Will Cryptocurrency Protocols Be Fat or Thin?
So far, the Joel Monegro fat protocol thesis is one of the most important ideas for understanding cryptocurrency.
The thesis was published in the year 2014 and the thesis states that the accrued to the application (app) layer: companies like Facebook, Google, and Amazon.
So far, the shared protocols like SMTP, TCP/IP, and HTTP have provided a huge amount of value as they didn’t have any way capturing that value.
This could be more like that- if the creators of SMTP, the email, delivery protocols, were wealthier than Google’s founders.
Let’s take a look at this,
So far, it seems to be true.
The value seems to grow more to the cryptocurrency protocol layer- Bitcoin and Ethereum.
Still, a number of analysts have asserted that the fat protocol thesis is misunderstood, lacks variations or is simply wrong.
How be the cryptocurrency protocols Fat?
There are three reasons that advocate it to be right.
The first one is that the data is stored on the blockchain, in a blockchain stack, that is a distributed database that everyone can hold a copy of, instead of siloed, walled garden of the application layer where the data accumulates on the web.
The core competitive advantage for most of the companies is their database., this is the reason why the companies like Facebook, Google, and Amazon focus on guarding their data so closely. The blockchain removes this competitive advantage pushing more of the advantage capturing down the stack to the protocol layer.
The second is that the cryptocurrency protocols have a quite higher level of awareness about the application layer as compared to their web counterparts as they are highly structured. SMTP, the thin layer protocol is highly unstructured and offers a low level of awareness about how it is being used.
However, the data structuring is done on the application layer by the companies like PayPal, that are then able to extract the value by charging a fee for the value they are offering.
Moreover, as SMPT is an unaware protocol you can structure the invoice by saying:
“Mail your payment in cash to 123 Alphabet Blvd. Aliceton, KY 12345.”
Many people prefer PayPal as the fee this company charge is worth it. comparatively to the reduced risk, increased speed, and some of the more professional impression it gives as opposed to mailing cash, the unstructured nature of the protocol allows either.
Whereas, with a fat protocol, the network is aware of the important details of the invoices such as the due date, amount, and recipient. The network can then take some appropriate actions like sending reminders, recording transactions and debiting accounts to the relevant ledgers.
As the cryptocurrency protocols are more active and aware of the details of who the parties involved are, what is actually happening, and what the economics are; accordingly it is better to charge for the value that is being created.
The third and final reason to believe that protocols would be fat is that there is a greater incentive for the entrepreneurs to build these protocols as they are able to create tokens, that can let them capture some of the value with the increase in the usage of the protocol.
With much of the market capitalization, today is conjecture and eventually, the decentralized applications would need to use networks like NEO or Ethereum for computing power, and Filecoin, STORJ or Sia for storage. This value would help in increasing the value of the tokens that are held by the founding teams.
How and Why the cryptocurrency protocols be thin?
When you don’t like how the protocol works, you fork it. The Bitcoin Cash and the Ethereum Classic are the first of many.
Forking actually means that the entire protocol that includes the database, can be easily copied by anyone. This acknowledges a more competitive market with comparatively lower barriers to entry.
On account of forking, the incentive of anyone developing a blockchain protocol is, building a protocol that would help in providing their services at the lowest cost. If they don’t; someone else would just fork it and undercut them.
It shows that if a protocol becomes increasingly fat, it could be easily forked into a new protocol that specializes in an exact type file storage. Finally, the end result would be a large number of challenging protocols that would be placed at every layer of blockchain stack.
This wasn’t possible in the app layer of the web. You just can’t fork Facebook and optimize for discovering the best of long-form articles instead of the baby photos and outrage. Moreover, as the protocol layer as a whole is fat, the individual protocols would likely to end up being thin, because of the forking and the competitive market, of course!
Here, you could argue that this doesn’t help in changing the investing thesis of fat protocols because of investing in the base level protocols; you also get exposure to all of the forks. Moreover, there is a new generation of companies that start learning from past one’s failures.
The biggest example governing this is of Google that did not fork AltaVista rather learned from their failures in such a way that helped in playing a major role in their success.