Riskgaming

Is web3 really just looking for Web 2.5?

Description

web3 technologies have received prodigious funding the past two years as founders and VCs collectively search for the path to the next evolution of the internet. But how do we bridge the gap between the ubiquitous Web 2.0 world with what we see coming in web3? In this episode, Lux VC investor Grace Isford joins host Danny Crichton to discuss the key infrastructure investments in what she is dubbing “web2.5,” the crypto developer stack, and what’s next for crypto in 2022.

Transcript

This is a human-generated transcript, however, it has not been verified for accuracy.

Danny Crichton:
... And the reason we say toast is the T of toast will pop and it'll be the-

Grace Isford:
Toast.

Danny Crichton:
... Loudest sound we get. So we want to just make sure that-

Grace Isford:
Good enunciation.

Danny Crichton:
... It sounds good. The intro now doesn't matter. It sounds like crap. We're going to talk about, so you don't want to call it Web 2.5?

Grace Isford:
Like Web 3 infrastructure or just I think I'm open to talking about it.

Danny Crichton:
Okay. We'll see how it goes. All right. I'm going to count myself in because this is a do-it-yourself operation here. Three, two, one. Welcome to Securities by Luxe Capital. I'm Danny Creighton, your co-host, and today we have Grace Isford, our new partner out here on the East coast in New York. Grace, welcome to the program.

Grace Isford:
Thanks so much for having me. Very excited to be here.

Danny Crichton:
When I think about the theme of this show Securities, my goal is to just dive right into the complexities where science, technology, finance, and the human condition intersect. Web 3, crypto, blockchain or whatever you want to dub it. The set of technologies is a quintessential example of exactly the kind of phenomenon I like to dive in deep on. There are huge economic and national consequences here at the macro level, but also massive changes at the micro level on how applications get built and what infrastructure developers are going to use in the future.

It's that latter topic we're going to talk about today, and it's one that you've been quite interested.

Grace Isford:
It is. I spent a lot of time at the intersection of crypto, crypto infrastructure and Web 3. I think it's really interesting you think about what Web 3 actually is and how you define that. I think there's been a lot of hype in the ecosystem. A lot of consumer venture firms are equating Web 3 to the new big consumer trend, and I think it's helpful to understand what Web 3 is versus Web 2. So the Web 2 world siloed organizations like the Big Fangs of the world, there's no real decentralized server or back in control.

In Web 3 by comparison, Web 3 you're seeing very different backend where value accrues more to those who contribute some of the contributors, operators in the network versus decentralized entities. So a lot of companies who Web 3 are built atop blockchains or decentralized ledgers versus going back to a single server on the backend.

Danny Crichton:
I want to zoom out, but you were just at ETH Denver, which is sort of I think the biggest conference for the developers and a lot of the ecosystem around Ethereum, which obviously is at the core of a lot of these Web 3 applications. And I'm curious just from the 2022 high level holistic feel, how did Denver feel for you? Are people excited? Are they worried? What'd you get out after a couple of days in Denver?

Grace Isford:
Yeah. The major thing is the energy. It felt almost electric in terms of operators, builders, investors, luminaries in the space. Vitalik was there and that was really exciting. The number one thing that a lot of crypto infrastructure or applications are looking to build right now is these bridges or partnerships with either other layer ones, other folks in the network, other protocols. The big takeaway on Web 2.5 or institutions are not truly thinking yet about how they can be fully Web 3. And so there's still a big dearth of tooling both from an education and accessibility standpoint, but also just from a pure infrastructure scaling, privacy security standpoint on how do you actually get institutions on board.

Danny Crichton:
Well, let's talk about that gap between the tooling available and centralized apps versus decentralized ones. I'm thinking of Amazon Web Services, Simple Storage Service, S3 can store files online central storage in a Amazon data center somewhere in the world versus say a file coin where there's a decentralized network of file storage and there's an incentive layer for folks to store that file, make sure it's protected, make sure there's backups and reliability. And that's sort of the difference between the Web 2 model of decentralized infrastructure versus decentralized Web 3.

Grace Isford:
Yeah. And I think maybe it's easy to give an example, so in the Web 2 world, if you're operating a consumer application. So for example, you're operating some game on your web browser, you really do little groundwork as a consumer just besides opening that browser or verifying maybe you're logging credentials for the game and then playing. In the Web 3 world, on the other hand, the backend infrastructure is meaningfully different. Maybe the front end may be similar looking to you, but you may need to have a MetaMask wallet established money imported into that wallet, often a four to five day time lag just to get money into that MetaMask, especially for in the US.

And then on the backend, there's no centralized database storing application state or logic. So there's like a decentralized backend node where there are smart contracts kind of define the logic behind the scenes. So if I'm, again, that same consumer user playing that game, even if I'm interacting with the front end in a similar way, on the backend, there's probably a node as a service like an Alchemy or Infura that's dealing with the EVM and the blockchain nodes behind the scenes.

Danny Crichton:
And the EVM for those folks who are totally new to blockchain-

Grace Isford:
Yes.

Danny Crichton:
... Is the Ethereum virtual machine.

Grace Isford:
Correct.

Danny Crichton:
Running on Ethereum. Well, so one of the challenges, I think, what you're really exploring as an investor right now is this kind of transition from the Web 2 to Web 3 world. So in the Web 2 world, very well established at this point, we have a pretty, the stack always seems to change every five years. But in terms of maturity, we have analytics, we have databases, we have backends as a service, front ends. We have a lot of libraries and services that are designed to quickly get apps up to speed.

We're trying to build that in Web 3, and that's sort of much more early because we're both struggling with exactly what to build, what does analytics look like in a decentralized app and how do you aggregate that in a decentralized way that's still in within the spirit of the Web 3 model. And then you also have this gap between the convenience and ease of use of the user experience for Web 2 apps. We've gotten really good at how to click and do that really fast, whereas Web 3, as you mentioned with MetaMask, super complicated. I had to buy an ENS domain name.

Wow, that took a lot of work. I had no idea it was going to take six different services and it's super complicated. So I'm curious when you're looking at that transition between Web 2, Web 3, what's interesting to you today? What's happening in 2022?

Grace Isford:
I think it's something I've been spending a lot of time exploring and thinking about. Because if you think about Web 3 and all the applications and companies that we're seeing a lot of folks invested in, I think VC investment in crypto and blockchain is up to over 10 bill in Q4 of 2021, that's like 500% year over year. So a lot of money and companies are being started in that Web 3 space. However, if you're going to believe those apps can scale to again hundreds of millions of users in the metaverse, we need the systems to be able to enable these applications to be built on top.

So there's a lot of companies in that space. I would argue many of them haven't even really hit escape velocity yet. And you need those companies to really become massive 10, 20, $30 billion companies in order for majority of these Web 3 applications to be able to scale the hundreds of millions of users.

Danny Crichton:
You look at the Web 2 world, there's sort of two investment thesis. You invest in the applications, you look at the end users, you invest in the Ubers of the world, and then part two was invest in the infrastructure layer, the picks and shovels and the gold mine metaphor. And you say, well, don't try to find the gold. Just go and build Levi's jeans and picks and shovels and everything will be fine. You're really focused on the infrastructure layer.

Grace Isford:
I think by far it's the most interesting maybe for me coming from a data infrastructure investing background. When I started investing in data infrastructure, I actually want to invest in ML companies, and this is a few years ago now, and realized that the most of the data infrastructure wasn't even there to enable you to run ML models at scale. I think we're actually facing an analogous situation right now in crypto where there's a lot of really cool sexy things and candy atop in the Web 3 world, yet we're not actually thinking about the vegetables and that stack of infrastructure that folks need in order to reach escape velocity and scale applications.

Danny Crichton:
I was just writing on the Securities blog this week about the quote or aphorism, "If you build it, they will come." Over the last 10 years, I think a lot of folks have tried to dismiss that and say, well, just because you build it doesn't mean they will come. You need to do customer development. You need to be a lean startup, find product market fit, move really, really fast, iterate. But I think in crypto, the big question has always been, well, what's the killer app that's going to get everyone to use crypto globally? Facebook has two billion going on, three billion users.

Crypto has certainly in the hundreds of millions have touched it in various ways, but doesn't seem to be critical to anyone's workflow. To me, this is actually a great example of where infrastructure, and yes, if you build it, they will come. If you empower the developers building crypto apps in the Web 3 world going forward, the apps will come. And in some ways, in the centralized Web 2 world, you needed Apple to launch the app store and foundation and a bunch of libraries in order to allow objective C to be used to build apps. That's essentially what we're investing in today.

Grace Isford:
A cool analogy is there's only 34,000 developers today or something of that nature building open source crypto projects. That's very small. Roughly-

Danny Crichton:
That's crazy.

Grace Isford:
... The same number of developers as Amazon, so.

Danny Crichton:
I feel like that number should be in the hundreds of thousands.

Grace Isford:
It should be. And I think it comes back to your original question is how do we scale this to hundred millions of people? What's the killer app? It's really the UI, UX accessibility component of how do we make crypto more accessible to more people, whether they be developers, consumers, institutions, etc. Specific to developers though, in Rust, Solidity, Python, a lot of the crypto apps today you can actually build with a Web 2 coding language. Most front ends are built with reaction JavaScript. The Web 3 and Ether JS libraries are super user-friendly and I encourage folks to take a look at them online.

A lot of companies I've talked to have encouraged their team to hire Web 2 folks because it's quite easy if you're a developer to learn solidity quickly and or adopt a lot of these libraries to deploy smart contracts. So I think we're going to see a massive growth and increase on the developer count and probably it's far out of date already.

Danny Crichton:
When you look at the evolution of ML, I mean you mentioned this earlier, folks on data infrastructure. When deep learning sort of became popular and popularized in 2014, the early libraries were a mess. It was very hard to do. It was something that Google had the infrastructure with PhDs to go build, and then we saw a series of libraries, things like PyTorch and others who really democratize access to this to the point where there were stories of Japanese farmers using Python coding in a library off the shelf in order to figure out the best crop rotations for their fields or whatever the case may be.

I think we're seeing a little bit of the same pattern in crypto today where I remember looking at some of the code bases for Ethereum in three, four years ago, 2017-ish, and they were terrible. I mean, there's really no nice way to put it. They were not commented well, they were not abstracted well, the code was very bad. But we're increasingly, I think, seeing kind of reusable primitives where there are best practices, the code quality has increased and that means a lot more folks who may not have been interested before, at least they don't have to spend a year trying to understand some of these languages.

They can do a weekend project, a hobby project, and get up to speed.

Grace Isford:
I think we're going to see a lot of companies training engineers, but also just helping bridge the gap. Get back to the web 2.5 thing. What are the series of companies that enable a developer and institution or an individual to port their skills over from Web 2 to Web 3 and more specifically be able to port over their scales, port over their companies, port over their usage at scale with high grade security, with risk fraud, privacy checks. Maybe not at the same extent what they would have in the Web 2 world, but at least to a certain extent, that someone from a major financial institution like BlackRock or Goldman or elsewhere will be able to deploy smart contracts and/or hold or manage crypto at a far greater scale than they do today.

Danny Crichton:
One of the interesting things here obviously is community is a huge part of a lot of these token sales is building up a huge audience, building up a lot of enthusiasm, momentum around a sale. And that's a lot easier I think in the user space where obviously Bored Ape Yacht Club being the canonical example, but many others have gone out there, have built up huge audiences, lots of folks are focused on them. It gets a huge amount of excitement. No one cares about internet infrastructure. No one's going out and going, I'm investing in the next ML decentralized API layer, come join my token sale.

And I'm curious when you think about some of the either tokens or just financing and how you deal with community, are the developers kind of the community you're trying to build there and therefore you're getting traction? Or how does community work at the infrastructure layer versus the user space?

Grace Isford:
One thing that I think is very cool about specifically the infrastructure side and just define more broadly is the modular Lego like aspect where it's very open source in nature. Many folks are building a top one another, sharing code, sharing resources, and so very, it can maybe to early days of open source kind of enterprise technology versus I'd argue at the consumer application layer, I'd argue it's a bit more hypey. It's a little bit more mimetic. Folks are doing things based on who is aping a token or doing this or doing that versus what is fundamentally a big developer problem or shortcoming that needs to be solved.

Danny Crichton:
I think that's the hardest part of understanding the Web 3 world today. There's incredible hype going on in the consumer layer, and so we see all these huge headline prices for NFTs, these massive hacks with Axie, and we think, God, what's the value of all this culture and chaos? But I think if you scratch beneath the surface into infrastructure, you start to have a really different perspective. We're starting to see tools that actually empower developers to build apps that they couldn't code before. And to me, that's really exciting.

But we're obviously going to be talking about this a lot in 2022. So for now, I want to thank you, Grace, for joining and chatting Web 2.5 with us.

Grace Isford:
Thanks, Danny. Appreciate it.

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