Web3 exists as a response to Web2’s limitations and therefore will not be the domain of the closed hyperscale behemoth
It’s no secret that Mac and PC followed very different product philosophies.
The iMac, the Macbook, and their many variants are all components within the “perfect” closed ecosystem that Apple aims to create. This requires Apple to meticulously curate every product and feature it distributes, to maintain its “walled garden.” The proprietary Mac operating system, design language, and applications are all constructed completely in-house. To further its vertical integration model, Apple elected to begin manufacturing its own hardware, with the most notable component being its flagship M-series CPUs. Today, Apple meticulously oversees its manufacturers, distributors, and retailers, effectively controlling every aspect of the supply chain.
With so much recent scale and attention being achieved these days with Web3 protocols, it’s a good time to check in on the ethos that underpins the most promising and exciting projects in the space. Does the true heart of Web3 still lean more toward the original ideas of openness and decentralization from the early days? Does a horizontal approach to building, design, community, and ecosystem development seem more conducive to scaling DeFi protocols?
Undeniably, the Web2 behemoths are remarkably efficient at what they do. A horizontal approach to operating and scaling a social media company built on an opt-in data collection model, for example, would probably not have served Facebook, its ad partners, and its end users as well. Our thesis here isn’t about good or bad: it’s about apples and oranges. Each approach has appropriate applications based on what you’re ultimately trying to do. So it’s important to remember that in many cases, Web3 isn’t necessarily here to replace or fix Web2; it’ just here to accomplish a different set of ends that can often exist side by side, the way that Gen Z, Millennials, Gen Xers and Boomers are all reading this sentence at the same time, and all have different valid perspective and voice. One isn’t simply here to displace and throw away next.
It is with this context in mind that we posit: Vertical integration for Dapps built on blockchains may seem like a smart choice, but it is still ultimately a more difficult approach than the horizontal methodology being utilized by the most inspired, cutting-edge protocols coming out of the Cosmos network these days.
Microsoft chose a more modular and community-driven approach with the PC. Main retailers standardized their hardware and software specifications, giving consumers more autonomy over replacements and upgrades for their systems. PC users today have true flexibility and autonomy over designing and building their systems. Everything from CPUs, to motherboards, and operating systems are interoperable, opening the door for cross-party collaboration and innovation. This kind of horizontal approach enables rapid integration of new products and frictionless improvement of existing products.
Today, we have observed a similar dichotomy in Web3. Fast-growing protocols and ecosystems often have to make trade-offs between horizontal and vertical integration strategies to grow their product offerings and user bases. This is a difficult choice to make. It’d be hard for anyone to say confidently that they have the unquestionably correct answer- but we could argue that for Web3, there is a better one. Those paying attention will note that tried and true L1s such as Ethereum, Solana, and Avalanche have all adopted the horizontal methodology in order to grow into the diverse and successful ecosystems they are today. One could even argue that this philosophy is also at the core of the Cosmos ecosystem.
dYdX is the 2nd largest decentralized exchange in all of crypto, and it has recently made waves by announcing that it will be migrating its protocol from the Ethereum ecosystem to the Cosmos ecosystem. With an average daily trading volume of half a billion dollars, dYdX is no small player in the crypto space; let’s not forget that it has done more volume in the not too distant past than Coinbase. dYdX’s move to Cosmos is extremely promising and legitimizes the case for Cosmos and its interoperable Internet of Blockchains.
One of the unique benefits offered by Cosmos is the ability for each protocol to operate as its own ecosystem or to build freely on others. It enables decentralized apps to scale via app-specific blockchains, reducing network congestion and transaction fees. dYdX has adopted Mac’s approach and elected to build out its own blockchain with a full suite of products entirely in-house. This approach can produce great results, however, for it to work, the product must have a vast gap in both quality and brand awareness when compared with its competition. In crypto, things move quickly, and creating a closed ecosystem means you do not benefit from one of this space’s key innovations -- decentralized collaboration.
From our perspective, projects that emulate the PC model are more in line with the core philosophy and fundamental tenants of Web3 and will ultimately grow and scale far faster than their closed counterparts. This speed will present builders with greater opportunities to contribute to developing ecosystems where they will be rewarded with genuine ownership. This approach leverages the experience and technology of our peers in the DeFi ecosystem. Most MAANG companies are desperately trying to offer more significant compensation and more benefits to draw and retain employees, but crypto has no lack of motivation or talent.
Macs are clearly successful. However, we believe in the absence of an unassailable moat, a closed system is excessively high risk and incredibly centralized in nature. We recognize that no one team or protocol can shoulder this herculean task. There is no “perfect” product in DeFi, and the key to widespread adoption is not to create a “super-app” but instead to build out various tools to cater to each user's specific needs.
The horizontal thesis is responsible for inspiring new developments such as orderbook-specific blockchain projects built on Cosmos that aim to offer a smoother and more efficient way of trading assets and derivatives, ultimately bringing a new wave of institutional and retail capital onto Web3. DeFi currently has an estimated market cap of 43B USD, dwarfed by the NYSE sitting at 30 trillion USD. But DeFi is in its infancy, so the best emerging projects with a horizontal ethos intend to continue laying the technical and philosophical foundations for future financial instruments and pioneers.
About Jay Jog
Jay currently leads engineering for Sei Network, an L1 blockchain with a built-in orderbook. He previously worked full-time at Robinhood, where he saw the company 10x in employee count and go through major milestones such as the IPO. At Robinhood, he worked primarily on KYC, and ultimately led the KYC portion of crypto deposits and withdrawals. In 2021, he started building across multiple ecosystems with his friend, eventually leading to the formation of Sei.
About Sei Network
Sei Network is the first orderbook-specific L1 blockchain. It is built using the Cosmos SDK and Tendermint core and features a built-in central limit orderbook (CLOB) module. Decentralized applications building on Sei can build on top of the CLOB, and other Cosmos-based blockchains can leverage Sei's CLOB as a shared liquidity hub and create markets for any asset. Designed with developers and users in mind, Sei serves as the infrastructure and shared liquidity hub for the next generation of DeFi. Apps can easily plug-and-play to trade on Sei orderbook infrastructure and access pooled liquidity from other apps. To prioritize developer experience, Sei Network has integrated the wasmd module to support CosmWasm. More information is available at www.seinetwork.io
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.