Web3 infrastructure is being overbuilt and we are acting blindly

Author: Jesus Rodriguez, CEO and Co-founder of IntoTheBlock; Translation: Yangz, Techub News

Web3 ecology 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 few mainstream applications running on this infrastructure. Meanwhile, new infrastructure building modules have been emerging, including various L1, L2 and L3, Rollup, ZK layers, etc. Although 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 technology market.

As for why this situation occurs? It's simple, because building infrastructure on Web3 is profitable.

Web3 has disrupted the application model of the traditional technical infrastructure market, creating a fast path to profitability and bringing 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 of overbuilding infrastructure.

Infrastructure and Application Value Creation Cycle 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.

Take the example of the Web1 era. 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 America Online (AOL) also brought tremendous value. Cloud infrastructure has driven the arrival of the Web2 era, bringing about SaaS and social platforms, giving rise to new cloud infrastructure.

Looking at the recent period, trends such as Generative AI have initially only been the basic infrastructure game of model builders, but applications such as ChatGPT, NotebookLM, and Perplexity have quickly gained momentum. This in turn has driven the creation of new infrastructure to support the next generation of artificial intelligence applications, and this cycle may continue multiple times.

The balance of creating value continuously 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 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 a large amount of liquidity 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 typically take a considerable amount of time. The investment cycle for most venture capital companies is ten years or longer. While rapid capital formation is one of the advantages of Web3, it often leads to misalignment of team incentives and is not conducive to creating long-term value.

This 'infrastructure casino' is a risk of Web3, which 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 applications? This approach brings some challenges, many of which are subtle and difficult to solve.

Challenges of Overbuilding Web3 Infrastructure

1. Constructing without adopting feedback

Probably the biggest risk of overbuilding infrastructure in Web3 is the lack of market feedback for applications built on top of 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 that are out of touch with market realities.

2. Extremely fragmented liquidity

The launch of the new Web3 infrastructure ecosystem is one of the main reasons for the decentralization of liquidity in this field. New blockchains often require billions of dollars to start liquidity and attract top DeFi projects to join their ecosystem. In the past few months, the speed of creating new L1 and L2 has exceeded the speed of new capital entering the market. Therefore, capital in Web3 is more decentralized than ever before, which presents great challenges for adoption.

3. Inevitable Increasing Complexity

If you've 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 complex and sophisticated. Applications built on this infrastructure should usually abstract this complexity for end users. However, in Web3 (lacking application development), users can only interact with increasingly complex blockchains, leading to friction in adoption.

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 new developer communities has always been 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 widening gap with Web2

The trend of generative artificial intelligence is driving the development of the next generation of Web2 applications, and redefining the fields of SaaS and mobile. The main trend of Web3 is still to build more blockchains, rather than to leverage this momentum.

End the vicious cycle

For 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 modules are needed, most builders in the industry are actually building infrastructure without market feedback.

Market feedback usually comes from applications built on top of the infrastructure, but there are few 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.