roundedWritten by: Jesus Rodriguez, CEO and Co-founder of IntoTheBlock Translated by: Yangz, Techub News Web3 ecosystem is often seen as the next-generation infrastructure of the internet. However, nearly a decade after the release of the Ethereum white paper, there are still not many mainstream applications running on this infrastructure. Meanwhile, new infrastructure building blocks have been emerging, including various L1, L2, and L3, Rollups, ZK layers, and more. While we may be building the future of the internet through Web3, there is no doubt that we are also overbuilding infrastructure. Currently, the imbalance between infrastructure and applications in Web3 is unprecedented in the history of the tech market. As for why this is happening? It’s simple: building infrastructure on Web3 is profitable. Web3 breaks some traditional application models in the tech infrastructure market, creating a fast path to profitability while also introducing unique risks to its development. To explore this further, we must understand how infrastructure technology trends typically create value, how Web3 deviates from this norm, and the risks associated with overbuilding infrastructure. The value creation cycle of infrastructure and applications in the tech market Traditionally, value creation in the tech market fluctuates between the infrastructure layer and application layer, seeking a dynamic balance between the two. Taking the Web1 era as an example, companies like Cisco, IBM, and Sun Microsystems powered the infrastructure layer of the internet. However, even in the early days, the emergence of applications like Netscape and AOL brought enormous value. Cloud infrastructure propelled the arrival of the Web2 era, leading to SaaS and social platforms that spawned new cloud infrastructure. Recently, trends like Generative AI started as infrastructure games for model builders, but applications like ChatGPT, NotebookLM, and Perplexity rapidly gained traction. This, in turn, drove the creation of new infrastructure to support the next generation of AI applications, and this cycle may continue multiple times. This ongoing balance of value creation between the application layer and infrastructure layer has always been a hallmark of the tech market, making Web3 a notable anomaly. But why is this imbalance so pronounced in Web3? Infrastructure Casino The main difference between Web3 and its predecessors lies in the rapid capital formation and liquidity of infrastructure projects. In Web3, infrastructure projects typically launch tradable tokens on exchanges, providing substantial liquidity for investors, teams, and communities. This sharply contrasts with traditional markets. In traditional markets, liquidity for investors is usually realized through company acquisitions or public offerings, both of which typically take a considerable amount of time—generally, most venture capital firms have investment cycles of ten years or longer. While rapid capital formation is one of Web3’s advantages, it often misaligns the incentive mechanisms for teams, which is detrimental to creating long-term value. This 'infrastructure casino' represents a risk for Web3, incentivizing builders and investors to prioritize infrastructure projects over applications. After all, when L2 tokens can achieve valuations of billions of dollars with minimal usage in just a few years, who still cares about applications? This approach brings about several challenges, many of which are subtle and difficult to resolve. Challenges of overbuilding Web3 infrastructure 1) Building without market feedback The biggest risk of overbuilding infrastructure in Web3 may be the lack of market feedback for applications built on that infrastructure. Applications are the ultimate embodiment of consumer and enterprise use cases and regularly guide new use cases within the infrastructure. Without application feedback, Web3 risks building infrastructure for 'imagined' use cases, becoming disconnected from market realities. 2) Extreme liquidity fragmentation The launch of the new Web3 infrastructure ecosystem is one of the main reasons for the liquidity fragmentation in this space. New blockchains often require billions of dollars to kickstart liquidity and attract first-tier DeFi projects into their ecosystem. In recent months, the rate of new L1 and L2 creations has outpaced the influx of new capital into the market. Consequently, capital in Web3 is more fragmented than ever, posing significant challenges for adoption. 3) Inevitable increasing complexity If you have tried using wallets, DApps, and cross-chain bridges for newer blockchains, you should know that user experience is often poor. Over time, technical infrastructure naturally becomes more complex and sophisticated. The applications built on that infrastructure should ideally abstract this complexity for end-users. However, in Web3 (with a lack of application development), users can only interact with increasingly complex blockchains, leading to friction in the adoption process. 4) Limited developer community If the development speed of Web3 infrastructure outpaces capital formation, the challenges regarding the developer community are even greater. DApps are built by developers, and creating new developer communities is always a challenge. Most new Web3 infrastructure projects operate within very limited developer communities, drawing talent from an existing talent pool that is insufficient to support the large amount of infrastructure being built. 5) Expanding gap with Web2 Trends like Generative AI are driving the development of a new generation of Web2 applications, redefining areas like SaaS and mobile. The primary trend in Web3 remains the construction of more blockchains rather than leveraging this momentum. Ending the vicious cycle For investors and development teams, launching L1 and L2 is profitable, but this does not necessarily bring long-term benefits to the Web3 ecosystem. Web3 is still in its early stages, and while more infrastructure building blocks are needed, most builders in the industry are currently constructing infrastructure without market feedback. Market feedback typically comes from applications built on top of the infrastructure, but there are virtually no such applications in Web3. Most usage of Web3 infrastructure comes from other Web3 infrastructure projects. We continue to build infrastructure, launch tokens, and raise funds, but we are essentially acting blindly.

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