Huobi Ventures Weekly Report #42

HTX Ventures
2 min readSep 1, 2022

Huobi Ventures Weekly Insights

Insight provided by Jinbin of Huobi Ventures

Web3 Value Capture Pyramid Model, why does Layer1 capture the most value?

In the web2 era, a great deal of the commercial value of open source software was captured by upper-layer applications. In the web3 era, this has reversed and more and more value is being captured by layer1 protocols with high adoption rates — what is the logic behind this?

If we categorise the top 20 projects in the coinmarketcap rankings, we would find that most of the items fall in the layer1 direction. Is this because investors think that layer1 projects are more secure or is that market more likely to carry large amounts of capital? If we analyse the shift from the Web2 to Web3 value capture model, there are some patterns that can be observed.

In the traditional Web 2.0 era, a large number of software companies flourished because of the rise of the open-source-software movement. They adopted free open-source software in large numbers to support their businesses and did not need to pay for it. Public companies like those with trillions of dollars in market capitalisation are now adopting open-source software, yet they are spending very little on sponsoring open-source software organisations. The lack of commercialisation as a means of capturing the value of the infrastructure that underpins a large number of applications has led to a lack of value capture.

As a prime example, log4J, a project maintained by only 3 people, was also heavily adopted by Apple for its applications. It wasn’t until Log4J had a 0Day security issue that people realised how widely it had been adopted. This case exposed the harsh reality that a large number of the underlying protocols were revenue-neutral, while the upper-layer applications that adopted them were robbing them of a lot of business value.

But in the Web3 era, this situation has been dramatically rectified.

Because there is a Token as a means of governing tokens or levying fees, for example, Ether captures a lot of value and achieves huge growth in market capitalisation because of the Dapp boom. The Dapp of popular boards on Ether will rotate, but what remains constant is that Ether uses its means of value capture to keep capturing the value from popular Dapps.

But Layer1 and popular Dapps are complementary, layer1 needs popular Dapps to drive transactions, and popular Dapps need ecologically rich Layer1. But like the Web2 era, the situation where only upper-layer applications plunder value is gone.

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