Article reproduced from: Techub News
Author: Jesus Rodriguez, CEO and Co-founder of IntoTheBlock
Compiled by: Yangz, Techub News
The Web3 ecosystem is often seen as the next generation of internet infrastructure. However, nearly ten years after the release of the Ethereum white paper, there are still few mainstream applications running on that infrastructure. Meanwhile, new infrastructure building blocks have been emerging, including various L1s, L2s, L3s, Rollup, ZK layers, etc. While we may be building the future of the internet through Web3, we are undoubtedly also overbuilding infrastructure. Currently, the imbalance between infrastructure and applications in Web3 is unprecedented in the history of technology markets.
As for why this is the case? It's simple: building infrastructure on Web3 is profitable.
Web3 breaks some traditional technology infrastructure market application models, creating a fast path to profitability while also bringing unique risks to its development. To further explore this, we must understand how infrastructure technology trends typically create value, how Web3 deviates from this norm, and the risks associated with overbuilding infrastructure.
Value Creation Cycle of Infrastructure and Applications in the Technology Market
Traditionally, value creation in the technology market fluctuates between the infrastructure layer and the application layer, seeking a dynamic balance between the two.
Take the Web1 era as an example. Companies like Cisco, IBM, and Sun Microsystems powered the infrastructure layer of the internet. However, even in its early days, the emergence of applications like Netscape and AOL brought tremendous value. Cloud infrastructure propelled the arrival of the Web2 era, which in turn brought SaaS and social platforms, giving rise to new cloud infrastructure.
Looking at recent trends, such as Generative AI, which initially seemed like an infrastructure game for model builders, applications like ChatGPT, NotebookLM, and Perplexity quickly gained momentum. This, in turn, drove the creation of new infrastructure to support a new generation of AI applications, and this cycle could repeat multiple times.
This ongoing balance of value creation between the application layer and the infrastructure layer has been a hallmark of the technology market, making Web3 a clearly anomalous phenomenon. 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 tradeable tokens, providing substantial liquidity for investors, teams, and communities. This sharply contrasts with traditional markets, where investor liquidity is usually achieved through company acquisitions or initial public offerings, both of which typically require a considerable amount of time; generally, the investment cycle for most venture capital firms is ten years or longer. While rapid capital formation is one of Web3's advantages, it often misaligns the incentive mechanisms of teams, undermining the creation of long-term value.
This 'infrastructure casino' is a risk of Web3, incentivizing builders and investors to prioritize infrastructure projects rather than applications. After all, when L2 tokens can achieve valuations in the billions with very little usage in just a few years, who still cares about applications? This approach brings several challenges, many of which are subtle and difficult to resolve.
Challenges of Overbuilding Web3 Infrastructure
1) Building Without Adoption Feedback
The greatest risk of overbuilding infrastructure in Web3 may be the lack of market feedback from applications built on that infrastructure. Applications are the ultimate embodiment of consumer and enterprise use cases, regularly guiding new use cases within the infrastructure. Without application feedback, Web3 risks building infrastructure for 'imaginary' use cases, becoming disconnected from market realities.
2) Extreme Fragmentation of Liquidity
The launch of the new Web3 infrastructure ecosystem is one of the main reasons for the fragmentation of liquidity in this field. New blockchains often require billions of dollars to initiate liquidity and attract first-level DeFi projects to join their ecosystem. In recent months, the pace of creating new L1s and L2s has exceeded the influx of new capital into the market. Therefore, capital in Web3 is more fragmented than ever, posing significant challenges to adoption.
3) Inevitable Increasing Complexity
If you've ever tried using some wallets, DApps, and cross-chain bridges for newer blockchains, you should know that the user experience is often poor. Over time, technological infrastructure naturally becomes increasingly complex and sophisticated. Applications built on that infrastructure should typically abstract this complexity for end-users. However, in Web3 (due to the lack of application development), users can only interact with increasingly complex blockchains, leading to friction during the adoption process.
4) Limited Developer Community
If the pace of development of Web3 infrastructure exceeds the pace of capital formation, then 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 the existing talent pool, which is simply not large enough to support the vast amount of infrastructure being built.
5) The Growing Gap with Web2
Trends like Generative AI are driving the development of a new generation of Web2 applications and redefining areas such as SaaS and mobile. The main trend in Web3 remains the construction of more blockchains rather than leveraging this momentum.
Ending the Vicious Cycle
Launching L1s and L2s is profitable for investors and development teams, but this does not necessarily bring long-term benefits to the Web3 ecosystem. Web3 is still in its early stages, and while more building blocks for infrastructure are needed, most builders in the industry are actually constructing infrastructure without market feedback.
Market feedback typically comes from applications above 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.