Challenges and Opportunities Facing Encryption Infrastructure

Current Market Environment

The cryptocurrency infrastructure sector is experiencing significant market fatigue. After years of rapid development, the valuations of infrastructure projects are shrinking, and investors' attitudes have become more cautious. This reflects a gradually maturing market, where relying solely on technological innovation is no longer sufficient to achieve high valuations.

Innovation Dilemma

The main issue facing infrastructure projects currently is that most provide similar functionalities with insufficient differentiation. Although technology has advanced, there have not yet been breakthrough use cases that support entirely new categories of applications. The encryption ecosystem struggles to provide enough appeal for mature Web2 platforms to migrate to the blockchain. Aside from decentralization, these platforms have little incentive to fundamentally change their existing operational methods. This fundamental adoption gap has resulted in trading and speculation remaining the primary applications for most infrastructure layers, limiting the transformative potential of the field.

Overbuilding of Infrastructure

Many infrastructure projects focus too much on cutting-edge technological innovations while neglecting the actual needs of developers. They often overly concentrate on elements beyond some core functionalities, such as privacy protection and verifiability. This forward-looking technological approach overlooks the importance of short-term market acceptance and practical applications, increasing the difficulty of early promotion and making it hard to obtain effective user feedback.

The surge in infrastructure projects has created a paradox: too many platforms competing for a limited number of attractive applications. This imbalance has led to a large number of "ghost chains" with extremely low usage rates and almost no revenue, resulting in an unsustainable economic model that mainly relies on token appreciation rather than actual application value.

In contrast, cloud computing directly meets the validated demands in the market, namely how to efficiently manage server resources with different configurations, times, and locations. Cloud computing platforms meet developers' actual needs for rapid deployment, elastic scaling, and cost optimization through modular and interface-based server resources, database management, and storage services. This is precisely why cloud computing technology has quickly gained market recognition and has developed into an important infrastructure supporting the internet economy.

Breaking the Feedback Loop

A healthy encryption ecosystem requires an efficient feedback loop between application developers and infrastructure builders. Currently, this loop has been broken - application developers are troubled by infrastructure constraints, while infrastructure teams lack clear signals to understand which features can drive actual usage. Restoring this feedback mechanism is crucial for sustainable growth. Despite these challenges, infrastructure development remains lucrative, with 35 of the top 50 cryptocurrencies by market capitalization maintaining their own infrastructure layers. However, the standards for success have significantly increased - new infrastructure projects must simultaneously demonstrate concrete use cases, substantial user appeal, and compelling narratives to achieve meaningful valuations.

Recent Successful New Infrastructure Projects

The previous development cycle of blockchain infrastructure primarily focused on addressing the limitations of Ethereum, with various projects positioning themselves as "faster and cheaper" alternatives, while offering little in terms of truly innovative features. Today, the landscape has changed dramatically, with recently successful projects introducing more diversified and specialized infrastructure solutions.

In the past year, some infrastructure projects have achieved significant results through token issuance or large-scale financing. These projects represent the most influential new infrastructure in the primary and secondary markets:

blockchain infrastructure

• Movement: MoveVM Ethereum Layer2
• Berachain: Liquidity Proof, EVM compatible Layer 1
• Monad: High-performance EVM-compatible Layer 1
• Solayer: Heavy re-staking based on the Solana ecosystem, ultra-fast SVM
• Succinct: ZK proof generation network and ZKVM

emerging infrastructure

• Walrus: Blob storage solution
• Aethir: GPU computing network
• Double Zero: Decentralized Physical Fiber Optic Network Infrastructure
• Eigenlayer: Provides Ethereum security for new protocols
• Humanity: Digital Identity Protocol Platform

The bridge between Web2 and Web3

• Ondo: RWA Layer2
• Plume: RWAFi blockchain
• Story: AI-driven IP programmable platform

Core Observations and Analysis

Based on the analysis of recent successful infrastructure projects and the current market environment, the following core observations can be distilled:

Market Maturity and Valuation Restructuring

The most significant characteristic of the current market is the shift in valuation logic. The early model of attracting investment solely based on technical narratives and high fully diluted valuation ( FDV ) is facing severe challenges.

unsustainable token economic model

Many projects exhibit characteristics of high FDV, low circulating market cap (MC), and low trading volume. This suggests that the future unlocking of a large number of tokens will lead to sustained selling pressure, and even if the project makes technological progress, the dilution of tokens may cause prices to fall, thereby eroding user confidence and creating a negative feedback loop. This indicates that a sound and sustainable token economic model is crucial for the long-term health of the infrastructure, and its importance is on par with the technology itself.

valuation ceiling and exit challenges

Even successful projects seem to face an invisible cap of around $10 billion in valuation. This means that for investors, achieving excess returns requires entering at a very early stage, highlighting the importance of timing and early judgment. The market is no longer easily paying for pure potential, but demands clearer proof of value.

Execution capability outweighs first-mover advantage

Not all projects that have pioneered new narratives can achieve the highest valuations. For example, while some projects are pioneers in their respective fields, many subsequent projects have obtained comparable or even higher valuations through stronger execution, better market timing, or more optimized solutions. This indicates that in an increasingly crowded market, the importance of high-quality execution, effective market strategies, and timing is becoming increasingly prominent.

Technological Pragmatism on the Rise

The technological development direction of infrastructure shows a clear pragmatic tendency, with the market favoring solutions that can solve real problems, optimize existing paradigms, or effectively connect to the real world.

"Continuous value of 'faster and cheaper'"

Despite the market's pursuit of breakthrough innovations, the demand for optimization of core blockchain performance remains strong. Some projects have achieved significant valuations by enhancing the performance of existing virtual machines (EVM, MoveVM, and SVM), rather than introducing entirely new paradigms. This indicates that, before finding the next generation of killer applications, improvements in speed, cost, and efficiency are still core value points of the infrastructure. Network layer optimization and security enhancements also fall into this category.

Embrace the real world, connect to Web2

Projects that align with real-world applications and assets demonstrate strong market appeal. Projects focusing on real-world assets ( RWA ) and intellectual property ( IP ) programmability have received high valuations. They apply blockchain technology to validated Web2 concepts, infusing them with programmability, global liquidity, and new financial possibilities, lowering the understanding threshold for users and broadening the application scenarios.

DeFi and AI become value anchors

From the perspective of target use cases, finance ( DeFi, RWA ) and artificial intelligence ( AI ) are the two areas currently most recognized by the market, capable of supporting high valuation infrastructure. This indicates that infrastructure capable of providing underlying support for these two high-potential areas is more likely to gain favor from capital and the market.

Some new narratives are encountering a cold reception.

At the same time, some infrastructure narratives that were once highly anticipated, such as pure game chains, Rollup-as-a-Service (RaaS), dedicated verification layers, multi-VM chains, Agent chains, part of DePIN and Desci, etc., have not yet produced billion-dollar leading projects during this cycle. This may reflect either a lack of technological maturity in these areas or that a clear, large-scale market demand and sustainable business model have not yet been found.

Ecological Synergy and Precise Narrative

In addition to technology and market positioning, building a strong ecosystem and conducting effective market communication have become key levers for the success of infrastructure projects.

network effects of the ecosystem

The vast majority of projects valued at over $1 billion are dedicated to building or integrating a dedicated ecosystem. Whether it is Layer 1/Layer 2 attracting developers to build applications or providing shared security for other protocols, it reflects the importance of network effects. An ecosystem with multiple composable projects can create value far exceeding isolated solutions, forming a positive cycle that attracts more users, developers, and capital.

layered narrative, precise communication

Infrastructure needs to cater to both end users and developers, two core groups with vastly different needs and concerns. For end users, it is essential to translate complex technology into an intuitive "experience" story, emphasizing the direct benefits brought by the technology. For developers, a deep explanation of the technology's "capabilities" is needed, providing professional and precise information for evaluation. Successful projects often adjust their communication strategies according to different audiences, effectively conveying their value propositions.

Future Investment Opportunities

Target the underserved Web2 market

The most promising infrastructure opportunities will target large Web2 markets that have not yet been adequately served by blockchain solutions. These projects can create globally accessible markets while introducing improved financialization mechanisms.

Create a new category of infrastructure

Compared to gradually improving existing infrastructure, the new category of infrastructure will generate significant value, for example:

• Intent-based infrastructure: A protocol that allows users to express desired outcomes rather than specific transactions, automatically handling execution optimization.
• Add privacy to every blockchain, the HTTPS infrastructure of Web3.

infrastructure that meets user needs and provides stable income

As the blockchain industry matures, the long-term value of infrastructure is gradually returning to its core functions: meeting the real needs of users and generating sustainable revenue. The initial market frenzy may have been based on expectations and technological narratives, but ultimately, infrastructure that cannot effectively serve users and build robust economic models will struggle to sustain itself.

A continuous revenue stream is the lifeblood of a project's healthy operation; it not only needs to cover high operating costs but should also provide real returns for ecosystem participants. Currently, some leading Layer2s have achieved considerable protocol revenue. However, due to changes in investor preferences during this cycle, their token prices remain at relatively low levels, reflecting a mismatch between revenue and valuation. They are taking measures such as token buybacks to rectify this mismatch.

Infrastructure lacking income support relies more on selling tokens to sustain team operations. This strategy is difficult to withstand the fluctuations of market cycles. Stable income is a direct proof that the market is solving real problems and providing effective services. For developers, infrastructure can achieve complex use cases that have been widely applied with greater efficiency, or enable functions that were previously unattainable; for end users, it can bring a smoother experience, lower usage costs, and richer features.

Web2 applications actively integrating blockchain

Creating revolutionary applications from scratch requires a significant amount of time and resources. A more efficient approach is to directly integrate encryption features into existing Web2 applications. Similar to the rapid adoption of AI functionalities recently, encryption infrastructure should prioritize seamless integration pathways, allowing Web2 applications to gradually implement encryption capabilities without disrupting their core user experience.

The most successful infrastructure will enable familiar applications to provide ownership, transaction, and financial functionalities without requiring users to understand complex blockchain concepts or navigate entirely new interfaces. Financial incentives may drive this wave of integration.