IntoTheBlock co-founder: Web3 infrastructure is in oversupply, are we building blindly?

By: Jesus Rodriguez, CEO and Co-founder, IntoTheBlock

Compiled by: Yangz, Techub News

The Web3 ecosystem is often viewed as the next generation infrastructure of the Internet. However, nearly 10 years after the Ethereum whitepaper was released, there are still few 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 layer, etc. While we may be building the future of the Internet through Web3, there is no doubt that we are also overbuilding infrastructure. The current imbalance between infrastructure and applications in Web3 is unprecedented in the history of the technology market.

As for why this is happening? Simple, because building infrastructure on Web3 is profitable.

Web3 breaks the application model of some traditional technology infrastructure markets, creating a quick path to profitability, but also bringing unique risks to its development. To explore this further, we need to understand how infrastructure technology trends usually 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 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 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 drove the advent of the Web2 era, which in turn brought SaaS and social platforms, giving rise to new cloud infrastructure.

Looking more recently, trends like Generative AI started out as an infrastructure play for model builders, but applications like ChatGPT, NotebookLM, and Perplexity quickly gained momentum. This in turn drove the creation of new infrastructure to support a new generation of AI applications, and this cycle is likely to continue multiple times.

This ongoing balance of value creation between the application layer and the infrastructure layer has long been a hallmark of technology markets, making Web3 a notable anomaly. But why is this imbalance so pronounced in Web3?

Casino Infrastructure

The main difference between Web3 and its predecessors is the rapid capital formation and liquidity of infrastructure projects. In Web3, infrastructure projects often launch tokens that can be traded on exchanges, providing investors, teams, and communities with a large amount of liquidity. 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 usually take a considerable amount of time. Generally speaking, most venture capital firms have an investment cycle of ten years or more. While rapid capital formation is one of the advantages of Web3, it often misaligns the incentive mechanism of the team and is not conducive to creating long-term value.

This “infrastructure casino” is a risk of Web3 that 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 little usage? This approach presents several challenges, many of which are subtle and difficult to solve.

The Challenge of Overbuilding Web3 Infrastructure

1) Building without using feedback

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

2) Liquidity is extremely fragmented

The launch of new Web3 infrastructure ecosystems is one of the main reasons for the fragmentation of liquidity in the space. New blockchains often require billions of dollars to launch liquidity and attract Tier 1 DeFi projects to join their ecosystems. In the past few months, the creation of new L1s and L2s has outpaced the influx of new capital into the market. As a result, capital in Web3 is more fragmented than ever before, posing a huge challenge to adoption.

3) Inevitable growing complexity

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

4) Limited developer community

If Web3 infrastructure is outpacing capital formation, the challenge is even greater when it comes to developer communities. 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 from an existing talent pool that is simply not large enough to support the large amounts of infrastructure being built.

5) The widening gap with Web2

Trends like generative AI are driving a new generation of Web2 applications and redefining areas like SaaS and mobile. The main trend in Web3 continues to be building more blockchains rather than leveraging this momentum.

Ending the vicious cycle

For investors and development teams, launching L1 and L2 is profitable, but it does 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.

Market feedback usually comes from applications on top of infrastructure, but there are basically no such applications in Web3. Most of the usage of Web3 infrastructure comes from other Web3 infrastructure projects. We continue to build infrastructure, launch tokens, and raise funds, but we are actually flying blind.