Dev2Dev, a potential ambiguous technological arbitrage

Original Title: Dev2dev: A Potential Technobabble Arbitrage
Original Author: Matti, Zee Prime Capital
Original Translator: Kaori, BlockBeats

At Zee Prime, we were one of the first teams to officially propose and publish middleware papers in early 2021, and we launched the second part in 2022. Middleware encompasses everything that is not an application or a base protocol. In other words, it is everything that lies between the two.

Another term used to describe middleware is infrastructure, which is clearly the paradise of today. All the magical space between L1 and applications is what we should be excited about. Infrastructure is the future. Alongside AI and ZK, there are modular technologies, and so on… and many more industry terms.

Related Reading: “A Comprehensive Overview of Web3 Middleware and Infrastructure”

Today, many large venture capital firms must prove their value while raising significant assets under management (AUM) from those who know little about the field. In fact, creativity in the crypto space is quite limited, and innovative resources are scarce. This is why infrastructure has become a default response. It is a simple solution—a developer's hell.

The crypto space has very few users apart from airdrop hunters, so it seeks self-redemption through B2B scenarios. This implies a warm, familiar concept of making money in Web2—B2B SaaS—you are not selling to users (because there are none), but to other businesses (of which there are many).

Thus, when pension fund boards realize that homomorphic encryption is not actually a scientific term for "undisclosed homosexuality," everyone will turn their attention to the cold technical terms represented by this infrastructure, but they will say, "Follow the money."

"Selling Shovels"

The initial crypto B2B concept has a small problem. Many cryptocurrency companies sell services to other cryptocurrency companies—but who are the customers of those other cryptocurrency companies? You guessed it—other cryptocurrency businesses.

What is missing is money. Without money, there is no "B."

Unless there are venture capital firms with a lot of funds that cannot be invested elsewhere, willing to fund a thriving developer-to-developer ecosystem, or what we call—dev2dev.

However, this situation cannot last forever, but it can persist for a while. Two years? Just in time for a four-year cycle (for those who believe in astrology). It is risky, but it has worked in the past.

Acronyms and buzzwords are popular because they can mean anything. In other words, you can use technical jargon to make it so that no one really knows what you are talking about. This is why you end up in a circle driven by institutional funding, focused solely on mutual back-patting among internal developers.

If you cannot see the actual product, then you are likely the product.

Thus, in Web3, developers provide the perfect product/market fit for venture capitalists, who can allocate capital and then raise new funds because "we need new infrastructure" and "building infrastructure is difficult and time-consuming."

What we ultimately get is the same self-referential token yield feedback loop, but this time it is a "composable" infrastructure self-referential dev2dev ecosystem. It is expected that retail investors will eventually buy tokenized developers.

Resources and Creativity

Infrastructure does need improvement. But it is questionable whether it should be built top-down before users arrive.

Amazon was the first user of AWS, which was built for internal use; it just happened by coincidence, not design, that it became the core infrastructure of Web 2.

Those with users are most likely to develop downstream. I do not want to burst your ETH-maxi decentralized bubble, but if Metamask exclusively routes its order flow to its builders, then they will build every block (this may have already happened; perhaps you can check the chain?).

Lex Luthor does not want to inspire some deep-tech media company to rebrand itself as Metamaskless, so this re-centralization attack vector is unlikely to materialize anytime soon. But it gives you insight into the fragility of the decentralized stack/infrastructure narrative.

Nevertheless, the insincere infrastructure narrative remains a seemingly conservative bet. It is a good analogy from the age of big tech, which the older generation finds interesting because it is a familiar concept. Therefore, if you combine the sexy buzzword ZK with the infrastructure SaaS analogy, institutional investors will be attracted.

Predictable returns from selling "pickaxes" and "shovels" look very enticing in boardrooms.

BlockBeats Note: In the crypto venture capital field, "Selling Shovels" refers to companies engaged in infrastructure and services related to cryptocurrency, blockchain, etc., rather than directly investing in cryptocurrencies. These companies may provide trading platforms, wallet services, blockchain technology development, and more. This phrase emphasizes that companies providing infrastructure and tools for the entire industry may be more profitable than directly investing in cryptocurrencies.

This is how to combine the drip-feed institutional narrative with unimaginative developers and serial entrepreneurs, seeking lifestyle businesses wrapped in tech jargon.

Large venture capital firms find it difficult to double down on the cryptocurrency frenzy of the past cycle to sell to their limited partners. Moreover, funding creativity is cheap. Great ideas often do not require significant investment. This is why venture capital firms are obsessed with resources; for them, developers are resources that need funding.

What I expect is that the next innovation trigger will be funded by 1% of the capital that has flowed into crypto startups over the past few years, meaning that most of the directed funds will be surpassed by very little capital supporting creativity.

The fact is that in the crypto space, the problem of innovation is not money, but creativity + execution.

Despite fierce competition in investing in infrastructure (and the massive resources this requires), today's high-stakes game is not being played at the infrastructure level. The Selden's Law applies here:

"In any controversy, the intensity of feeling is inversely proportional to the value of the issue involved."

This is reflected in a quote often cited by Henry Kissinger: "The reason university politics are so vicious is because the stakes are so small." When the objective differences are minimal, you need to compete fiercely to maintain some sort of differentiation. This differentiation is often more fictional than real, so there are 20 L2s and ZKbs that need funding.

After all, venture capital firms have fully exploited the narrative of L1. They have extracted all the value from this space, and even more. Now, they are refocusing their attention on infrastructure while avoiding the most important question: Where are the users? In the process, they also overlook existing infrastructure projects that have been built for some time.

Infrastructure Arbitrage

How to creatively leverage foolish funds to support technology? Are there any truly worthwhile infrastructure projects to support? The generalization I propose will certainly have exceptions; there are indeed some interesting and important efforts in building Web 3 infrastructure.

As I mentioned earlier, in the investment space of Zee Prime, we have been active in infrastructure building over the past few years, while most of what we see now is merely recycling old ideas and products or cramming them into current trends (ZK, L2, etc.). The difference is that they are gated and not freely accessible on the secondary market.

While attending the Token 2049 event, I noticed free alpha providers and "folk hero" Arthur Hayes quietly promoting Filecoin. This made me realize that playing the infrastructure game on the secondary market could be a robust arbitrage. Infrastructure investments in private rounds mainly rely on illusory innovation.

Innovation often comes at a high cost, borne by large venture capital firms, and then quickly drops in price after unlocking. Whether it is storage or decentralized RPC (what we actually need), account abstraction, indexing, etc., there may be another way to play the infrastructure game.

The early winners of DeFi Summer 2020 were not teams built by venture capital firms, but projects that had been innovating and executing for a long time, whether Synthethix or Aave.

If you dig deeper, you can find teams on the secondary market that have received ample funding and purchase tokens at a significant discount. Not to mention that their allocations are more favorable compared to private rounds. This is a risky bet, but it is not the first time that public trading market performance has outperformed venture capital.

When this shiny new toy is not actually that shiny and comes with a heavy venture capital burden, it may be possible to avoid it. After all, the opportunity to invest in great tech companies is never just a few rounds of private funding or a few months. It is at least a multi-year opportunity.

If you must bet on infrastructure, consider those experienced teams that have weathered the bear market and have been building for years. After all, Hayes has a bigger trap than most venture capital firms, and you know that big traps mean alpha returns.

Disclaimer: Zee Prime has invested in many infrastructure and middleware projects, including Filecoin, Pocket Network, Biconomy, Subsquid, etc., so this article represents a biased perspective.