Web3 infrastructure is being overbuilt and we are flying blind

Written by: Jesus Rodriguez, CEO and Co-Founder of IntoTheBlock; Compiled by: Yangz, Techub News

The Web3 ecosystem is often regarded 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 are emerging all the time, including various L1, L2 and L3, Rollup, ZK layers, etc. While we may be building the future of the Internet with Web3, there's no doubt that we're also overbuilding the infrastructure. The current imbalance between infrastructure and applications in Web3 is unique in the history of technology markets.

As for why this happens? Simply because building infrastructure on Web3 is profitable.

Web3 breaks the application model of some traditional technology infrastructure markets, creating a path to rapid profitability but also bringing unique risks to its development. To explore this further, we need to understand how infrastructure technology trends typically create value, how Web3 deviates from this norm, and the risks of overbuilding infrastructure.

Infrastructure and application value creation cycle of technology market

Traditionally, value creation in technology markets has fluctuated between the infrastructure layer and the application layer, seeking a dynamic balance between the two.

Take the Web1 era as an example. Companies such as Cisco, IBM, and Sun Microsystems power the infrastructure layer of the Internet. However, even in those early days, the emergence of applications such as Netscape and AOL brought tremendous value. Cloud infrastructure has promoted the arrival of the Web2 era, which has brought about SaaS and social platforms, giving birth to new cloud infrastructure.

Looking at the recent past, trends such as generative AI (Generative AI) started as an infrastructure play for model builders, but applications such as ChatGPT, NotebookLM, and Perplexity quickly gained momentum. This in turn drives the creation of new infrastructure to support new generations of AI applications, a cycle that is likely to continue many times over.

This value-creating balance between the application and infrastructure layers has long been a hallmark of the technology market, making Web3 a clear anomaly. But why is this imbalance so obvious in Web3?

infrastructure casino

The main difference between Web3 and its predecessors is rapid capital formation and liquidity for infrastructure projects. In Web3, infrastructure projects often launch tokens that can be traded on exchanges, providing investors, teams, and communities with large amounts of liquidity. This is in stark contrast to traditional markets. In traditional markets, investor liquidity is usually achieved through company acquisitions or public offerings of shares, both of which usually take a considerable amount of time. Generally speaking, the investment cycle of most venture capital firms is ten years or more. longer. Although rapid capital formation is one of the advantages of Web3, it often misaligns the team's incentives and is not conducive to long- term value creation.

This "infrastructure casino" is a risk of Web3, which incentivizes builders and investors to prioritize infrastructure projects over applications. After all, who cares about applications when L2 tokens can achieve multi-billion dollar valuations in just a few years with very little usage? This approach presents several challenges, many of which are subtle and difficult to resolve.

The Challenge of Overbuilding Web3 Infrastructure

1) Building without feedback

Perhaps the biggest risk of overbuilding infrastructure in Web3 is the lack of market feedback for applications built on top of the infrastructure. Applications are the ultimate expression of consumer and enterprise use cases and regularly guide new use cases in the infrastructure. Without application feedback, Web3 risks building infrastructure for "imaginary" use cases that are out of touch with market realities.

2) Liquidity is extremely dispersed

The launch of the new Web3 infrastructure ecosystem is one of the main reasons for the fragmentation of liquidity in this field. New blockchains often require billions of dollars to initiate liquidity and attract first-tier DeFi projects to join their ecosystem. Over the past few months, new L1s and L2s have been created faster than new capital is flooding into the market. As a result, capital in Web3 is more fragmented than ever before, creating huge challenges for adoption.

3) Inevitable growing complexity

If you’ve tried using some of the wallets, DApps, and cross-chain bridges for newer blockchains, you should know that the user experience is often miserable. Technology infrastructure naturally becomes more complex and sophisticated over time. And applications built on this infrastructure should generally abstract this complexity away from end users. However, in Web3 (lack of application development), users are limited to interacting with increasingly complex blockchains, leading to friction in adoption.

4) Limited developer community

If Web3 infrastructure is outpacing capital formation, the challenge for the developer community is even greater. DApps are built by developers, and creating new developer communities is always a challenge. Most new Web3 infrastructure projects operate within a very limited developer community, drawing talent from an existing talent pool that is simply not large enough to support the massive amount of infrastructure being built.

5) The growing gap with Web2

Trends such as generative artificial intelligence are driving the development of a new generation of Web2 applications and redefining areas such as SaaS and mobile. The main trend in Web3 is still to build more blockchains rather than capitalize on the momentum.

End 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, and while more infrastructure building blocks are needed, most builders in the industry are currently building infrastructure without market feedback.

Market feedback often comes from applications on top of the infrastructure, but such applications are largely absent from Web3. Most usage of Web3 infrastructure comes from other Web3 infrastructure projects. We continue to build infrastructure, launch tokens, raise funds, but we are really flying blind.