There are too many Web3 infrastructures! Where should they be applied? What are the risks of imbalanced development?

The Web3 ecosystem is often seen as the next generation infrastructure of the internet. However, almost 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 have been emerging, including various L1, L2 and L3, Rollup, ZK layers, etc. Although we may be building the future of the network 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 technology market.

As for why this situation arises? Very simple, because it is profitable to build infrastructure on Web3.

Web3 has disrupted the application models of some traditional infrastructure markets, creating both a fast path to profitability and unique risks for 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 posed by overbuilding infrastructure.

The infrastructure and application value creation cycle of 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 such as Cisco, IBM, and Sun Microsystems provided the driving force for the infrastructure layer of the Internet. However, even in the early days, the emergence of applications such as Netscape and AOL brought significant value. Cloud infrastructure has driven the arrival of the Web2 era, leading to SaaS and social platforms, and giving birth to new cloud infrastructure.

Looking at recent trends, Generative AI and other trends that were initially just a game for model builders, have quickly gained momentum with applications such as ChatGPT, NotebookLM, and Perplexity. This in turn has driven the creation of new infrastructures to support the next generation of AI applications, and this cycle may continue multiple times.

The constant creation of value between the application layer and the infrastructure layer has always been a hallmark of the technology market, making Web3 a clear anomaly. But why is this imbalance so apparent in Web3?

Infrastructure Casino

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

This "infrastructure casino" is a risk for Web3, as it incentivizes builders and investors to prioritize infrastructure projects over applications. After all, when L2 tokens can achieve billions of dollars in valuation with little usage in just a few years, who cares about the application? This approach brings some challenges, many of which are subtle and difficult to address.

Challenges of Overbuilding Web3 Infrastructure

1. Building without adopting feedback

The greatest risk of overbuilding infrastructure in Web3 may be the lack of market feedback for applications built on top of the infrastructure. Applications are the ultimate embodiment of consumer and enterprise use, and regularly guide new applications in the infrastructure. Without application feedback, Web3 may build infrastructure for 'imaginary' applications that are disconnected from market reality.

2. Extremely decentralized liquidity

The launch of the new Web3 infrastructure ecosystem is one of the main reasons for the decentralization of liquidity in the industry. New blockchains often require billions of dollars to kickstart liquidity and attract top DeFi projects to join their ecosystem. In the past few months, the creation speed of new L1 and L2 has surpassed the speed of new capital entering the market. Therefore, capital in Web3 is more decentralized than ever before, posing significant challenges for adoption.

3. Inevitable increasing complexity

If you have tried using wallets, DApps, and cross-chain bridges for newer blockchains, you should know that the user experience is often poor. Over time, the technical infrastructure naturally becomes more and more complex and sophisticated. Applications built on this infrastructure should 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, then the challenge in the developer community is even greater. DApps are built by developers, and creating a new developer community is always a challenge. Most new Web3 infrastructure projects operate within a very limited developer community, drawing talent from existing talent pools, which are simply not sufficient to support the large amount of infrastructure being built.

5. The growing gap between Web2.

The trends of generative artificial intelligence and other technologies are driving the development of a new generation of Web2 applications, and redefining industries such as SaaS and mobile. The main trend of Web3 is still the construction of more blockchains, rather than leveraging this momentum.

End the vicious cycle

For both investors and development teams, launching L1 and L2 can be profitable, but it may not necessarily bring long-term benefits to the Web3 ecosystem. Web3 is still in its early stages, and although more infrastructure building blocks are needed, most builders in the industry are actually building infrastructure without market feedback at the moment.

Market feedback usually comes from applications built on top of the infrastructure, but there are hardly any such applications in Web3. Most of the usage of Web3 infrastructure comes from other Web3 infrastructure projects. We continue to build infrastructure, launch tokens, raise funds, but in fact, we are acting blindly.

[Disclaimer] The market is risky. Investment should be cautious. This article does not constitute investment advice. Users should consider whether any opinions, views or conclusions in this article are consistent with their specific situation. The responsibility is on the investor.

This article is authorized to be reproduced from: "Foresight News"

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

There are too many Web3 infrastructures! Where can they be applied? What are the risks of imbalanced development? This article was first published in 'Crypto City'.