Author: Donovan Choy, Blockworks; Translated by: Deng Tong, Golden Finance

Negative sentiment about cryptocurrencies’ current bloated infrastructure and lack of consumer adoption has reached a fever pitch.

This is such a familiar topic on social media and podcasts that it has largely become a consensus. Previous cycles saw innovations in smart contract blockchains, ICOs, DeFi, Layer 2, and NFTs, but the new tools of the current cycle are mainly memecoins and increasingly redundant infrastructure.

According to L2Beat, there are currently 71 L2s online, with another 82 coming online soon. This does not include Layer 3. Why so many?

In an industry where investors are still struggling to find a “fundamental” valuation method, the standard approach to valuing upcoming L2s is to conduct a comparative analysis (or “comps”) with the largest L2s to determine their potential value. The general idea is that since the largest L2s have amassed multi-billion dollar valuations, newer L2s should also have at least a sizable share of that.

This is perhaps a testament to one of the most successful investment themes in crypto, the “Fat Protocols Thesis.” Written in 2016 by Union Square Ventures’ Joel Monegro, the thesis argues that value accrual at the Web3 infrastructure layer will generate the most value, in stark contrast to Web2, where value has leaked from the TCP/IP/SMTP protocol layer into the walled gardens of large tech companies.

This idea has largely been realized; of the top 30 crypto tokens by market cap today, 18 are either L1 or L2.

And, thanks to Rollup-as-a-Service (RaaS) providers like Conduit and Caldera, it has never been easier to launch a Rollup chain. The result is that almost identical Rollups are competing with each other for capital.

Conduit founder Andrew Huang claims his company focuses on projects that are “uniquely differentiated from day one.”

“I don’t deny that there is little differentiation between L2s, which has led to users becoming tired of Rollups,” Huang noted.

Market participants may have finally expressed their rejection of Rollups. For example, the much-hyped Blast L2 issued its token at a $2.7 billion FDV, severely below market expectations. The token has since fallen in value to just over $1 billion.

Behind the popularity of Rollup, there is more than just large-scale marketing. For most on-chain application builders, minimizing costs is also a driving factor.

“We’re seeing more and more rollup deployment patterns because as dapps become popular, the ‘rent’ they pay to L1/L2 becomes very expensive,” Huang said. “Chains like Base are charging $50 million in fees, but dapps don’t get a penny.”

However, launching your own application-specific rollup, the dapp, would be able to capture those revenues. “It’s a very sound business decision,” he said.

We still need infrastructure

Despite the progress in infrastructure, some believe that this is far from enough. The tangible and intangible limitations of existing Rollups still exist, such as fragmented liquidity and other friction points in the user experience.

Caldera CEO Matt Katz noted that Ethereum’s rollup-centric vision is exacerbating this situation, “There may be tens of thousands of these rollups in the future.”

“These rollups are siloed and it’s hard for them to communicate with each other,” Katz said, noting that connecting via the Ethereum mainnet is slow and expensive. “There needs to be a more efficient way.”

In Katz's view, applications and infrastructure must work together. "It's a mistake to think of it as a zero-sum game," he said.

Another area where infrastructure development is still lacking is interoperability, which goes beyond cross-chain bridges. This is sometimes called "chain abstraction," a broad design concept that aims to eliminate all the inconvenience of moving across chains for ordinary on-chain users.

Wei Dai, research partner at 1kx, said shared settlement bridges like Polygon’s AggLayer and Zksync’s Elastic Chain will help.

“With better interoperability infrastructure, there is no need to rely on external service providers for high-risk cross-chain transfers,” Dai pointed out. “Shared sorters can guarantee atomic swap transactions across Rollup chains, which is a great improvement to the user experience,” he said.

Yes, some areas of infrastructure are overfunded, and many areas will fail, Dai said. “But there are also some underfunded areas, like AVS tools and interoperability layers, which are sorely lacking,” he added.

It may be premature to dismiss infrastructure, one would think. After all, the value of infrastructure development is often not immediately obvious. Many of today’s cherished consumer innovations are largely emergent and unplanned outcomes, the result of decades of painstaking work in making piecemeal improvements to infrastructure.

Netflix, for example, was a mail-order movie rental business for a decade before broadband internet became ubiquitous enough to deliver high-quality on-demand streaming services at the scale it does today.

Consumer apps: Just do it

So, is the infrastructure ready for consumer application builders? Vitalik Buterin believes that developers “no longer have any excuses.”

“Until a few years ago, we were setting a low bar for ourselves, building applications that clearly couldn’t be used at scale, as long as they worked as prototypes and were reasonably decentralized,” he wrote in a blog post in May. “Today, we have all the tools we need, in fact, most of the tools, to build applications that are both cypherpunk-esque and user-friendly.”

Venture capital funds may have realized the valuation trap. According to Galaxy Research, the share of crypto infrastructure investment has dropped to 15% in the second quarter of this year from 24% in the previous quarter.

Infrastructure builders are hard at work, but that doesn’t mean consumer application builders are napping.

Seed Club, a venture fund organized as a DAO that runs a consumer cryptocurrency-focused accelerator, received 350 applications for its last accelerator, according to partner Josh Cornelius.

“Historically, it’s only in the last six months that we’ve been able to cheaply build great consumer products on blockchain and easily bring them to market,” Cornelius said.

He attributes the success of protocols like memecoin and Farcaster to the growth of abundant and cheap block space and developments like embedded wallet technology.

So why haven’t consumer apps caught on? For Cornelius, one big remaining sticking point is marketing — “the socio-cultural side of things.”

“The most difficult challenge for consumer builders is educating users about the novel, differentiated experiences that cryptocurrency and blockchain enable,” Cornelius said.

Old go-to-market strategies no longer apply.

“We need founders who are great brand builders who have cultural influence outside of crypto and can tell the story of what’s happening here in a way that’s accessible and culturally relevant,” he said.