Article Source: Techub News
Author: Jesus Rodriguez, CEO and Co-founder of IntoTheBlock
Compiled by: Yangz, Techub News
The Web3 ecosystem is often viewed as the next generation of internet infrastructure. However, nearly 10 years after the release of the Ethereum whitepaper, there are still few mainstream applications running on that infrastructure. Meanwhile, new infrastructure building blocks have been constantly emerging, including various L1, L2, L3, Rollups, ZK layers, etc. While we may be building the future of the internet through Web3, there is no doubt we are also overbuilding 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 has broken some traditional technology infrastructure market application models, creating both a fast 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 norm, and the risks associated with overbuilding infrastructure.
The Cycle of Value Creation in Technology Market Infrastructure and Applications
Traditionally, value creation in the tech market oscillates 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 tremendous value. Cloud infrastructure propelled the arrival of the Web2 era, which in turn brought about SaaS and social platforms, giving rise to new cloud infrastructures.
Looking at recent trends, such as Generative AI, which initially was just an infrastructure game for model builders, applications like ChatGPT, NotebookLM, and Perplexity have quickly gained momentum. This, in turn, drives 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, 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 tradable tokens, providing considerable liquidity for investors, teams, and the community. This contrasts sharply with traditional markets. In traditional markets, liquidity for investors is typically realized through company acquisitions or public stock offerings, both of which usually take a considerable amount of time, generally, most venture capital investment cycles last ten years or more. While rapid capital formation is one of the advantages of Web3, it often misaligns team incentives, detrimental to long-term value creation.
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 valuations in the billions with minimal 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 biggest risk of overbuilding infrastructure in Web3 may be the lack of market feedback from applications built on top of that infrastructure. Applications are the ultimate embodiment of consumer and enterprise use cases and regularly guide new use cases within the infrastructure. Without application feedback, Web3 risks building infrastructure for 'imagined' use cases, disconnected from market realities.
2) Severe Liquidity Fragmentation
The launch of new Web3 infrastructure ecosystems is one of the main reasons for the liquidity fragmentation in the field. New blockchains often require billions of dollars to kickstart liquidity and attract Tier 1 DeFi projects into their ecosystems. In recent months, the pace of new L1 and L2 creations has outstripped the influx of new capital into the market. Therefore, capital in Web3 is more fragmented than ever, posing significant challenges to adoption.
3) Inevitably Increasing Complexity
If you have tried using some wallets, DApps, and cross-chain bridges for newer blockchains, then you should know that the user experience is often poor. Over time, technology infrastructure naturally becomes more complex and sophisticated. Applications built on that infrastructure are supposed to 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 speed of Web3 infrastructure exceeds the speed of capital formation, the challenges in 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 an existing talent pool that is simply insufficient 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, redefining areas like SaaS and mobile. The primary 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 building blocks of infrastructure are needed, most builders in the industry are actually constructing infrastructure without market feedback.
Market feedback typically comes from applications built on top of infrastructure, but there are virtually no such applications in Web3. Most of the use of Web3 infrastructure comes from other Web3 infrastructure projects. We continue to build infrastructure, launch tokens, and raise funds, yet we are essentially acting blindly.