of tokens has evolved from well-founded intentions by projects, where the creators have a sensible rationale for creating them.

Unfortunately, the impact of speculators and bad actors in web3 has meant that many of them do not function in the way they were originally intended.

A Wild Epidemic of Dumbness and Overweening Greed.

The initial coin offering (ICO) process undertaken to launch the Ethereum network was effective as a fundraising mechanism to bootstrap the network.

It was so effective that it was replicated creating an ICO bubble a few years later. This bubble highlighted the skewed incentives between web3 projects and investors — projects need funds to bootstrap and turn their vision into a reality, and investors want to see the largest possible return on their investment.

This meant that it was in the investor’s interests to create as much hype as possible about a project, enabling them to realise a return on their investment as early as possible.

The speed with which profits could be made during the ICO boom was immense, which meant huge amounts of capital flowed into projects from professional investors, who would end up dumping their holdings on retail investors who often didn't have the resources or knowledge to get into the projects early.

The irony is that many of these tokens were marketed as utility tokens — tokens that are intended to be used to pay for decentralised services on a network or project.

Where you have a decentralised network the utility tokens make sense. There needs to be a mechanism to incentivise network node operators and for users to pay to use the network. If you don’t want your network tied to a specific jurisdiction, it can make sense to create your own currency.

However, simply bootstrapping a decentralised network is hard. Especially when you don’t have a first-mover advantage. Investors in the network token are effectively purchasing block space on the network that they believe will be worth more in the future than it is now.

With staking, they gain the additional benefit of being able to help secure the network. Depending on their motivations this may be a service they wish to undertake as opposed to speculating on the price of block space.

Provided you can create sufficient demand for your network in the form of active users, this model of selling block space is an effective economic model for blockchain networks.

A similar model is used for decentralised applications or protocols, where the purpose of the utility token is to pay for a service that the project provides. The theory is that when the project has built out its service, people will use the project token to pay for it over traditional currencies as this is the way of web3.

Unfortunately, this is where the theory and reality start to diverge.

A Question of Scale

Base layer blockchain networks such as Ethereum are intended to be a global, internet-scale blockchain networks. As the network is global and not run or owned by anyone, the utility token that underpins it makes sense. Ethereum has the scale and reach that it could not exist without a token.

It needs the neutrality of not being tied to a specific entity or geography to fulfil its goals. Unfortunately, whilst many projects in web3 may have similar ambitions, without achieving a comparable scale there is little point in having a utility token tied to them.

For many projects in web3, their utility token is treated as a security token by their holders. It can't be a security token, as several regulators such as the SEC and CFTC wouldn't like this, but the projects don't have functional economic models for their projects.

That's not to say they don't have a theoretical model, it's that the price of their token doesn't reflect the revenues being generated by their project. Instead, it's a valuation that web3 investors are willing to trade at.

The result of this is that utility token economic models are largely broken. To provide context on this.

Imagine I created a decentralised car-sharing platform, like Uber, but decentralised. Let's call it Duber. Instead of accepting payment in fiat currencies like Uber, I issue a token DUB. You can use DUB to pay for your rides.

The Duber team decided to do a pre-sale to investors for DUB tokens, for $0.10 per DUB. The team raised $10m by issuing 100m DUB tokens this way, with the intent of there being a further 900m DUB taking the DUB treasury up to 1bn tokens with an implied protocol valuation of $100m.

They then get building Duber, and do another round of token pre-sales, this time 50m DUB tokens at $0.20 per DUB doubling the valuation to $200m.

Duber is subsequently launched and gains traction. Users start purchasing its DUB tokens to pay for services. A percentage of each ride fee is paid to the Duber treasury.

The problem is, with the growth of Duber, its token price increases, resulting in the service becoming more expensive for users.

This is great for investors, whose DUBs are gaining value, but not good for its users whose rides are becoming more expensive. Duber could decide to lower the price of rides in line with token price increases, but then not as many funds will go to the Duber treasury, which not everyone is happy about.

This is then compounded when one of the early investors in DUB tokens decides to dump their holdings, selling their tokens at $10 for a 100x return on investment. The DUB token price tanks and again the economics for users need to change to avoid DUB rides being too cheap.

This is one of the challenges at the heart of the classic token model for protocols — utility tokens are used by investors who are incentivised by growth, but their core services are also paid for using these same tokens.

There needs to be a separation between the two. It is better to have a service that can be paid for using regular currencies via stablecoins or widely used cryptocurrencies instead of their token.

It would be equivalent to Amazon, Microsoft or Google requiring that you pay for their cloud services using shares in the respective company.

Many web3 protocols should be viewed like regular businesses. It’s fine to utilise crypto technologies for paying for their services, but there should be a clear separation between the user-centric digital assets they accept payment via to provide their core service, and assets that are investor-centric and represent their profitability as a commercial enterprise.

This distinction appears to be lost on many projects in web3, and as a result, we have utility tokens that are part utility tokens, part facade. And governance tokens that allow holders to have a say in protocol governance, but no access to a yield or return based on the success of the project itself.

Having a framework to support security tokens would greatly help here.

The reality is that many protocols’ economic models do not work. They are not generating real revenue. Leading protocols are exceptions, ENS, Uniswap, and stablecoins like USDT and USDC, but many networks and applications are dictated by their token price over their revenues. This is where web3 is broken.

The majority of people in web3 right now are speculating on tokens, DeFi protocols and NFTs. They are not using these assets for utility. This results in high amounts of volatility for these assets. No person paying for a service wants or needs this.

The Product Market Fit Illusion in Web3

It's not only price volatility that is a problem here. The explosive growth in the price of cryptocurrencies and tokens in web3 has resulted in several projects and teams sitting on large token treasuries (although these are down from their highs a couple of years back).

Having this capital is good for preserving the runway, but not good for motivating the original vision. Startups should be scrappy in their formative years, experimenting and pivoting to try and find product market fit. Once that fit is found, the engine for growth turns on and problems of scaling emerge.

It's never an easy journey to get money in the bank, but successful tokens have alleviated this problem for a subset of web3 projects. They may be cash-rich, but likely revenue-poor.

Launching a token is a fantastic way for projects to reach this point. Teams are happy that they have money in the bank, and investors are happy as they can cash in, but a functioning business is not the outcome.

I fear this is one of the reasons why many people and projects launch new blockchains — it is an easier story for investors to get a return on, than an experimental application that has the potential to onboard more users to web3.

Herein lies the problem.

More Real-World Assets

The blockchain rails that have been built underpinning web3 are incredible feats of engineering that will change many parts of our world. But, instead of creating brand new currencies and assets, we need teams to focus on creating familiar assets on these platforms.

Assets that people understand such as fiat currencies, securities or ETFs. Or assets that are modelled on existing digital assets such as those used in video games, or stored in Apple or Google phone wallets.

These assets should be priced for everyday people, and where there is an element of speculation associated with them, the reason shouldn't be "because web3 is the future", but because the underlying asset they represent has utility in our world.

Because many web3 communities have a token, many participants end up using the token price as a metric of success. It's natural that if you're rewarded with something for free, a token provides an incentive for your work.

This can affect the trustworthiness of web3 communities. If the token price is the metric of success being used, the motives of a project will be to do to what is best for the price of the token first and, for users second.

A traditional business relies on profiting from providing a valuable service that people are willing to pay for. In a decentralised project if they have a valuable token, protecting the token price is more important than developing a service that people are willing to pay for.

This can mean that a web3 project is not focused on its end user as much as it should be.

When this is combined with the inability to create security tokens due to regulatory red tape, we find ourselves where we are now. Where most web3 assets are not suitable for everyday people.

Many of the native web3 projects have failed everyday people in this regard. The main users of web3 are speculators in developed nations trying to get rich from the technology, and those who are forced to use the technology as native digital assets such as Bitcoin are safer than their sovereign currencies.

The willingness of investors to invest in projects creating tokens facilitating a quick return on investment is the fuel keeping this fire burning.

The way to solve this is by having entities investing in web3 technologies, products and services that are agnostic towards utility/governance/security tokens. Ironically, the entities best suited to this are our established institutions, as they are not allowed to issue speculative tokens due to regulatory uncertainty.

Hence, they may be the saviours of web3 who bring this amazing technology to the masses. Web3, like web2 before may well end up going full circle in this regard.

The web3 landscape is continuing to evolve, especially with respect to the choices being presented to enterprises for blockchain initiatives.

Historically when it came to choosing a blockchain network, enterprises had to decide between public or private networks. Now they also have the option of layer 2 networks and creating appchains which further complicates the decision-making process.

However, even against this complex landscape, whenever I am asked which platform is the one that will offer the most future-proof technology for them to build upon, the answer is simple — Ethereum, using the Hyperledger Besu client.

My reasoning follows.

The Ethereum Virtual Machine

Ethereum and its execution environment, the Ethereum Virtual Machine (EVM) is the TCP/IP of web3. It is a common standard for executing programs on decentralised blockchain networks running on the internet.

All major blockchain networks have made an effort to be EVM compatible because the lion’s share of developer activity on blockchain networks is via the Solidity programming language created 9 years ago. Smart contracts written in Solidity powered the initial coin offering (ICO) craze in 2018, the DeFi summer of 2020, the NFT mania of 2021 and continue to underpin the vast majority of blockchain applications.

Using a platform that is EVM compatible enables you to tap into the ecosystem with the widest amount of tooling, which lowers the time to market to launch products.

However, choosing to work with the EVM is only part of the story. Once you have decided to explore this route, you still need to understand how best to work with Ethereum. This will involve running Ethereum node or client software.

The node will be used to either bootstrap a private Ethereum network or operate as a node on the public Ethereum network.

Public or private or other?

Originally most enterprises were interested only in private blockchain networks that they could control either themselves or via a consortia. Today the story is different.

Public blockchain networks have a proven technology track record and with their global reach, organisations are starting to utilise them to reach a wider number of customers than they could historically with their products and services.

For example, brands such as Nike and DC Comics have created NFTs to engage with their customers. Also, financial brands such as Paypal have launched stablecoins to bring fiat currencies on-chain. This trend is only going to accelerate in the coming years.

You also have a landscape of layer two blockchains and application-specific blockchains (appchains) being launched which are also applicable to enterprises. Appchains enable companies to launch a public or private blockchain that is secured by the public Ethereum network.

This securing via the public Ethereum network is achieved by rolling up batches of transactions, or proofs of transactions together and storing them on Ethereum. Once stored on Ethereum, they cannot subsequently be altered due to the immutability guarantees of the network.

This enables appchains to avoid the typical challenges associated with securing public blockchain networks which typically require a cryptocurrency to incentivise participants to act in an honest manner.

The result of this is that when organisations decide to work with blockchain technology, they need to choose a technology stack that not only meets the needs of enterprise, but also provides the deployment flexibility to work in multiple network configurations — public and private, and potentially with appchains.

This is where Hyperledger Besu comes in.

Hyperledger Besu

Hyperledger Besu is the only Ethereum client that was designed for enterprise at the outset. Prior to the emergence of Hyperledger Besu, when companies wanted to work with Ethereum technology, they would provision one of the public Ethereum clients such as the Ethereum Foundation's Geth.

This was suboptimal for companies on a number of fronts:

• It is licensed using the GPLv3 license which is a less permissive license.

• The only way of influencing the project’s development is by creating issues and submitting pull requests directly to the project developers.

• There are no support services available from vendors for the software.

• Modifying it to support private blockchain deployments requires hacks to the codebase which have no chance of being incorporated into the main codebase. This makes it very expensive to maintain.

This combination of challenges meant that it was non-trivial for organisations to work with Ethereum technology until Hyperledger Besu was created.

Hyperledger Besu was first launched in March 2019 under the name Pantheon. It became a Hyperledger Foundation project a few months later and was rebranded Hyperledger Besu.

Hyperledger Besu is the only Ethereum client that was designed to support both permissioned and public blockchain networks.

What this means is that you can run Hyperledger Besu as an execution client on the public Ethereum network. You can use this node for transacting with the network, deploying and interacting with smart contracts.

You can also create your own public or private permissioned blockchain network using Hyperledger Besu. This means you can create your own independent blockchain network, should this be more appropriate for your use case.

It's important to emphasise that Hyperledger Besu supports both deployment options equally — it is not primarily intended for a public or permissioned network deployment.

The association with Hyperledger is also important for Besu. The Hyperledger Foundation is an open-source, global ecosystem for enterprise-grade blockchain technologies. It provides a neutral, open community supported by technical and business governance.

What this means practically is that anyone can contribute to Hyperledger Besu — you don't need to be a member of the foundation. However, the project is governed by the Hyperledger Foundation, which ensures that the needs of its members (enterprises large and small) are being met via its governance process.

This governance is vital, as enterprise software has different requirements for open-source projects. A lot of web3 has been built thus far via open-source projects which were not designed with the needs of enterprise in mind.

This isn't an issue per se, these open-source projects secure hundreds of billions of dollars of digital assets and underpin public blockchain networks.

However, when things go wrong, an enterprise doesn't want to have to deal with a community, it needs other businesses it can interface with whose primary focus is to provide services to them.

They need support service level agreement, the ability to contribute to roadmaps, regular release cadence, and permissive licenses. Most importantly of all, they need projects to have a lifetime that will outlive their creators.

Having a neutral entity in the mix, such as Hyperledger helps ensure projects meet those guarantees.

This is why for enterprises, utilising Ethereum's Virtual Machine with Hyperledger Besu is the most enterprise-friendly way forward.

What About Layer 2 Networks and Appchains?

In the future, the landscape of layer 2 technologies and appchains will mature, and they will become clear winners in this space.

However, at the current time, there are a large number of competing layer 2 and appchain providers competing with each other for market share. The market they are focusing on is public blockchain networks with open-source technologies.

They are not established offerings for enterprise. However, most of them have adapted Ethereum client technology for their networks.

What this means practically is that it's likely Hyperledger Besu will be adapted to support certain flavours of layer 2 networks or appchains.

Given that its modular architecture supports public and private networks, these types of extensions can be added without too significant an overhead.

This will ensure that Hyperledger Besu will continue to thrive supporting enterprises building with Ethereum technology.

The evolutionary nature of blockchain technology can create challenges for enterprises when it comes to choosing a platform to focus on. Hyperledger Besu is the only Ethereum-compatible client which was designed to service both the needs of enterprise and public blockchain networks.

Enterprises are well served by it due to:

• It's the only Ethereum client which was developed for enterprise.

• It is governed by the Hyperledger Foundation which provides both technical and business governance.

• Not being reliant on a single company or person for its long-term survival.

• Permissive licensing via its Apache 2.0 license.

• Its modular architecture allows you to use it for both public and permissioned blockchain networks.

• It's ability to evolve to support layer 2 networks.

The future is uncertain, but Hyperledger Besu helps reduce many of the challenges organisations face when working with technology, which is an achievement that should not be underestimated.

This month marks a big milestone for me in the Ethereum community. In September 2016, I announced the open-source library, Web3j, that I had authored to the world.

Web3j was created out of a clear need that I saw, but the outcome of creating this software was nothing like I expected.

In December 2015, I left the corporate world of banking. I'd spent the previous 10 or so years building technology platforms in the financial services industry, a place that was full of smart people, but a working environment that wasn't conducive to my way of being — too many meetings and processes.

I'm the kind of person who thrives with variety and needed to find an out (in fact in the years since then I’ve being formally diagnosed as being on the autistic spectrum, which no doubt plays into this).

The first out was a failed startup, Huffle with a couple of great co-founders. We tried to launch a new home loan product in Australia, but quickly learned that convincing a bank to launch a product based on a financial model you have is not easy. Especially when a) you’re a tiny startup and b) this product won’t significantly move the needle initially for them as far as volume is concerned.

As a result of this failed experiment, I'd decided to start looking into this blockchain thing as Huffle was wound up.

What I saw then (this was around May time 2016) was that Ethereum seemed to be the blockchain platform that most of the buzz was about — if you searched blockchain in Google, I'm pretty sure Ethereum was the first thing that came up. Although it wasn't particularly clear what it was from the website back then.

Anyway, I started digging around, built a cryptocurrency mining rig (which I can talk about some other time), and then started getting more involved in my local community — the Sydney Ethereum Community.

In all those years working in banks, I'd been building on the Java platform. Since the early 2000s, Java has been adopted very heavily in enterprises due to its ease of deployment and automated memory management compared with previous programming languages.

This meant that by the 2010s, significant parts of our modern financial infrastructure ran on the Java platform. It was further boosted by Google using it as the basis of their Android mobile platform.

Back when I was continuing my foray into blockchain and Ethereum, there was a lot of talk about how blockchain was going to be a transformative force for financial services.

Given my experience, I noticed a clear gap in the market. How were all of these financial services companies which had spent the previous 15 years building platforms on Java going to hook them into the Ethereum network — in my view the most promising blockchain technology?

Scratching beneath the surface, it was clear there was no easy way for Java developers to work with Ethereum. I was shocked!

It was such an obvious opportunity! Surely someone else must have thought of it by now? After all, this was midway through 2016, the Ethereum network had been live for a year (it launched on the 30th July 2015).

I spent time researching numerous code repositories on GitHub and found libraries for JavaScript, Microsoft's .NET platform, but nothing for Java (Note: there was an early Ethereum node implementation — EthereumJ, but this was for running a node, not simply integrating with the network which is different).

I was jittery with excitement. Usually, the problem that engineers face when trying to do greenfield development (building something from scratch), is that invariably someone has beaten you to it and it doesn't make sense to handcraft everything yourself.

It was time to start creating a prototype.

In order to talk to a node on the Ethereum network, you have to connect with a protocol called JSON-RPC. JSON-RPC is the same protocol that is used to communicate with nodes on the Bitcoin network (a number of implementation details of Ethereum were copied from Bitcoin, such as JSON-RPC, and the Secp256k1 elliptic curve used for cryptographic operations).

There were a ton of different method requests and responses I needed to implement, ranging from getting information about the node software being run to the transactions within a block.

Once I'd implemented a few and still hadn't found a library doing anything similar, I was ready to commit, and make this project a reality.

I spoke to my wife, we'd had our first kid a few months earlier and I said to her that I'm going to need to properly get my head into it for a few weeks to get this first version done. This meant spending as much time as was humanly possible devoted to the library.

I was at home, so when I needed a break I could hang out with my son which was fortunate in these early years of his development.

In those weeks the days just whizzed by, I'd get in front of my computer as early as I could, put my cans on, get into the zone, and before I knew it another day was over.

This carried on until I had something that provided the core functionality to work with Ethereum. In my naïvety, I had thought the JSON-RPC implementation was all that was required.

However, I quickly discovered that to do anything meaningful with Ethereum, you had to also support the creation of wallets, signing of transactions and the ability to create, deploy and interact with smart contracts.

This kept me busy. Especially as I didn't just want to create any old integration library, I wanted to create a high-quality library, with excellent documentation and build a community around it.

The naming of the library was easy — Web3j. The reason is that almost anyone who worked with Java was aware of the major logging library — Log4j, plus you also had the JavaScript integration library web3.js. Web3j spoke to what the library was perfectly in my view.

Web3j was formally announced to the world via the Ethereum subreddit on Sunday 18th September 11:26:35.

Momentum slowly started to build. By the end of November, four different people I had never met before had contributed to the library, and I had to start focusing my energies beyond just writing the library and fixing bugs.

It was time to invest time in the documentation and think about how I could promote Web3j and build a community around it, such as the below talk I gave in early 2017 (which has has over 60k views).

This is where the hard work truly started, and 7 years in I’m happy to say the project is still going strong. We’ve been fortunate that almost 200 people have made contributions to the library and it’s been downloaded over 2 million times!

Whilst I’m no longer contributing to it myself these days, the team at Web3 Labs are. There is also a steady stream of new users.

Earlier this year I was at an event where staff from a major American bank mentioned how useful they were finding Web3j for their work with blockchain. This and numerous similar conversations over the years reaffirm that I made the right decision all those years ago in creating it.

The vast majority of open source software is a gift to the world. It solves a problem that people have. In Web3j’s case it was using one of the world’s most widely used programming languages, Java to develop on Ethereum. I’m proud that I took the time to create this all those years ago, and I wouldn’t change anything in that respect.

I've been reading David Deutsch's excellent book, The Beginning of Infinity of late. For those of you who aren't familiar with David Deutsch, he pioneered the field of quantum computation. He is the Alan Turing of the field.

In the Beginning of Infinity, David ties together concepts from mathematics, physics, computation, biology and philosophy to underline the importance of epistemology (the theory of knowledge), and why it is so vital for the evolution of the human race.

Given the breadth of the topic, there is far more to the book than I will discuss here, but there are two topics that surface and resurface that have relevance to web3 and blockchain technology.

These are reach and universality.

Reach

Within the Beginning of Infinity, reach is used in the context of knowledge. The reach of knowledge is infinite. The only limitations are on how far it can be transmitted by a medium.

The internet provides a global reach of knowledge. As long as you have access to a device with connectivity you can access this. But without the tools to understand the information being presented, you cannot access the knowledge.

Universality

This is where universality comes in. Universality is the ability to encode knowledge in a universal framework. Our alphabets and languages are universal. Using words we can describe most things. However, for those that can't, we use letters from the alphabet to make new sounds and words.

This universality of language is another crucial building block. Emojis, whilst incredibly useful in their ability to articulate feelings and emotions transcending languages are not universal.

Unlike with words or letters, you cannot use emojis to describe anything to someone, and this is where they fall short of being universal.

Computer programming languages are universal. Using any Turing-complete programming language we can program a computer to do or simulate whatever we want.

There are limitations we may encounter in terms of the resource availability to perform all of these computations, such as CPU, memory or storage. However, the limitation is not in the programming language itself, but in the availability of the required resources.

Outside of physical limitations, the only limitation of what a computer can perform is our knowledge. We cannot program a computer to have artificial general intelligence without having the knowledge of how creativity works, and therefore how we can create it ourselves.

It is the ability of the human race to be creative and create knowledge that allows us to evolve as a species and have reach beyond the boundaries of our own planet.

Reach and Universality in Web3

Blockchain networks such as Ethereum, are global in their reach. In being built on the internet, they are able to reach a global population of users. However, the purpose of these networks is not to share knowledge and communicate as the internet was created, but to provide a global platform for computation.

Exactly what type of computation is debatable, it means different things to different people. For some, it is a global settlement layer. For others, it is a platform for transacting with others in a trustless way. For others still, it is a safe haven for their money.

These possibilities are underpinned by the universality of these blockchain networks.

Like the World Wide Web before them, which provided universal communication protocols, blockchain networks provide universal, Turing-complete programming languages upon which smart contracts can be created and executed in a permissionless and decentralised manner.

Given these technologies are still in their infancy, there are many resource constraints on what computations can be performed on them, but they will no doubt improve by many orders of magnitude over time.

However one cannot underestimate the significance of the reach offered by these networks.

• They make it possible for people to have an entirely digital existence, without any dependencies on states.

• They provide a neutrality that cannot be overly influenced by a single actor or state.

We are just getting started with these networks. In decades to come they will underpin our everyday lives in some shape or form.

There are criticisms levied toward blockchain networks due to the financial speculation and scams that take place on them. They are not perfect. Our knowledge can always be improved and the builders of web3 are continually searching for ways to make them more resilient, performant or simpler for users.

This mindset of continually improving upon what we have will increase the reach and universality of blockchain networks (David Deutsch talks about all problems being soluble in this regard). The more accessible they are to users, or people building real-world applications, the more they will flourish.

There is so much more to the concepts of reach and universality than I can do justice for in a short article. I believe blockchain technology is of such significance because it transcends geographical, political and cultural borders.

There is so much more that could be debated on these subjects.

To Learn More

For more on reach, universality and lots of other thought-provoking material, I really encourage you to read The Beginning of Infinity. It's an amazing book.

I also encourage you to listen to Brett Hall's excellent podcast — ToKcast where he breaks down many of the concepts discussed in chapters of the book and provides his own perspectives on the content too.

There are no shortcuts to getting your head around David's material, but it's definitely worthwhile taking your time to work through it. I have only scratched the surface, and cannot possibly confess to understanding the material fully.

His work provides you with so much perspective unifying mathematics, physics, quantum theory, computation, epistemology, biology, philosophy and psychology. His work has no other equal to the best of my knowledge, which is why it’s so important to study.

People talk about change as the one constant in tech. The more cutting-edge the technology, the faster it evolves. This is very true of web3. Going back 7 years to when I first immersed myself in it, it was easy to keep up with many of the projects and innovations.

Most users hung out in Reddit communities and the signal-to-noise ratio on Twitter/X was somewhat healthier. Many of the projects and businesses were still highly experimental.

Businesses were generally focused on launching their private blockchains to take advantage of the immutability and decentralisation properties offered by this technology.

Remember, this was pre-NFTs, DeFi, stablecoins, and even FTX.

Things were clunky, but it still worked, provided you had keen technologists on your side.

A lot has changed since then, concerning the right use cases businesses should be going after in web3. Although the only place we've seen web3 go mainstream has been in crypto trading and investment, the time now is right to double down on the following opportunities.

These are stablecoins, NFTs and appchains.

These aren't necessarily the endgame for web3, but they are all highly impactful uses of the technology which will become far more widespread in the coming years.

Stablecoins

This is one for financial services firms. The blockchain rails that we have in place powering DeFi are perfect as a distribution mechanism for existing types of financial products.

Be it stocks, ETFs or currencies, by creating fully collateralised stablecoins on public blockchains, issuers have the opportunity to reach a far larger user base than they can presently.

By taking advantage of public blockchain networks, anyone globally can hold these assets, and trade them 24/7 using both centralised and decentralised cryptocurrency exchanges.

This ability to issue assets on a global scale simply wasn't possible previously. There are regulations that issuers will need to abide by in their local jurisdictions, but the flexibility for users holding these assets must not be underestimated.

Simply put, those organisations that embrace blockchain rails to bring traditional financial assets on-chain will in the coming years be able to bear the fruits of their labours.

NFTs

NFTs have undergone a wild ride during the past few years. From the heights of the NFT mania of 2021 to where we are now with a number of them trading at far more reasonable prices than they once did.

The value of NFTs doesn't lie in speculating on their prices, but in providing digital art, collectables and in-game assets that may or may not have scarcity associated with them.

Many of the world’s best-known brands including Adidas, Nike, Coca-Cola, Budweiser and Starbucks have leveraged NFTs to great effect for their customers.

They are a new channel by which brands can engage with their customers directly, and demand for such digital assets is only going to increase in the coming years.

AppChains

Back in 2018, private-permissioned blockchains were all the rage in enterprises. Fast forward to 2023, appchains are the trending blockchain technology.

Appchains, also known as layer two or even three networks, are blockchain networks that are secured by public blockchain networks but offer lower cost and higher transaction throughput than the base layer one network such as Ethereum.

They secure themselves by rolling up batches of transactions, or proofs of transactions onto the underlying network they are running on top of.

Appchains are the private-permissioned blockchains of 2023. companies and consortia are running them using the likes of Polygon, Optimism and Linea to spin up networks to focus on specific use cases.

Appchains are significantly simpler to launch than a dedicated blockchain network due to being secured by an existing network. They can effectively piggyback off the existing network.

This is achieved via a node on the network called a sequencer that is responsible for batching groups of transactions or proofs of transactions from the appchain to the base layer network.

As appchains are linked to an underlying network, in addition to benefitting from the underlying security guarantees, assets on the underlying network can be transferred to and from them via bridges, which simplifies the historic interoperability challenges that have been faced with blockchain networks.

Their lifespan can be finite too. A rollup can be retired at some point in the future, with the proof of the activities that took place on it whilst active being permanently encoded in the ledger of the underlying blockchain.

It is this combination of factors that makes appchains particularly attractive. The silos of private permissioned networks are still valid for some use cases, such as highly regulated financial networks. But for more general use cases, the creation of assets or decentralised applications to solve specific business problems makes sense.

Appchains in their current form are more of a platform for innovation for the companies and projects that choose to run them. But given the lower costs of creating these networks, coupled with the significantly lower fees and greater throughput they offer, they will offer a new platform for decentralised applications, which is why they are so relevant now.

The Frontier

The frontier technologies of web3 still include DAOs. Longer term the structures offered by DAOs will likely be embraced for company registries, in a similar manner to how global currencies will be underpinned by blockchain networks.

The issue faced by many DAOs currently is that there is often a token associated with them. This token may be used for governance. However, due to the red tape associated with issuing a legitimate security token in many jurisdictions, their governance tokens are treated more like a facade for a security token by holders.

In addition, the transparent nature of activity that takes place for many is too radical compared with conventional business which takes place with a degree of privacy. Be this for competitive or regulatory reasons.

DAOs remain a fascinating concept in web3, and some have managed to thrive. However, for corporate initiatives, they are less well-suited, without support from company registries. With this would come much more streamlined reporting if able to utilise blockchain technology.

Where next?

Stablecoins and NFTs are proven technologies for bringing established assets on-chain. Businesses with strong brands or those offering financial products should be considering very carefully how they can utilise web3's rails for digital assets to reach a new class of users.

Those businesses without digital assets they can bring on-chain should be considering instead how applicable appchains can be for them. Again to provide value for their customers or industry.

We're at a point in the evolution of web3 where the stars are starting to align with specific opportunities for the technology, and those I've discussed here are a good place to start.

The consumer fintech revolution of the past decade has been monumental, impacting everything from consumer banking to payday lending. Providing access to services via smartphones provisioned at scale via the cloud, changed how many consumers accessed their day-to-day financial services.

Bank branches have been shut on mass, in response to the many fintechs banks that launched without physical branches. In fact, the only thing physical about many of them is the debit card they issue should you opt-in.

It was the internet that provided the reach at the heart of the consumer fintech revolution. In the previous decade, we'd seen the retail industry decimated by Amazon, where retailers realised how much larger a market they could reach by setting up shop online to service a far wider potential customer base than they could ever hope to reach with physical stores.

The Neobanks

Monzo, Revolut, Starling and others were some of the fintech darlings that sent tremors throughout the banking industry. By building banks from the ground up, unconstrained by legacy plumbing and technical debt that had been accumulated over the decades prior, they would change the face of banking forever, or so they thought.

What they ended up doing was give many of the incumbents an overdue kick into the 21st century, forcing them to start taking topics such as user experience and customer service far more seriously than they had been prior.

These changes have progressed us to such a point where the majority of our banking is app-based, and in-person relationships are by the by for the most part.

The Problem With Scale

This is fine when everything works, but the problem with these app-based banking models is that they're optimised for scale and automation, which means they fail people who don't fit into some predefined customer criteria.

When you combine this approach with heavy-handed regulation that exists for financial services, you have a very real problem with people becoming unbanked.

I was reminded of this recently with the setup of a holding company account, where a large number of banks simply stated that they did not cater for such companies.

Those that did would often allow you to sign up for their services, but once you started providing information about the source of funds to satisfy AML legislation, they would typically decide it was too much hassle for them and simply close the account.

One of my staff previously too had issues with their bank where their account was frozen by a leading bank for a few months and during this time they could not access their funds, or be provided with the reason as to why their account had been frozen in the first place.

There's been countless other horror stories I've heard about people, especially in the crypto and web3 communities where long-standing accounts have been closed with little in the way of explanation.

To compound matters, with today's digital banking landscape, generally, the only recourse people have is via online chat, which may or may not have a real human at the other end of it.

In recent weeks, the former head of the UK's Independence Party (UKIP) Nigel Farrage has in fact taken it upon himself to try and give a voice to the unbanked, after he himself had his account closed (and subsequently reopened) with Coutts Bank.

He hasn't been promoting crypto as a possible solution, but he does seem set on championing this cause.

Automate everything

KYC, AML and other legislation exist for good reasons. But fintechs have attempted to automate as much of the provisioning of these services as possible. This means when things don't work it is the end customer that suffers, not the bank. If only one in every thousand of your customers doesn't fit into your nicely streamlined platform, why should you care?

There is no real incentive to cater for these outliers, and this is the problem with many of our modern fintech platforms. They're optimised for scale and automation, not the needs of your non-average customer.

The only way I could see this changing was via some sort of government-mandated legislation that guarantees businesses and individuals access to a full range of banking services. But unfortunately, banking is not a true public service which makes this problematic.

So the days of relationship banking are long gone for all but the most wealthy, and it’s unlikely to change.

Fintech's problem is cryptos opportunity, and we're now in a fortunate position whereby anyone with an internet connection can choose to hold crypto assets natively, without fear of access to them being blocked.

Onboarding to crypto exchanges does require KYC and AML checks. However, they don't tend to be as cumbersome as those required for banking. I presume this is due to the nascent nature of the industry, but it's likely to only get worse in time.

Fortunately, people do have the option of being fully bankless, whereby all of their crypto assets are stored in self-custodial wallets. This does come with its drawbacks, but it’s also incredibly liberating for people who've experienced challenges with our banking sector.

Unfortunately, we are unlikely to stay this way forever. GDPR ruined the internet browsing experience in Europe, with cookie popups on every website. Who knows what legislation could be enacted to protect web3 users.

SBF's Final Hurrah

Just before he was exposed as a fraud, SBF had the audacity to suggest some approaches to legislating decentralised applications that were enforced at the website layer. I hate to say it, but if native web3 DApps end up being regulated as financial applications, it's likely to happen here or at the protocol layer.

Neither option bodes well for native web3 apps.

It may be that regulators remain focused on the rails that onboard users to web3 — exchanges. However, it will likely be dictated by how the majority of users interact with DApps.

Base's ability to onboard new users

In these respects seeing how Coinbase's Base network evolves will be interesting. It's feasible that their network becomes a rail for onboarding a number of users to DApps and DeFi protocols.

This is in part because of Coinbase's market-leading position (behind Binance), but also their ability to control the Base network to a degree. Whilst it has been launched as an Ethereum Layer 2 network using Optimism's OP Stack, Coinbase will be able to yield significant influence on the DApps that the users interact with via their platform, which has the potential to be a very significant number of users.

Coinbase will not only have responsibilities to provide a safe experience to its users it is onboarding to Base, but also regulatory responsibilities.

This is where Coinbase's actions with policing Base will be interesting to observe. Will they try to continue to promote many of the decentralised and permissionless freedoms associated with Ethereum, or will they have to bow to regulator pressures and be willing to de-bank users?

Coinbase has always tried to take the higher ground towards promoting decentralisation. Coinbase wallet is non-custodial, and Base is a layer 2 network as opposed to a permissioned Ethereum network like Binance Smart Chain.

I'm sure Brian Armstrong would like Base to be truly permissionless, but as the regulatory landscape evolves it has the potential to force Coinbase's hand in the matter.

With the permissionless nature of Bitcoin, Ethereum and other cryptocurrencies, it's likely that there will now always be crypto rails available for those whom the existing banking industry appears not willing to cater to.

In these respects, crypto and web3 has already succeeded where fintech fails.

There are still numerous barriers for a significant majority of those people in using these digital currencies. Without greater certainty on what regulation looks like for crypto and DeFi, there is still risk users could be cut off via protocols and DApps bending to the will of governments.

However, at the current time, crypto is an inclusive ecosystem and this should be celebrated.

One of the mantras Arnold Schwarzenegger lived his life by was "Be Useful". His father used to say to him Instead of pissing away your time with stupid arguments, ask yourself if you have improved the world. Ask if you were useful!

This idea of being useful is a crucial part of the mindset of web3 builders and communities. For decentralised protocols and projects to function, you need committed collaborators. People who are there to help each other out and serve a greater purpose.

The Global Settlement Layer

Many builders see the Ethereum network as the internet's global settlement layer. An internet-scale network that can be used to facilitate transactions between anyone, anywhere. This isn't just limited to payments, but any type of digital asset. Be that a currency, utility token, stablecoin or real-world asset.

It's unfortunate that blockchain and web3 has been tarnished by a few bad actors who have seen the technology as nothing more than a platform for scamming users.

One should be asking the question of how is this project or team being useful with the product or service they are providing. Claiming to make people rich is not enough.

If a project or protocol provides a tangible benefit to its users and those who bore real risk benefit from this as an upside, that's ok. But that benefit needs to be real and impact their everyday lives, not be theoretical.

Real World Applications

We have already seen blockchain networks leave their mark across a number of applications, including:

• Stablecoin issuance has benefitted millions globally by giving them an easy way to access more stable financial products such as dollars and ETFs.

• Decentralised lending protocols and exchanges have allowed people to lend and exchange their assets at competitive rates regardless of where they are located.

• NFTs have given new ways for brands and artists to reach their fans directly. It's also provided new revenue opportunities which is especially relevant for artists.

• Even within enterprises such as J.P. Morgan, blockchain has been useful in creating new efficiencies for their business.

These are useful services. Not everyone has to be a fan of them. But the builders who have created these services benefit a tangible user base.

How to Start Being Useful

When people start trying to find ways to contribute to the web3 ecosystem, being useful is the best starting point. Whether it's cleaning up documentation or code, or simply helping respond to users on Discord, all of these service are valuable.

These types of contributions have been a significant part of the success of open-source software. However, within the web3 ecosystems, these contributors are often compensated for their work. Many protocols and decentralised applications have grant programs that reward contributors who consistently want to make an impact to projects. Examples include Gitcoin, the Ethereum Foundation and Web3 Foundation. There’s also retroactive public goods funding from Optimism for those who provide a positive impact to the Optimism Collective.

These are just some of the ways in which the usefulness of contributions is recognised, and something that is unique within web3.

Onboarding the Next Wave of Users

In order to onboard the next wave of users to blockchain networks, builders do need to continue to ask themselves how they can be useful to those who aren't currently engaging with this technology.

I don't believe the answer lies with more tokens, but in working on tools to:

• Streamline the user experience

• Bring more familiar financial assets on-chain such as securities

• NFTs by well-known brands (such as Coca Cola has just done).

• Using DeFi for real world assets and stablecoins, not just web3 tokens

• Bridging the gap between decentralised autonomous organisations and real-world company registries, allowing governments and tax organisations to use blockchain-based structures to simplify reporting and management.

Build Useful Applications Not More Blockchains

The emphasis is on building useful applications. We don't need more faster, optimised base layer blockchains. There are already more than enough. Instead, the great minds already contributing to, and wanting to contribute should be considering how to make these blockchain platforms more useful to everyday people and businesses.

Blockchain is the most significant technology to have been created since the internet. Its reach is global and in the future, it will underpin large swathes of our everyday lives. Its potential impact should not be underestimated.

Useful Infrastructure Product and Services

At Web3 Labs we embrace this mindset in building useful infrastructure products and services. This is spread across the following offerings

• Our open-source Web3j library for Ethereum saves Java and Android developers thousands of hours of development time when they want to write applications on Ethereum.

• Our Chainlens Explorer provides blockchain users with a user interface to see what activity is taking place on the blockchain and provide easy access to normalised blockchain data. Again, this is incredibly time-consuming data to decode and access yourself if you're working directly with a blockchain network.

• We are maintainers for Hyperledger Besu and provide the support organisations need when running it in production.

• We publish useful content. For instance, our Web3 Innovator's Podcast shares conversations with leading voices in the blockchain and web3 communities. Additionally, we provide regular thought leadership on where we're heading with web3, as you are reading here.

The mindset of being useful is universal and applies to all parts of life. But for blockchain networks and decentralised applications to truly thrive, builders and communities have a responsibility to make these networks useful to the widest number of potential users.

If we cannot make the most significant technology, since the internet ,useful to a large part of our society, it won't have fulfilled its potential, and that is why Arnold's words resonate so strongly within web3.

For more inspiration from Arnold Schwarzenegger, I highly recommend all of the following:

• His daily email of positive inspiration “Arnold’s Pump Club”

• The Arnold documentary on Netflix

• His autobiography "Total Recall"

• The classic documentary Pumping Iron

What is the end goal for crypto and DeFi with respect to TradFi? Crypto maximalists will state that it's about Bitcoin, Ether, etc replacing fiat currencies. But this is not the case.

Cryptocurrencies will continue to thrive, but they won't be the assets that come to dominate TradFi. What will is the rails that have been created by public blockchain networks.

It is these rails that will completely change the way in which financial assets are distributed. At the heart of this is the token abstraction, which currently powers utility tokens, stablecoins and NFTs, but it is the stablecoins that will come to dominate TradFi.

Why Stablecoins are the Future of Finance

Stablecoins aren't just those that are tied to fiat currencies, such as USDC, but also those tokens that track any financial instrument or commodity. The stable in their name refers to the fact that their price is dictated by the underlying asset.

Stablecoins in assets other than currencies are only just starting to appear on-chain. Backed Finance have made available ERC-20 tokens that track treasury bonds, high yield bonds and the S&P500. The underlying assets they use are ETFs, and Backed is responsible for ensuring the token is redeemable for the underlying asset.

We’ve also just seen Paypal enter the fray with their dollar-backed stablecoin PYUSD.

This stablecoin model taken by Circle, Paypal for USD, Backed with their tokenised securities, where we have fully collateralised on chain TradFi assets is the future of asset distribution.

Why Tokenised Means Choice

This approach will change how a significant number of people hold their assets. By existing as tokenised assets on public blockchain networks, holders get new freedom that does not exist in TradFi currently.

That freedom is the choice of where you store that asset and the ability to trade it whenever you want.

You can choose to hold the asset with a custodian, exchange or broker, or custody it yourself via a cryptocurrency wallet.

This freedom also comes with the ability to trade it via a centralised or decentralised exchange or loan it. These markets are available 24/7, which is also something that doesn't exist for traditional classes.

If you want to purchase traditional securities or currencies via a broker or exchange, you are constrained by the hours in which you can trade them. Whilst cryptcurrency exchanges run 24/7, only our existing FX markets come close by offering 24/5 trading. Futures, stocks and ETFs follow exchange hours which are 8/5, at best — public holidays reduce that number.

The end-user is not the only beneficiary of these freedoms, issuers of these instruments have the ability to reach a global population, which is likely far larger than their current base of holders.

None of this is new information to users of crypto. What is really important to highlight is that we are discussing traditional financial assets here. Cryptocurrencies by virtue of them being native assets on these networks also come with these same benefits. But what is being highlighted is how our traditional financial assets will change to embrace this. Cryptocurrencies may or may not feature in this from their perspective.

How DeFi Needs to Evolve

DeFi in its current form does allow users to layer DeFi protocols upon protocol, harvesting additional yields in the process. This is not the opportunity for main street. This is the frontier opportunity, which comes with appropriate levels of risk/reward for those willing to embrace it.

The majority of users investing in financial assets need to understand the risks associated with the investment. Having a team of anons running DeFi projects via Discord server is good for builders and innovators, but less so for your average investor.

Investors need clear accountability and to understand what their downside risk looks like. For most people, the risk of a hack sending investor funds to zero is not an option. The way this needs to be achieved is via trusted organisations offering fully collateralised tokenised securities.

These trusted organisations should include asset managers, ETF providers and exchanges. What's crucial is that there's an intermediary there to provide a backstop against catastrophic events. Their job is to ensure that the tokenised asset will always be redeemable against the underlying, keeping investor funds safe. Otherwise the risk profile of tokenised assets is simply too high.

Why Legislation Will Remain

Existing legislations need to be adhered to also. Participants in this new stablecoin ecosystem need to be willing to have KYC'd identity available to the institutions that they are using. Issuers of stablecoins, exchanges and custodians will continue to have to take onboard AML/CFT requirements.

Many advocates of crypto and web3 will not support this view, but it's short-sighted not to align with regulators and governments in the jurisdictions within which you wish to do business.

It may be possible to avoid such oversight, but if you want to reach the average investor with this technology, you need to adhere to the protections that have been put in place.

Global Rails for Finance

Public blockchains provide far greater reach than our existing financial systems. Our financial systems are not broken, but they can improve. They must evolve to support these new rails that are now available.

Rails that provide a standardised representation of a financial asset in a tokenised form. Rails that are available to anyone globally with an internet connection. Rails that provide a choice to the owner of whether the asset is held with an intermediary or in their own cryptocurrency wallet.

The foundations of these rails have already been deployed and are proven. Our existing institutions have a choice to embrace them or miss the greatest innovation provided to them since the internet.

Last week DeFi faced another crisis, this time it was with one of the stalwarts of the ecosystem, Curve Finance.

Curve is a leading decentralised exchange, popular with many DeFi users for its liquidity pools which enable depositors to earn a yield on a number of popular tokens. This includes Bitcoin, Ether, and staked Ether tokens such as stETH and RETH. Also stablecoins such as USDC and USDT.

What has made Curve so popular is that in addition to earning a yield on their deposits, liquidity providers can boost their earnings significantly through Curve's governance token, CRV.

For instance, Curve's most popular pool, 3pool consists of DAI, USDC and USDT. The base APY on the pool is 0.85%, however, this can be boosted from 0.94% to 2.35% in CRV rewards by locking up their CRV tokens.

You can further boost your return via Convex Finance and earn additional returns via their CVX token.

The Curve Exploit

Last week Curve announced that there had been a reentrancy exploit on some of their pools. It was caused by a bug with an old version of the Vyper compiler. This bug allowed attackers to drain certain Curve pools. A total of approximately $62m was extracted.

Like Solidity, Vyper is a smart contract development language for Ethereum. Vyper is the second most popular smart contract language after Solidity and is based on the widely used Python programming language. However, it is responsible for securing under $3bn of the TVL in DeFi against over $66bn with Solidity.

It's Only When the Tide Goes Out You Learn Who's Been Swimming Naked

The Vyper bug wasn't the only issue. Curve's Founder, Michael Egorov had pledged 34% of CRV's total market cap across a number of DeFi protocols.

This meant that if CRV's token started plummeting below a certain threshold the CRV collateral would start flooding the market in order to liquidate the position.

In order to sure up Curve, Justin Sun, founder of the Tron blockchain then stepped in with others to purchase CRV to help stabilise prices.

As Ryan of Bankless pointed out, the potential CRV selling pressure was plain and simple, leverage going wrong.

But people really should be paying attention to who holds the tokens associated with the DeFi protocols they are using. And what these holders are doing with them.

The net effect is that Curve appears to have survived this time around, but it does highlight clear issues still facing the DeFi ecosystem.

Managing Software Vulnerabilities

Developers face an endless game of cat and mouse with malicious hackers trying to find vulnerabilities and exploit their code. In the past, this was constrained to corporate systems that sat behind firewalls which often required social engineering or lax security practices to get into.

Public blockchains changed this. In creating decentralised applications, huge honeypots of cryptocurrencies were created for attackers to focus their energies on. Why jump through all of the hoops to exploit institutions, when you have hundreds of millions of dollars available on public blockchain networks?

Anyone who has spent significant time working as or with developers will appreciate just how time-consuming development is. No code is ever perfect or complete. There are always ways in which it can be improved or optimised.

Heartbleed

This includes the identification of vulnerabilities which can often lay dormant for years before being discovered. The Heartbleed OpenSSL vulnerability of 2014 is one such example, which was caused by a change made in 2012 to the code base.

It's estimated that 17% of the webs secure web servers were exposed to the vulnerability when it was detected. The exploit enabled an attacker to retrieve encryption keys on servers and impersonate others accessing them.

Parity Multi-sig

Back in 2017, we also saw Parity Technologies' multi-sig wallet exploited to the tune of 153,037 Ether ($290,770,300 in today's prices). This was caused by a vulnerability in a library dependency.

In the years since there have been countless further exploits.

It will never be possible to eliminate errors in code. Even with AI techniques, the underlying large language models (LLMs) are trained on code that has been created by fallible humans.

Can we ever reach a point where decentralised finance can truly fulfil its potential?

I do see areas of the ecosystem in which I have great confidence, such as Circle's USDC. However, they control token issuance and are very transparent in how they operate as a business, including providing audited reports of their reserves.

Also with base network protocols themselves such as Ethereum. While I don't envisage any events on the horizon that could threaten the solvency of Ether or the security of the entire Ethereum network, there are ways to recover from major events as the DAO hack once demonstrated (although few in the Ethereum community would be supportive of this level of meddling again).

Stacking DeFi

Where I believe the problem lies is in the ability to stack app upon app and create complex positions spread across multiple DeFi apps.

This is where someone deposits tokens with Curve, deposits the CRV into Convex for a yield boost and may further lock up their CVX tokens. Curve may be one of the stalwarts of DeFi. However, with each additional DeFi protocol used the risk to users increases significantly.

Within each DeFi protocol, there will be a small number of developers who truly understand how their smart contracts work. When you combine a number of protocols together, that number becomes even smaller.

This means that a very small proportion of users will have any idea of how safe their funds really are, and instead is simply chasing the advertised yields.

Teams do take measures such as engaging auditors to help verify their contract source code. But are those auditors re-engaged with every change? Are those auditors constantly monitoring all dependencies for updates or vulnerabilities? Even if they are, some exploits will still slip through.

Protecting Mainstream Users

I believe that for DeFi applications to go mainstream we will need greater protection for users. This could be in the form of institutions that have enough capital to make good for their users in the event of exploits. Or simply insurance for them.

Perhaps centralised exchanges will end up being the gateway that many use? Seeing how Coinbase's Base network evolves in this regard will be very interesting, as they will have the ability to provide backstops in the network.

It is incredible the amount of value that has become locked in the DeFi ecosystem during the past few years. However, from a personal perspective, I still don't feel comfortable putting any meaningful amount of funds into DeFi protocols unless I can monitor what I'm doing with them around the clock.

I have fewer concerns with stablecoins such as USDC and Ether, as there's far more transparency with how they operate, which doesn't require digging through smart contract code.

Without some breakthroughs in how user funds can be protected, I do think that many DeFi protocols will remain niche applications for those users who really understand what they're doing. Especially now as you can deposit funds with normal banks for 4-5% yields which come with government guarantees.

The risk tied with DeFi simply isn't worth it. I remain as ardent a supporter of blockchain and web3 as I ever have. But parts of DeFi still feel like high-stakes games of poker, and I'm no gambler.