What to Know About Investments in Crypto Infrastructure

Dan Edlebeck

We speak with Dan Edlebeck, head of Growth at Phi Labs, about why investments in the infrastructure in the crypto and blockchain spaces are critical. Edlebeck also shares where investments in the digital assets space are currently being deployed. 

How has the digital assets space been performing?

I see a divergence in the investment and inflows of capital into crypto and the innovation and building happening in the industry. Crypto capital flows have been largely stagnant over the past nine months. After the FTX collapse in November, there has been cold feet around capital deployment in the industry. According to data from Bloomberg and CoinShares, capital asset flows in crypto have been net negative throughout 2023. However, the past month has seen an uptick in investment. I believe emerging investment markets, including the MENA region, will make meaningful investments. 

From the development and innovation lens, the industry is flourishing. Development continues to happen at the infrastructure layer: Layer 1 (Move development language, EVM development, Comsos IBC, Solana, Layer Zero) and Layer 2 blockchains (Optimistic rollups and ZK rollups) are gaining lots of traction. Liquid staking derivatives and real-world assets are two emerging sectors bringing in builders and entrepreneurs that have never interacted with web3 previously. Innovations in blockchain interoperability and modularity of the tech stack (separating the data availability layer from the execution layer) that are bringing some of technical builders and academics into the industry.

What is a Layer 1 Blockchain and what should investors understand about it? 

A Layer 1 blockchain, also known as a "base layer" or "on-chain" solution, refers to the underlying infrastructure of a blockchain network. It is the foundational layer where the core protocols and consensus mechanisms are implemented. Layer 1 blockchains are responsible for the fundamental functionalities of the blockchain, such as validating transactions, reaching consensus on the state of the network and maintaining the integrity of the data. Key characteristics of a Layer 1 blockchain include consensus mechanisms, security, smart contracts, scalability and interoperability.

Examples of Layer 1 blockchains include Bitcoin, Ethereum, Cardano, Polkadot, Solana and Archway, among others. Each of these blockchains has its unique features, consensus mechanisms, and use cases, catering to different application scenarios and user requirements. Layer 1 blockchains play a crucial role in shaping the blockchain landscape and facilitating decentralized applications across various industries.

Where are investments in the space going? 

Investments in crypto are currently being deployed into some of the most interesting technical developments and innovations in the industry. There is a lot happening at the infrastructure layer. Areas where artificial intelligence meets the blockchain ecosystem in novel ways (especially trading and research) are attractive to investors. Liquid staking derivatives and real-world assets are two emerging sectors that will be two big narratives and will attract significant total value locked in these protocols over the next couple of years. Other interesting innovations include blockchain interoperability and modularity of the tech stack (separating the data availability layer from the execution layer) that are piquing technical investor and builder interest.

Why are investments in infrastructure in the crypto space critical? 

Investment in blockchain infrastructure is critical to realizing the full potential of this transformative technology. It provides a strong foundation for building secure, scalable and efficient decentralized applications that can revolutionize industries and reshape the way we interact with data and conduct transactions.

By investing in robust blockchain infrastructure, organizations can strengthen their cybersecurity and protect sensitive information from unauthorized access.

As blockchain technology becomes more widely adopted, the demand for efficient and scalable networks increases. Infrastructure helps optimize the performance of blockchain networks, ensuring they can handle a growing number of transactions and users without sacrificing speed or efficiency. 

Different blockchain platforms and applications have unique protocols and structures, making it challenging for them to communicate and interact seamlessly. Investments in blockchain infrastructure can focus on interoperability solutions that enable data and asset exchange between different blockchains, fostering collaboration and efficiency. 

Smart contracts are self-executing agreements with predefined conditions written into code. They automate processes, reducing the need for intermediaries and streamlining operations. To leverage the full potential of smart contracts, robust blockchain infrastructure is essential to support their secure and reliable execution.

Since blockchain enables the tokenization of real-world assets, representing ownership digitally, investment in blockchain infrastructure facilitates the creation, issuance, and management of these tokens, unlocking new opportunities in finance, real estate, supply chain, and more.

Blockchain's immutable and transparent nature also allows for better auditing, transparency and compliance. By investing in blockchain infrastructure, businesses can establish a tamper-proof record of their transactions, ensuring regulatory compliance and enhancing accountability.

Infrastructure investment also drives financial inclusion in underserved/unbanked areas, providing access to banking and financial tools for individuals who lack traditional banking services.

Continued investment in blockchain infrastructure also fosters innovation and research in the field. This leads to the development of more efficient consensus algorithms, improved privacy solutions and enhanced scalability, making blockchain technology more versatile and applicable to various industries.

What is blockchain commoditization and what should investors know about it?

When you think about web2, think about how value is created and captured. Apps or platforms, like Instagram or Twitter, operate via an “http,” similar to the way that a dApp operates on a blockchain. But in web2, when a successful application generates a lot of user volume and activity, it doesn’t have a problem making sure it is compensated accordingly because all of the money is going to that base layer of infrastructure. 

Right now, the blockchain world isn’t set up this way, and that’s essentially the whole thesis behind the commoditization event we feel is basically already upon us. 

Essentially, the infra projects that have seen the explosion of investment and scale have done it by stressing the pure speed of the blockchain. And that’s been important in the early days of the space when we were all trying to figure out what is even possible. 

But now that we’re approaching a world in which block times are more or less the same or at least similar; the metrics for “winning” are being completely rewritten. Teams now need to demonstrate a lot more value than just pure speed and a rapidly growing community: They need to show why their economic model is sustainable for builders and users over the long term. And that’s just not at all where we’ve been in this space yet. It’s exciting and a long time coming. 

The biggest takeaway for investors is that you really need to understand the environment you’re paying into in terms of a long-term vision. Is the groundwork being laid for equitable scaling over time, or does it feel more speculative, where the only discernible value of the project is the token? 

What is archway blockchain, and how does it fit into blockchain’s future?

In a nutshell, Archway is the Cosmos-native Layer 1 blockchain designed to enable developers to Capture the Value they Create for a network. By enabling developers to earn, this has never been more important as the global blockchain space stands on the precipice of technological commoditization. Archway aims to provide developers with a more equitable distribution of value and opportunities to build self-sustainable dapps, while simultaneously benefiting from the value they bring to the network. By introducing two new modules to the Cosmos SDK, the Protocol distributes a portion of gas fees and inflation, as well as a smart contract premium, to developers. Archway is coming out of stealth to provide developers and dapp creators the remuneration avenues they deserve.

Archway began with Griffin Anderson, an early contributor to the Ethereum ecosystem. As a developer, Griffin faced challenges on conventional platforms and recognized the unfair distribution of value in the Ethereum community. This led him to envision a protocol that could empower developers to benefit from the demand they help create for the underlying networks they build upon. In February 2021, Griffin established the concept of Archway with a team of like-minded individuals. They formed Phi Labs in early 2022 and began contributing to the Archway protocol. The Torii Testnet launched in April of that same year, enabling the Archway community to test the protocol's core modules. A year later, the Archway protocol is ready to come into the world and empower developers everywhere. 

This interview originally appeared in our TradeTalks newsletter. Sign up here to access exclusive market analysis by a new industry expert each week. We also spotlight must-see TradeTalks videos from the past week.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.



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