Cloud for Web3 and Why We Invested in Validation Cloud

What is Blockchain Infrastructure or Cloud for Web3?

Blockchain infrastructure constitutes the essential system that supports the functioning of a blockchain network. It includes the necessary hardware, software, and network configurations for operating a blockchain. This infrastructure features a peer-to-peer network of nodes that work together to maintain the ledger, process transactions, and secure the network from attacks. It also involves nodes that link users and applications to the blockchain.

Bitcoin is notable for solving the 'double spend' problem, but its protocol's ability to establish rules for a network of computers to maintain a single, accurate ledger is equally significant. Initially utilizing standard CPUs, this network evolved to use GPUs and ultimately specialized into ASIC mining hardware.

However, mining hardware is infamous for its high energy consumption. This led next-generation blockchains to abandon this model in favor of the Proof-of-Stake (PoS) mechanism for network security and ledger updates.

This was a significant paradigm shift in the blockchain industry - consensus participation was no longer defined by hardware scale. Instead, consensus participation became defined by cloud orchestration  - ushering in the era of the cloud.

The same cloud that powers our daily applications also started powering blockchains, particularly those like Ethereum 2.0, Tezos, Solana, and Polygon. Unlike Bitcoin, these are decentralized compute networks forming the base layer of Web3 applications. Yet, the infrastructure powering these networks isn't limited to cloud or server farms; it also includes bare metal implementations run by individual entities. However, even these entities typically rely on cloud services to run their blockchain instances, as the economies of scale offered by cloud providers make it impractical to run independent computers or servers.

However, blockchain infrastructure extends beyond familiar cloud providers like AWS or GCP. It involves an additional layer atop these services, tailored specifically for each blockchain's needs in hardware, software, or network configurations. This specialization precludes traditional cloud providers from easily entering this niche, as it deviates from their standard model of offering basic computing and storage components. It requires distinct blockchain expertise and skills. Consequently, a new category of infrastructure providers, including Blockdaemon, Alchemy, and Quicknode, has emerged as leaders in this specialized domain.

Thus, a new sector emerged: Web3 or blockchain infrastructure, which I like to refer to as ‘The Cloud for Web3’. This cloud will power the blockchain technology market which is estimated to be $17.46bn in 2023¹. Infrastructure and protocols account for 61% of this market, translating to a market size of $10.65bn in 2023.

What Encompasses Blockchain Infrastructure?

The value provided by blockchain infrastructure providers varies across the life cycles of a blockchain and its ecosystem, encompassing users, investors, and application developers. This can be classified into four products:

1. Validator Infrastructure

Validators are the cornerstone of the blockchain, responsible for verifying and validating new transactions and blocks to ensure compliance with the network’s rules and to prevent fraudulent activities.

In a blockchain's development, infrastructure providers' roles evolve. Initially, they support network bootstrapping by validating testnets. The expertise gained in this phase positions them to become validators on the mainnet, a coveted role requiring technical proficiency. Often, the blockchain's foundation oversees the validator onboarding process, especially in early stages, to maintain network security and efficiency.

In public blockchains, cryptoeconomic dynamics, like slashing rewards and stakes, serve to phase out less competent players despite their open nature.

Validators incur fixed costs, including hardware or cloud services and tokens for staking. Infrastructure providers are often incentivized through contracts with foundations in either tokens or fiat currency, and they earn additional rewards in tokens as validators. Validators who have participated in several early testnets often bring a depth of operating knowledge and tooling that is invaluable for bootstrapping new networks.

2. Staking Infrastructure

Staking infrastructure represents a natural progression for validators -  whereby token holders forgo operating the infrastructure themselves, opting to “delegate” to a validator in order to participate in rewards

As validators on widely-adopted and yield-generating blockchains, infrastructure providers are well-positioned to offer staking services to network stakeholders. Their primary clients include network investors such as retail investors, venture capital funds, asset managers, and institutional investors.

Validators with optimized cost and performance architectures are ideally situated to generate high yields, attracting delegators. Similarly, since poor validator performance results in reduced rewards for delegators compliance and security are vital.

3. Node API as a Service

Node APIs, crucial for broadcasting transactions and retrieving transaction data, serve as vital connectors between blockchain networks and the applications built upon them

In the early years of distributed applications (dApps), developers typically managed these nodes in-house to link their applications to blockchains. However, this approach proved to be as inefficient as a Web2 developer running all backend processes internally rather than utilizing a cloud provider. As developers shifted their focus more on application development, Node-as-a-Service became increasingly popular, with services like Infura leading the way. Additionally, successful business models like Alchemy have emerged, offering enhanced developer tools and feature modules atop their node API solutions.

In this model, the customers — application developers — pay the provider a recurring fee, and/or charges based on the volume of calls made to the blockchain using the service. This approach has unlocked recurring and SaaS revenue models for such providers, making them highly attractive to venture capitalists.

4. Data Streaming as a Service

This represents the next evolution of blockchain infrastructure, or rather, how it's meant to be.

While Node API primarily focuses on connecting applications to blockchains, Data Streaming (or Data-as-a-Service) solution will enable the creation of highly scalable Web3 applications. This concept is the cornerstone of our thesis for 'Why We Invested in Validation Cloud.' Here, the speed, scalability, and resilience of the infrastructure provider become critical factors.

Consider, for example, the impact of companies like Cloudflare or Juniper Networks in the Web2 era. Their technical breakthroughs led to improved content delivery and consumption mechanisms for online services, such as OTT (Over-The-Top) platforms like Netflix, Hulu, and YouTube. Similar on-demand and high-speed data streaming capabilities will be vital for Web3 applications that aim to disrupt industries such as gaming, payments, open financial products, metaverses, social media, and more.

That is why we, along with other early believers in the company, refer to Validation Cloud as 'The Cloudflare for Web3.'

Why We Invested in Validation Cloud?

Several factors influenced our decision to invest in Validation Cloud; yet, three core theses predominantly informed our decision-making process:

1. Technical Innovation: Speed & performance of the technology
2. Compliance: Applying Web2 institutional-grade standards to Web3
3. Team: Exceptional founders, surrounded by equally exceptional team

1. Technical Innovation: Speed & Performance

Despite the presence of well-capitalized legacy  players, the infrastructure market has failed to deliver on enterprise-grade performance. Poor  systems’ architectures and large amounts of tech debt have prevented  these legacy providers from innovating in key areas of speed and scalability. Additionally, there's limited  talent with both deep expertise at the intersection of Web2DevOps and in-depth blockchain infrastructure, making it even more challenging for legacy providers to support next-generation blockchain applications and new infrastructure primitives.

Blockchain innovation is increasingly focused on scalability, with protocols like Solana and Hedera Hashgraph leading the way. However, high-latency Web3 infrastructure poses a major bottleneck for these next-gen blockchains, limiting the capabilities of developers and the experiences of users. Consequently, low scalability is a major hurdle for Web3 adoption, influenced by both the blockchain and infrastructure layers. In this context, providers like Validation Cloud, offering highly performant infrastructure, stand to gain a significant advantage.

This thesis is not a mere conjecture; it is a quantifiable reality.

Validation Cloud stands as the market's top blockchain infrastructure provider based on performance, demonstrating low latency both globally and regionally across major economic centers in North America, Europe, and Asia.

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But what does this mean for applications? Let’s discuss two cases:

Gaming

In gaming, speed and fluidity are crucial, spanning from gaming engines to processors and monitors. Companies aim to provide a seamless gaming experience, while gamers prioritize high-performance hardware, favoring the latest graphics cards and monitors with at least 120 Hz refresh rates.

In a market focused on optimizing speed and performance, game developers cannot afford infrastructure bottlenecks. With the evolution of Web3 games from current GameFi applications to AAA-quality experiences and fully on-chain virtual worlds, highly performant infrastructure solutions are a requirement.

This trend is evident in the gaming adoption on highly scalable blockchains like Solana, Polygon, or BNB Chain: even at the cost of compromising decentralization (no pun intended).

As the most performant infrastructure provider, Validation Cloud is ideally positioned to power future Web3 games.

High-Frequency Trading

To minimize latency, often limited by the speed of light, hedge funds, and trading houses typically locate their trading venues near stock exchange data centers, enabling quicker data access and trade execution

In the Web3 domain, the strategy of geographical proximity used in traditional trading doesn't apply, as blockchain operations are on global decentralized networks, making physical closeness impossible. Therefore, infrastructure providers who offer the lowest latency solutions on a global scale will become crucial, particularly as DeFi grows in popularity among institutional entities

Validation Cloud's platform is designed with scalability as a core principle.

The company has developed proprietary technologies such as global smart routing, caching layers, and super networks to propagate data efficiently worldwide, ensuring the lowest latency for users. Innovations at the DNS level enable automatic re-routing and cross-region traffic management, maintaining service continuity despite infrastructure or blockchain errors. This allows end consumers and applications to consistently use the same URL and API key without disruption. Additionally, the infrastructure's comprehensive automation makes it agile and replicable, facilitating quick service expansion to new blockchains and sustaining high margins.

2. Compliance & Security: Web2 Standards to Web3

Validation Cloud stands out as the only infrastructure provider in the market that has achieved platform-wide SOC 2 compliance.

Other leading competitors are striving for SOC2 standards compliance but have not yet secured actual SOC2 certification. In Web2, particularly for enterprises, financial institutions, and professional service firms demanding strict compliance, SOC2 compliance is regarded as the gold standard.

This uniquely positions Validation Cloud to capture two emerging markets:

Enterprise Blockchain Use Cases

The expected surge in Web3 adoption will likely come from Web2 incumbents and enterprises integrating Web3 features into existing products or launching new ones. These organizations will require compliance with established Web2 standards. With its SOC2 compliance already in place, Validation Cloud is strategically poised to capitalize on this emerging market opportunity

Institutional Staking

Validation Cloud offers a distinct, non-custodial staking-as-a-service solution, specifically tailored to meet institutional requirements. Their state-of-the-art technology redefines industry standards, significantly boosting the efficiency, affordability, and reliability of Ethereum and other blockchain validators. The service features a user-friendly UI, API deployments, and adheres to SOC2 compliance, allowing for secure, bulk, on-demand deployment of validators in dedicated environments.

Furthermore, the automated management of staking rewards through on-chain smart contracts greatly simplifies reward distribution. This architecture ensures not only transparency but also eliminates the need for intermediaries, thus cutting down both costs and risks. As a result, Validation Cloud offers unmatched performance and security, catering to a wide range of institutional clients, including investors, asset managers, custodians, wallets, and exchanges

3. Team

The team is led by visionary founders, Michael Horowitz (CEO), Andrew McFarlane (CTO), Alex Nwaka (CSO), and Alex Altman (COO), who have decades of experience spanning crypto, mining, PoS blockchains, venture capital, investment banking, M&A, telecom, cybersecurity, and experience in building and scaling companies.

Their broader team, including the technical staff led by the CTO, has a strong background in developing scalable Web2 cloud infrastructure. The team's collective experience spans leading Web2 and Web3 companies in various sectors, including Uber, Workday, Citadel, Lyft, KPMG, Deloitte, Crypto.com, R3, Figure, Blockdaemon, Figment, Faraway, Bitpanda, RECUR, BlockFi, and Voyager.

This blend of Web2 and Web3 experience within the team is a distinctive advantage, often absent in Web3-native infrastructure teams.

The founders have successfully bootstrapped Validation Cloud, creating a superior product and attracting top Web3 brands as clients, showcasing their deep commitment and clear vision. Their prior collaboration, complementary skills, and experience in scaling startups demonstrate their capability as proven entrepreneurs. Furthermore, their expertise in capital markets and venture capital provides valuable insights and connections, enhancing their ability to engage with institutional investors and enterprise clients.

Conclusion

At Blockwall, we see blockchain infrastructure as the future of cloud computing, integral to the evolution from Web2 to Web3. Blockchain technology is expected to play a central role in the development of future applications and financial solutions. With Web3's growing adoption, we foresee a vast expansion in the blockchain infrastructure market. This shift will draw more enterprises, Web2 incumbents, and institutional investors to Web3. Successful mass adoption of Web3 depends on offering products that are decisively superior to Web2 counterparts. Consequently, the most performant blockchains and infrastructures, like Validation Cloud, will lead the market. As the most efficient and reliable infrastructure solution available, Validation Cloud is poised to become a top 'cloud provider for Web3.' Its exceptional team and ambitious vision position Validation Cloud as a potential industry leader. We are thrilled to be a part of this remarkable journey, supporting the founders as investors and partners.