Welcome back to MondayMunday, my personal blog on tech and fintech. As mentioned, I wanted to spend the next couple of weeks discussing the intersection of crypto and fintech. Today is no different, we will take a look at how infrastructure providers are simplifying the development of crypto products. Thanks to the 17 new subscribers for last week’s post, if you enjoy this week’s post feel free to subscribe and share!
Last week I covered the custody solutions, I viewed them as the AWS for asset workflow. Given their ability to store and hold assets what is the next step to allow builders to utilise them? The promise of crypto and DeFi is the new infrastructure to build better financial services… To do this builders need to access underlying infrastructure to create these services. This can prove hard with the complexity of running decentralised services…
This is where infrastructure-as-a-service providers come in. They allow builders to access to the blockchains. This is not only exciting from a building perspective as it makes it easy to create blockchain solution but from strategic perspective on how fintechs build new products integrating traditional finance and decentralised finance.
Today we will look at:
What is blockchain infrastructure?
The types of providers?
Use-cases and market direction?
How blockchain infrastructure mirrors, extends, and compliments traditional infrastructure.
A primer on blockchain infrastructure
Blockchains are peer-to-peer networks, they work as a set of computers running common ‘software’ (i.e. the blockchain protocols). An equivalent example is torrent software, you need to run software on your laptop to receive files. Running a blockchain node is a similar construct, you run a server with certain software which allows you to build access and query the blockchain to see transactions across the network.
But why do you need to access a node?
Individuals, institutions and service providers, need to access nodes to access the blockchain infrastructure, they may want to do this for the following reasons:
Sign transactions on the network. For example, when you send a MetaMask transaction, they will call into a node to submit your transaction to a network, they do this using Infura, however, you can connect your own endpoints with your own infrastructure to call your own node to submit the transaction.
Query the network. An example use-case is the DeFi applications, Uniswap does this as they contact a node to pull smart contract and wallet data when you want to make an exchange using their AMM.
Validate the network and gain rewards. Depending on the type of network you may need a node to access the network to give you access to mine blocks or you need to run validators nodes to validate new blocks on the network. Looking at only Proof-of-Stake chains, validation occurs by ‘staking’ some native tokens as a validator node to gain the opportunity to propose and validate new blocks. You need to run your own infrastructure to directly participate in this*
*You can participate in staking by delegating tokens to a validator node, but this involves smart contract risk as this contract will govern the redemption of tokens i.e. you are not the direct controller of this yield.
The problem with running nodes
Nodes are complex infrastructure to manage, the parallel is managing the backed of a payments network, where we have companies whose jobs are dedicated to solving this. The following problems that emerge when trying to run your own infrastructure tend to relate to operational complexity, as listed below:
Time constraints - It can take a couple of days to sync a node and a backchain of the blockchain before you can run your node. This increases the time taken to start building your application.
Cost requirements - Cost requirements come in numerous iterations…
Storage costs - Node sizes for Ethereum require 500GB of storage and can be greater for other chains.
DevOps cost - to run a node you will need to have to spend time on engineering to securely run the node and manage subsequent APIs and calls you to make to the nodes, as well as ensure the robustness of your API.
Robustness requirements - Robustness feeds into cost requirements, but I have mentioned it separately due to the fact due to its importance for staking. When staking, you are required to put collateral to win the right to validate the next block, if you incorrectly validate the next block you lose this stake. This poses an operational risk you have to take on when hosting your own nodes.
Abstraction requirements - When building a node you may have to create abstractions such as endpoints to access the node to build the services you want. Whilst this is good if building custom endpoints for solutions, many dApps simply need read-write access to the blockchain. Many DeFi applications need to send, sign and interact with smart contracts which can be abstracted with common node end-points and APIs for certain use-cases.
Solving with Infrastructure-as-a-Service
To solve the problems Infrastructure-as-a-Service providers developed solutions to abstract away this complexity - to date, this has formed into a few use-cases which have formed to the basis for infrastructure being built to improve blockchain accessibility.
Managed blockchains
These services solve the time and cost constraints of running your own node, the provide scalable node hosting through the cloud.
Cloud providers → Cloud providers like AWS Managed Blockchain, Microsoft Azure and Google Cloud have all expanded their offerings to target offering blockchain nodes as a service to varying levels of success.
Multicloud solutions → Providers like Blockdaemon offer you multi-cloud node hosting. This is the promise of decentralisation-as-a-service as you can run infrastructure on different clouds.
The solutions allow you to run dedicated nodes, these are nodes that are dedicated to you with uptimes managed by the provider of the solution. These solutions provide managed up-time and node access through RPC endpoints allowing you to ‘read’ your node.
Staking nodes
Staking has become one of the primary reasons to run your own node infrastructure, Proof of Stake networks incentivise users to validate the networks by offering their collateral to gain the chance to validate new blocks.
Given this custodians and large institutional players now want to stake their tokens to gain yields. It is seen as a way of controllably earning yield. You do not have to worry about smart contract design, token design or DeFi protocol design as sources of risks.
Using native blockchain staking allows individuals to manage risks internally as their yield is dependent on managing up time on their nodes to ensure staking validation occurs correctly.
This requires robustness in node architecture to ensure uptime and enterprise-grade SLAs to ensure security for users. The players in the space have focussed on dedicated node infrastructure to support staking these services are aimed at enterprises or institutions to manage the staking of their assets. However, some of these providers (like Figment and Staked) also offer staking as an API allowing you to send your tokens to their staking nodes.
‘Read / write’ node access
The quest to simplify the building has dApps, given the common infrastructure of transferring the sending bearer assets and monitoring and relaying transaction data has been simplified to:
Reading the blockchain for a relevant transaction or transaction metadata
Writing the blockchain to initiate a new transfer.
These build upon RPC node calls which simply facilitate reading blockchains, to building dedicated APIs and SDKs to help you create products by allowing you to create a common communication framework with nodes. This helps the development cycle as developers no longer have to directly interact with blockchains to access data to read and write to nodes and secure transactions.
Due to the nature of the services these abstraction services have to be offered as shared nodes, as they allow developers to read and write to different nodes in a network to send and receive transactions.
These services often form the foundational element of most blockchain applications in the early stage as they simplify development. As solutions mature, they may try to run their own node infrastructure to manage their service.
Mapping the space
Below we have mapped some of the key players in each segment:
⛏ Shovel salesmen in the goldrush
As Micheal Godsey, Ex-CPO at Infura said on the Fintech Blueprint podcast, they originally created Infura as a way to capitalise on the number of devs building in Web 3 to build common access points. They had no real use-case or market fit when they initially started abstracting away this stuff, and Consensys funded a lot of the early development. However, as the use case emerged it led to the further development of the space.
we have seen many other situations where markets dictate the use-case for crypto infrastructure plays… This can be a sign that infrastructure plays really are built to leverage accumulated problems in the crypto space, for example:
Infura simplified the development process for building on Ethererum, by abstracting the blockchain and allowing you to build crypto applications. The first and most popular one being Metamask.
Networks need to bootstrap the network, given this, they turn to managed blockchain solutions to provide node infrastructure for their initial market. We can see this with Google Cloud and their move into digital asset infrastructure by being the supporters of the infrastructure of blockchain protocols from Dapper Labs and Hadera.
Visa dictated anchorage holding NFTs products, this was possible not only by storing the private keys of the wallet that contained the NFT, but from user-experience perspective they need to connect to the blockchain to provide metadata around the NFT.
Institutions wanted yields from staking their crypto leading to providers building solutions to provide staking. This led to the rise in staking infrastructure providers and companies leveraging them to provide staking services to their clients.
In a common critique of Web3, as pointed out by Moxie, the infrastructure of blockchains is centralised by these service providers who all rely on the same cloud infrastructure. This is highlighted by Messari who says 65% of Ethereum nodes that are hosted in data centers (which makes up 69% of all Ethereum nodes) are hosted by 3 cloud providers → To solve this on the managed blockchain side, providers like Blockdeamon offer multi-cloud hosting and even bare metal node hosting. Additionally, RPC and API endpoint providers are now being created with decentralised networks on top to manage their control, creating decentralised endpoint infrastructure for builders.
Here we can see the market dictates what infrastructure providers are building. Given this, I believe we will see a continuation of the acceleration of these themes. Providers will seek to make network formation easier with simpler managed blockchain services, application building simpler with more API and data products, increase in ease of running staking infrastructure and more decentralised infrastructure alternatives.
What does this mean for fintech builders?
Infrastructure is always one of the hardest parts of building fintech systems, ensuring the robustness of payment systems is difficult. In traditional financial systems, these infrastructure providers were hidden behind companies or single providers. Payment networks are controlled by Visa and Mastercard, and asset ownership is dictated by central systems. The beauty of the blockchains is this is accessible and buildable from day one. You can leverage abstraction layers or build new systems interacting with the ledger.
Fintechs opened the stack
We can make the parallel to Banking-as-a-Service (BaaS). Before BaaS, the systems used for payments, interbank reconciliation, and card networks were gated and hard to access. BaaS has done a great job at creating access to these services for builders. Open banking is another case on the data side allowing users to share banking data freely between users allowing for product innovation.
Crypto opens it…
All the functionality of the above is built into blockchains, they already contain ledgers, transaction data and the ability to own and send assets. Infrastructure providers just open this up in a developer-friendly way. You can now access payments, automation workflows via smart contracts and account data through wallets to build financial products through leveraging blockchain APIs and node infrastructure.
A duality of financial infrastructure
This is not to say I’m naive, I don’t think all finance should or will be done on DeFi using crypto. But use-cases have and will emerge where this makes sense (we can already see this in lending where DeFi has been shown to reduce the costs as per an IMF report) or institutions’ demand for hedging assets such as Ethereum
We are seeing fintech’s wanting to offer non-custodial crypto (e.g. Revolut and Robinhood), how on-ramps and off-ramps and exchanges operate to bridge crypto and fiat worlds, and companies like Ziglu, BlockFi and the like offering DeFi yields. All these players need duality of infrastructure (This means access to traditional rails as well as crypto rails via infrastructure providers) to offer these services, Infrastructure- as-a-Service providers allow them to do this without getting involved in the underlying complexity of the blockchain.
A case in point is Fireblocks, as discussed in my piece on crypto custody, they have built a stack of new products for customers such as staking, tokenization engines etc. This is only possible as they have access to common infrastructure layers to build these services and access to traditional entities such as regulations to provide this in an accessible way to customers.
This leads me to think the real use-case for web3 is the common infrastructure to build financial services with use-cases being initially for B2B (i.e. Fireblocks offering staking) or B2B2C (i.e. Robinhood offering non-custodial crypto accounts) plays.
For example, building a lending protocol might be more of use to fintech to access directly through an infrastructure provider to give their client access to new lending models, staking yields and other crypto products.
Blockchain infrastructure plays provide a crucial component in this and is a lynchpin of how to build solutions leveraging the workflow components of blockchains. It mirrors how fintechs have opened traditional finance technology stacks, extends them with additional functionality and can be combined with them in such a way to build better products for users.
If you are fintech builder or investor feel free to reach me by replying to this email or DM on Twitter or LinkedIn, I’d love to chat! 🙏