Transaction fees are the center of the cryptocurrency space.
So much so that anything and everything that works within this paradigm makes the news.
One project is tracking transaction fees of the major blockchains and ledger projects.
We were interested and as usual, we swooped in to get the inside scoop with the Web 3 Index Project Founder Adam Soffer.
Here is what he had to say.
Adam Soffer Project Lead Web 3 Index
Please, can you tell us why you decided to track Web3 transaction fees?
The Web3 Index aims to shine a light on how web3 protocols are being used and how much value they’re creating for society.
By highlighting fundamental metrics that show actual work being performed such as fees paid, the Web3 Index is out to prove that crypto is more than just speculative trading, finance and meme coins.
The index is initially focused on listing protocols that fall under a category of web3 referred to as work protocols.
These are token coordinated networks that provide decentralized infrastructure services such as compute, bandwidth, storage and data services to developers building web3 applications in exchange for a fee.
We decided to initially focus on this category of web3, because we believe work protocols, used in tandem, are a fundamental substrate upon which web3 applications will be built over the next few years.
We also noticed that while there were plenty of sites and tools for measuring the state of layer 1 consensus chains and DeFi, work protocols and web3 as a whole weren’t getting the same attention.
Who’s the audience for the Web3 Index?
The Web3 Index moves beyond the hype to identify the protocols generating actual fees for delivering real work.
Drawing on open-source data, it ranks protocols based on the fees they generate for providing services.
By tracking demand-side trends across web3 protocols and highlighting protocols that have proven their utility, the index aims to be of value to a wide range of users, including:
Developers seeking infrastructure services
Investors hunting for protocols that will go the distance
Stakers looking for promising protocols to participate in
Aspiring node operators
Journalists and web3 watchers
Prospective new index members
Whether you’re a supply-side participant keeping tabs on in-demand networks, a developer interested in building on top of web3 infrastructure, or simply a crypto-enthusiast passionate about the web3 movement, the Web3 Index is your barometer to momentum in the space.
How are transactions fees critical to the mass adoption of Web3 technologies? Please, can you tell us more about this?
Web3 tech requires market participants in one area beyond end users and developers: technical operators.
Since a single entity doesn’t run web3 tech, there must be incentives to participate.
So transaction fees are critical to attracting these technical operators, which then build enough capacity to give developers the confidence to build on those protocols – and eventually attract the users that take web3 mainstream.
Are there any zero-fee models that you discovered in your research? Please, can you tell us how they work?
There’s no such thing as a free lunch!
That adage holds true.
There’s not much evidence that zero-fee models work for delivering critical web3 infrastructure for work protocols. That may be different over time, but currently, financial incentives drive adoption for technical operators within web3 communities.
What is the relationship between transaction confirmation processes and transaction fees?
Web3 protocols built on and secured by layer 1 consensus chains such as Ethereum have a limited amount of “blockspace”, meaning only a certain amount of transactions may be included in each block.
In Ethereum, for example, a block is minted every 14 seconds or so.
Depending on the demand for a particular blockchain, users may choose to pay a higher transaction fee to miners to incentivize them to include their transaction in the next block for a faster confirmation time.
How have transaction confirmation processes on distributed ledgers affected Web3 transaction fees?
Node operators participating in web3 work protocols built on blockchains like Ethereum are not immune from these fees.
To ensure profit, many will increase their advertised price of service to developers to account for the overhead incurred.
It’s important to note though that there are lots of promising layer 2 scaling solutions bringing these fees down by orders of magnitudes and these affected work protocols are beginning to adopt them in mass.
How have transaction fees aided big tech in the fight between big tech and Web3 technologies?
I think it has provided big tech companies slightly more breathing room.
But as soon as these web3 protocols complete their migration to layer 2 scaling solutions and the tooling around web3 work protocols mature, I predict a mass migration of developers to the web3 stack followed by end-users.
On the infrastructure side, big tech companies will not be able to compete on the price, reliability, and scale web3 work protocols can offer developers.
On the application side, big tech companies will find it difficult to compete with the superior user experience of web3 which offers better aligned economic relationships between those who create content and services, those who consume them, and the platforms themselves that provide access to them.
I believe, over time, big tech companies such as Amazon, Google, and Microsoft who run siloed data centers will begin to transition to becoming actual participants and providers of service web3 work protocols, competing with the long tail of grassroots node operators providing developers compute, storage, bandwidth, and data services across the web3 stack.
They will also begin converting their end-user products into web3 gateways.
We’re already seeing signs of this transition. Cloudflare, one of the most critical pieces of web infrastructure today that a majority of web2 developers rely on, just this week announced a web3 gateway product.
Twitter, in the same week, announced Ethereum wallet support for verifying NFTs and is investing heavily in a project called Blue Sky, a decentralized social media protocol that Twitter will adopt itself as a client.
What are your thoughts on the rise of “geek speak” and other technical jargon within the Web3 space?
The web3 ecosystem definitely has work to do to make the space more approachable and that includes reducing a lot of the technical jargon.
Projects need to come together and reach consensus around terms and metrics for evaluating the state and health of the ecosystem.
I still have no idea whether to capitalize the “w” in web3.
What’s the consensus here?!
I think The Web3 Index can play a role in bringing together leaders from top web3 projects and help accelerate consensus here.
Based on your analysis, what are the various advantages of Web3 technologies? Please, can you give us practical use-case scenarios?
Web3 is often misunderstood; at its simplest, it’s a philosophy that proposes a new way of building technical infrastructure, services, and products that replaces reliance on centralized, closed systems with decentralized, community-governed tools and platforms.
Web3 has six criteria that separate it from legacy tech:
Agency: Users own their identity, data, and reputation, which puts them in control of their data destiny.
Interoperability: Seamlessly switch between applications and BYOD (bring your data).
Reliability: With distributed infrastructure, applications are guaranteed to run forever, reliably, and with plenty of redundancy.
Infinite Scale: Zero application downtime unlocks infinite scale.
Money: Built-in financial features, such as smart contracts.
Security: Thanks to its decentralized nature, Web3 is inherently safe, secure, and private.
These six criteria distinguish web3 tech from existing web2 tech, which is vulnerable to attacks, mismatched incentives, and internal politics.
From an end-user perspective, another way simplistic way of viewing web3 is in context to its predecessors:
What do you think are the limitations of Web3 technologies? How can these limitations be resolved?
Web3 tech introduces a couple of unique challenges:
Non-custodial wallets: Right now, web3 wallets are double-edged sort.
Your wallet is your key to interacting with web3. It represents access to your money, your content, and your reputation.
This provides a wonderful user experience because it allows you to connect with and interoperate between web3 applications, bringing your own data with you.
Long gone are the days where you had to sign up with a username and password each time you wanted to try a new application or service and start from scratch in a siloed network.
However, in a world where you’re the sole owner in possession of your wallet, securing your private key becomes paramount.
Less technologically adept users may find it challenging to secure their wallets and risk losing all the money, content, and reputation they accrued in web3.
This limitation is being addressed by offering users social recovery methods. Lose your private key? Simply ping an assigned trusted guardian to unlock it for you.
Wallets such as Argent and Gnosis are making great strides here.
Governance: Distributed networks are more effective and more affordable when they are powered by the largest possible number of participants, or node operators, who compete to perform work.
Fledgling protocols that hope to keep services affordable must focus as much on building out these node networks through coordination and governance as they do on technical innovations and partnerships. There are many experiments in web3 governance being researched and put into practice today.
Protocol founders and contributors that wish to overcome coordination challenges should take heed of the governance models that prove successful.
What is your method of valuation for the Web3 index? How did you come about your data?
Unlike most indexes in DeFi (a category of web3) that weight listings based on market capitalization or “total value locked (TVL),” The Web3 Index uses a fundamental index methodology.
We chose this method because the underlying valuation figures (i.e., network revenue and usage) are more accurate estimators of a network’s present and intrinsic value rather than the listed market value of the network’s token.
And there’s also a growing understanding of the limitations of “easy” metrics, just as TVL.
Where do you see Web3 technologies going in the next decade?
I think, similar to how in the early web2 days developers rallied around a stack of technologies that came to be known as “LAMP” (Linux, Apache, MySQL, PHP), developers will rally around the most reliable work protocols which, used in tandem, offer the best overall developer experience. I
wouldn’t be surprised to see a new web3 stack acronym take shape over the next few years consisting of work protocols listed on The Web3 Index.
As more countries adopt cryptocurrencies and their underlying technologies, what do you think is the next leap for Web3 technologies?
Layer 2 ZK rollup scaling solutions for Ethereum such as StarkNet. With ZK rollups, web3 applications can achieve unlimited scale for its computation, without compromising Ethereum’s composability and security.
And, for the first time in Ethereum’s history, the marginal cost per transaction will decrease with adoption.
I think this breakthrough technology will blow the roof off current adoption. Applications are beginning to take the leap and adopt it. TikTok just announced to its 1 billion users that it went with an Ethereum ZK rollup solution for its NFT integration — that’s a momentous milestone.
What plans do you have to cover Non-Fungible Tokens (NFTs), or do you think their valuation has no mathematical or economic basis?
We have no plans at the moment to cover NFTs as a distinct category, as there are many comprehensive data sources out there that cover this space in great detail.
But, we do have plans to support application layer protocols that use NFTs. An example of an application layer web3 protocol would be something like the decentralized blogging platform Mirror.xyz, or the decentralized video platform, Glass.xyz.
Both of these protocols use work protocols under the hood such as Arweave and Livepeer, and they use NFTs as a smart contract standard to provide agency for its users over content, whether that’s a piece of writing or a piece of video.
How do you determine a Web3 project’s viability? What are the criteria you use to measure this?
Unlike many other benchmarks in the crypto space, the index does not weight protocols according to the market value or performance of their native tokens.
It instead assesses projects based on a fundamental index methodology, which reflects our conviction that empirical metrics, such as revenue and usage data, are the best reflection of a project’s place in the web3 ecosystem.
At launch, the Index focuses first on projects providing resources for developers to build Web3 applications: “work” or “service” protocols within the middleware layer of the web3 stack that provides compute, bandwidth, storage, indexing, and data services.
Users are often developers paying fees into these decentralized and permissionless networks. This category of Web3 excludes L1 consensus chains and DeFi.
Finally, to be listed, a protocol’s fee data must exist in a consumable format that allows us to pull into the Web3 Index. This can be done via the Graph, a publicly auditable API, or The Web3 Index’s own database.
As the Index grows, each project listed will determine additional projects via an initially informal light governance process.
How do you think regulation will affect the Web3 industry? Please, can you share your thoughts on this?
My feeling here is that governments have some ability to slow down the adoption of web3 through regulation, but they don’t have the means to stop it.
No force on earth can stop an idea whose time has come.
What other projects are you involved in within the Web3 space?
I lead product engineering at Livepeer, where we’re building the world’s open video infrastructure and the video streaming layer for the web3 stack.
Do you have any secrets you want to tell us? Care to spill the beans?
While initially confined to developer-facing work protocols comprising the Web3 infrastructure layer, The Web3 Index will expand over time to cover the whole web3 spectrum.
Once the index reaches ten work protocol listings, it will broaden out to the rest of the web3 universe.
We’re actively seeking more protocols, so please check out these instructions to get listed.
The more comprehensive our data set, the more accurate and valuable the Index will be!