Author: Jesus Rodriguez, CEO and Co-Founder of IntoTheBlock
Compiled by: Yangz, Techub News
The Web3 ecosystem is often viewed as the next-generation infrastructure of the internet. However, nearly 10 years after the release of the Ethereum white paper, there are still relatively few mainstream applications running on this infrastructure. Meanwhile, new infrastructure building blocks have been emerging, including various L1s, L2s, and L3s, Rollups, ZK layers, and so on. While we may be building the future of the internet through Web3, there is no doubt that we are also overbuilding the 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 of technology infrastructure markets, 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.
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 the 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 tremendous value. Cloud infrastructure drove the arrival of the Web2 era, which in turn brought about SaaS and social platforms, spawning new cloud infrastructure.
Looking back recently, trends like generative AI initially seemed to be just an infrastructure game for model builders, but applications like ChatGPT, NotebookLM, and Perplexity quickly gained momentum. 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 the infrastructure layer has been a hallmark of the tech market, which also makes Web3 a striking anomaly. But why is this imbalance so pronounced in Web3?
Infrastructure casino
The main difference between Web3 and its predecessor lies in the rapid capital formation and liquidity of infrastructure projects. In Web3, infrastructure projects typically launch tradeable tokens on exchanges, providing significant liquidity for investors, teams, and communities. This contrasts sharply with traditional markets. In traditional markets, investor liquidity is typically realized through company acquisitions or public stock offerings, both of which often take a considerable amount of time, generally, most venture capital firms have an investment cycle of ten years or longer. While rapid capital formation is one of the advantages of Web3, it often misaligns the team's incentive mechanisms, hindering the creation of long-term value.
This 'infrastructure casino' is a risk for Web3, incentivizing builders and investors to prioritize infrastructure projects over applications. After all, when L2 tokens can achieve valuations in the billions with very little usage in just a few years, who cares about applications? This approach brings some challenges, many of which are subtle and difficult to address.
Challenges of overbuilding Web3 infrastructure
1) Building without adoption feedback
The biggest 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 embodiment of consumer and enterprise use cases and regularly guide new use cases in the infrastructure. Without application feedback, Web3 risks building infrastructure for 'imagined' use cases, disconnected from market realities.
2) Extreme liquidity fragmentation
The launch of new Web3 infrastructure ecosystems is one of the main reasons for the liquidity fragmentation in this 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 outstripped the influx of new capital into the market. Therefore, capital in Web3 is more fragmented than ever before, posing significant challenges for adoption.
3) Inevitable increasing complexity
If you've tried using some wallets, DApps, and cross-chain bridges for newer blockchains, you should know that the user experience is often quite poor. Over time, the technological infrastructure naturally becomes increasingly complex and sophisticated. Applications built on this infrastructure should typically abstract this complexity for end users. However, in Web3 (lacking application development), users can only interact with increasingly complex blockchains, leading to friction in the adoption process.
4) Limited developer community
If the development of Web3 infrastructure outpaces the speed of 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 the existing talent pool, which is simply insufficient to support the vast amount of infrastructure being built.
5) The widening gap with Web2
Trends like generative artificial intelligence are driving the development of the next generation of Web2 applications, redefining areas like SaaS and mobile. The main trend in Web3 is still to build more blockchains rather than leverage this momentum.
Ending the vicious cycle
For investors and development teams, launching L1s and L2s 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 actually 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 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.
