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 relatively few mainstream applications running on that infrastructure. At the same time, new infrastructure building blocks have been emerging, including various L1, L2, and L3, Rollup, ZK layers, etc. 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 technology markets.

As for why this situation has arisen? It's simple: because building infrastructure on Web3 is profitable.

Web3 breaks some traditional application models in the technology infrastructure market, creating a fast track to profitability while also introducing unique risks to its development. To further explore this, we need to 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 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.

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 immense value. Cloud infrastructure drove the arrival of the Web2 era, leading to SaaS and social platforms, which in turn birthed new cloud infrastructure.

Looking back recently, trends like Generative AI initially began as an infrastructure game for model builders, but applications like ChatGPT, NotebookLM, and Perplexity quickly gained momentum. This, in turn, has driven the creation of new infrastructure to support the next generation of AI applications, and this cycle could continue multiple times.

The balance of continually creating value between the application layer and the infrastructure layer has been a hallmark of the technology market, making Web3 an obvious 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 often launch tokens that can be traded on exchanges, providing significant liquidity for investors, teams, and the community. This stands in stark contrast to traditional markets. In traditional markets, investor liquidity is usually realized through company acquisitions or public stock offerings, both of which often take considerable time; typically, the investment cycle of most venture capital firms lasts ten years or more. 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' 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 resolve.

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 that infrastructure. Applications are the ultimate manifestation of consumer and enterprise applications and regularly guide new applications in the infrastructure. Without application feedback, Web3 risks building infrastructure for 'imagined' applications, disconnecting from market reality.

2) Extreme dispersion of liquidity

The launch of new Web3 infrastructure ecosystems is one of the main reasons for the dispersion of liquidity in the industry. New blockchains often require billions of dollars to kickstart liquidity and attract top-tier DeFi projects to join 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 dispersed than ever, posing significant challenges to adoption.

3) Inevitable growing complexity

If you've tried using wallets, DApps, and cross-chain bridges for newer blockchains, you should know that the user experience is often quite poor. Over time, the technology 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 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 pace of development of Web3 infrastructure surpasses the pace of capital formation, the challenges in the developer community become 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 existing talent pools, which are simply inadequate 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 industries 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

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; while more infrastructure building blocks are needed, most builders in the current industry are actually building infrastructure without market feedback.

Market feedback usually 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.

[Disclaimer] The market carries risks, and investment should be done cautiously. This article does not constitute investment advice; users should consider whether any opinions, views, or conclusions herein align with their specific circumstances. Investment based on this is at one's own risk.

  • This article is reproduced with permission from: (Foresight News)

  • Original author: Jesus Rodriguez, CEO and co-founder of IntoTheBlock

'There is too much Web3 infrastructure! Where are the applications? What are the risks of development imbalance?' This article was originally published in 'Crypto City'