A recent Cartoon Avatars episode with Frank Rotman demonstrated an incredible display of intellectual curiosity and honesty. For those of you who don't know, Frank is a prominent fintech VC and former operator. Although late to crypto, he has been publicly exploring for the last year. He's always thoughtful and balanced. At 1:34:00, Frank said, 'playing around in the space tells you a lot about whether it's ready for prime time or not. And the answer is no. I don't think anyone would disagree if you asked, is the web3 ecosystem ready for the next billion people to onboard? There's just so much that has to catch up, from user interfaces and protections and all the things we're used to... But you're looking at primitives being built that have to be assembled.'
I'm a pragmatic product-minded person so I won't pretend to disagree with his statement. It's true, and it does no good to fight reality in this case.
This got me thinking – how will the building blocks be assembled to offer great products? What might the most successful assemblers look like?
I started by thinking about products with a high NPS. Companies like Apple, Warby Parker, and Tesla are common examples. I noticed they all happen to be vertically integrated. Vertical integration is a strategy where a company takes control over a few stages of the production or distribution of its product. Benefits include user experience, fewer transaction costs, quality control, supply assurance, efficient coordination, technical innovation, and competitive barriers.
Verticalization applies to pure software companies as well. Vertical SaaS has emerged as a formidable competitor to the longer-living horizontal model. It's a group of software that serves the distinct needs of a specific industry. MindBody, CareCloud, and Cresicor (a Costanoa portfolio co.) are a few common examples. Benefits include user experience, specialization, data availability, customization, lower CAC, and compliance adherence.
So, what applies to crypto? Any lessons here?
Whether related to crypto or not, enterprise software is enterprise software. Infura, Quicknode, and Luabase (a Costanoa portfolio co.) are great examples. There will continue to be significant opportunities for enterprise-grade 'infra for the infra,' as I call it.
CeFi providers like Binance and Coinbase have been going both wide and tall. It's common for financial institutions (FIs) to go horizontal, acquiring competitors and expanding their product suite. Their numerous acquisitions also help them go vertical with their tech stacks, providing revenue opportunities and maximum control over critical functions like custody, staking, compliance, and analytics.
NFTs are mostly exchanged through Opensea, LookRare, and Magic Eden today, similar to the way peers exchange goods with each other on horizontal marketplaces like eBay and Etsy. But true to the web3 ethos, we're likely to see more value exchanged directly between creators and consumers in the future (like Costanoa portfolio company Novel enables) because many creators are akin to digitally native vertical brands (DNVBs). And while NFTs are relatively narrow today, it's reasonable to expect vertical solutions to discovery, exchanging, and managing as NFT categories expand beyond art.
Solana Labs announced that they're working on a mobile phone called Saga. It will have unique hardware and software, making it easy for users to access and interact with web3.
There are dozens of bridges in the market right now. The fragmentation limits liquidity on any single bridge. Vertical bridge by chain, asset, or other factors is the likely path to creating the best experience and becoming the go-to place for certain users to accomplish what they're trying to do.
Wallets seem like prime candidates given most follow design principles established for transfers which was the only use case prior to the concept of web3 being birthed. They don't provide a useful, insightful experience for most activities. And most apps are built assuming a user is 'bringing' their own wallet but in the future, apps will probably play a role in distributing wallets to new users. And those wallets will likely be designed for that particular use case, or, vertical.
dYdX announced that v4 would be built as a fully sovereign blockchain on the Cosmos SDK. They said, "This is a great platform for the dYdX community to continue to build in a vertically integrated way with the protocol token holders fully controlling the system. Whether it’s building additional features like spot trading, options, or multi-collateral or improving core underlying technology the dYdX community will now control every aspect of the stack and can build the best possible product experience."
Regardless of your opinion on their technical choices, both Solana and dYdX have a shared goal. They're focused on creating great products that are full-featured and easy to use. As mentioned by Frank, this doesn't exist across crypto today. It's interesting to see them taking a vertical approach to achieve their objective. Ultimately, it seems like maximizing for control enables you to provide a better end-user experience, and therefore, product offering.
Crypto flips things inside out. Everyone essentially shares databases. Users bring their accounts wherever they go. They choose the software they want to use for authentication and service interactions. They can maintain separation between their identity and account, making underlying services blind to who their user is. Data is siloed but openly available. Composability is a core feature. So verticalization in crypto may not always look like it does elsewhere.
As history indicates, verticalization could be the technique for many breakout products. Solana and dYdX provide two examples, but we don't know all of the ways that verticalizing in crypto could take shape. Building vertically can also be a great wedge to later expand as a platform. I'm excited to explore this further and would love to chat with early-stage founders with insights or hypotheses related to this topic.