Written by: Jesus Rodriguez, CEO and Co-founder of IntoTheBlock
Translated by: Yangz, Techub News
The Web3 ecosystem is often seen as the next-generation infrastructure of the Internet. However, nearly 10 years after the release of the Ethereum white paper, there are still not many mainstream applications running on this infrastructure. At the same time, new infrastructure building blocks have been emerging, including various L1, L2 and L3, Rollup, ZK layer, etc. While we may be building the future of the Internet through Web3, there is no doubt that we are also overbuilding infrastructure. The current 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, because building infrastructure on Web3 is profitable. Web3 breaks the application model of some traditional technology infrastructure markets, creating both a quick path to profitability and unique risks for its development. To explore this further, we must understand how infrastructure technology trends typically create value, how Web3 deviates from this routine, and the risks of overbuilding infrastructure.
The value creation cycle of technology market infrastructure and applications
Traditionally, the 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 the early days, the emergence of applications like Netscape and AOL brought enormous value. Cloud infrastructure propelled the arrival of the Web2 era, which in turn led to SaaS and social platforms, spawning new cloud infrastructure. Looking at recent trends like 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 may continue multiple times. The ongoing balance of value creation between the application layer and the 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 that provide significant liquidity for investors, teams, and communities. This stands in stark contrast to traditional markets. In traditional markets, liquidity for investors is usually achieved through company acquisitions or public stock offerings, both of which typically take quite a long time; generally speaking, most venture capital firms have an investment cycle of ten years or more. Although rapid capital formation is one of Web3's advantages, it often misaligns the incentives for teams, which is detrimental to creating long-term value. This 'infrastructure casino' is a risk in Web3 that incentivizes builders and investors to prioritize infrastructure projects over applications. After all, when L2 tokens can achieve multi-billion dollar valuations with minimal usage in just a few years, who still cares about applications? This approach presents several challenges, many of which are subtle and difficult to resolve.
Challenges of overbuilding Web3 infrastructure
1) Building without feedback The greatest risk of overbuilding infrastructure in Web3 may be the lack of market feedback from applications built on top of the infrastructure. Applications are the ultimate manifestation of consumer and enterprise use cases, regularly guiding new use cases in the infrastructure. Without application feedback, Web3 runs the risk of building infrastructure for 'imaginary' use cases, disconnected from market realities. 2) Extreme liquidity fragmentation The launch of new Web3 infrastructure ecosystems is one of the main reasons for liquidity fragmentation in the field. New blockchains often require billions of dollars to kickstart liquidity and attract tier-one DeFi projects to join their ecosystem. In recent months, the pace of creating new L1s and L2s has outpaced the influx of new capital into the market. Therefore, capital in Web3 is more fragmented than ever before, presenting significant challenges for adoption. 3) Inevitable increasing complexity If you have tried using some 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 this infrastructure are usually supposed to 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 in the adoption process. 4) Limited developer community If the pace of Web3 infrastructure development exceeds the speed of capital formation, then the challenges regarding the developer community are even greater. DApps are built by developers, and creating new developer communities has always been a challenge. Most new Web3 infrastructure projects operate within very limited developer communities, drawing talent from an existing talent pool that is simply not large enough to support the significant amount of infrastructure being built. 5) The widening gap with Web2 Trends like Generative AI are driving the development of a new generation of Web2 applications and redefining fields like SaaS and mobile. The main trend in Web3 remains building 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; although more infrastructure building blocks are needed, most builders in the industry are actually constructing infrastructure without market feedback. Market feedback typically comes from applications built on top of the infrastructure, but there are nearly no such applications in Web3. Most of the 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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