The Defi world is booming (on a relative scale) with an over 40% increase in the amount locked (in USD) in the month of January. The introduction of multi-collateral DAI (MCD) in late Fall last year, has clearly made a difference.
— Dr Efi Pylarinou (@efipm) February 3, 2020
Admittedly, the amounts involved are still very small; shyly approaching the $1billion mark in a cryptocurrency market with a total market capitalization of $260billion.
My post today is inspired by Joel Monegro`s excellent review of the nearly 5yr old `Fat protocol` concept. Keep in mind that at the time Ethereum wasn’t around yet. In `Thin Applications` he looks to make sense of Web3, a work in progress with the dazzling choice of blockchains to choose from.
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What is a Thin Application?
Well, let`s look at an example that we are all familiar with, that is NOT a Thin Application. Coinbase, the popular crypto application, is nothing more and nothing less than a traditional business model. It charges exchange fees for custodying your cryptocurrencies and for offering an onramp and an offramp to fiat money and the traditional banking system. Coinbase, is actually in a business that has high barriers to entry as it is expensive to get the licensing required, to be compliant in all jurisdictions and to maintain security. Coinbase, is also a business that can enjoy economies of scale in the conventional way, much like GAFAs do. Their clients are captive of the Coinbase interface which is not interopable with the rest of the world. Client data also resides on the Coinbase interface.
A Thin Application is native to Web3 which means Non-custodial & sovereignty of personal data. Current live examples of Thin Applications are ventures that offer microservices on open-source protocols. They don’t require lots of capital to go live, because the main costs are carried at the protocol layer. For that reason they can launch before even getting Seed capital. As Ivan on Tech said in a recent broadcast, `this is the time to build applications`.
Of course, Thin Applications cannot charge fees like Coinbase. This is exactly where we will see a genuine business model innovation.
Joel Monegro mentions three Thin Application examples, Zerion, InstaDapp, and Multis. Placeholder has recently invested in Zerion which is a friendly app to manage Defi assets. It is not centralized like Coinbase and therefore, cant charge fees for the bridges it has built so that its customers move from one Defi protocol to another (MakerDAO, Compound, Uniswap, Set).
InstaDapp launched first a Smart Wallet for Defi assets and later also a dashboard (a la Zerion) with interop ability between MakerDAO and Compound (Uniswap coming soon).
Smart Wallets are another Defi innovation that will be competing with hardware wallets more and more. They not only give control of the private key management to a smart contract but they also aim to offer a wallet recovery procedure. I am a beta tester for the Pillar Smart wallet which combined with Pillar layer 2 solution (PPN) that uses the Pillar as a meta-token, can become a leader in crypto adoption. Pillar announced during their General meeting last week, several important ecosystem partnerships – Abridged.io and Connext are two mains ones (you can watch the entire GMA here).
Thin Applications clearly rely on the growth and value creation of their protocols that they operate on – e.g. MakerDAO, Compound, Uniswap, etc. The open question remains what will be the business model for these Thin Applications?
Assuming they grow their user base, will they choose to launch an in-app token to reward their users while still maintaining their non-custodial & sovereign principals?
Will they become a `money lego` to a decentralized core banking system?