Thin Applications

Joel Monegro’s latest piece revisits his earlier articles on The Blockchain Application Stack and Fat Protocols. Joel’s insights back in 2014 and 2016 weren’t far off from how crypto networks operate today. But this new piece offered some clarity on one of his more highly debated hypotheses, the idea that most of the market value in crypto would accrue to the protocol layer (hence “fat protocols”).

Whereas protocols have the potential to address a much larger market, as they are the foundation of all the crypto layers built above it, Joel insists this does not translate to fewer opportunities for “outsized returns” at the application layer. Protocol layers have more development requirements, and therefore require more investment, which means most of the “value has to accrue to that layer to maintain equilibrium.”

On the other hand, applications benefit from reduced development costs. The various underlying protocol layers provide the foundational infrastructure, allowing new ventures to build “thin” interfaces that interact with the Web3 world below. The question that now remains is how do these applications capture value, to which Joel points to three possible models: fees, Amazon-style vertical integration, and user staking with an in-app token.

Why it matters:

• One important note is that value capture at the protocol layer also depends on how participants use and view the network’s token. For instance, users will value tokens that function similar to a commodity differently compared to assets that present the ability to accrue a monetary premium.
• Joel highlights user-staking as a promising and cost-effective model for applications to capture value. This strategy changes the user-service relationship by creating an economic lock-in for users, which lets apps retain users and, theoretically, offers users the opportunity to benefit if the app succeeds.