In the fast-paced world of Web3, a concerning trend has emerged: the rapid proliferation of infrastructure projects that far outpace the development of actual applications. While the creation of new blockchains, protocols, and tools continues at a breakneck pace, the ratio between infrastructure and applications in the Web3 space is unparalleled in the history of technology markets. This imbalance poses significant risks to the healthy evolution of the ecosystem.
The Infrastructure-Application Value Creation Cycle
Traditionally, value creation in tech markets oscillates between the infrastructure and application layers, finding a dynamic equilibrium. The Web1 era saw infrastructure companies like Cisco and IBM powering the internet, while applications like Netscape and AOL captured significant value. Similarly, the Web2 era was driven by cloud infrastructure, which then catalyzed the rise of SaaS and social platforms, in turn driving the creation of new cloud infrastructure.
However, this delicate balance is notably absent in the Web3 ecosystem. The primary reason for this anomaly is the rapid path to capital formation and liquidity for infrastructure projects in Web3. Unlike traditional markets, where investor liquidity is realized through acquisitions or public offerings over an extended period, Web3 infrastructure projects can launch tokens that become tradable on exchanges, providing substantial liquidity for stakeholders in a matter of years.
The Infrastructure Casino
This “infrastructure casino” incentivizes builders and investors to prioritize infrastructure projects over applications. After all, why focus on building applications when L2 tokens can achieve multibillion-dollar valuations with minimal usage? This approach, however, presents several subtle but significant challenges.
Building Without Adoption Feedback
One of the most significant risks of overbuilding infrastructure in Web3 is the lack of market feedback from applications built on top of that infrastructure. Applications represent the ultimate expression of consumer and business use cases and regularly guide new infrastructure development. Without this feedback loop, Web3 risks building infrastructure for “imaginary” use cases that are disconnected from market realities.
Extreme Liquidity Fragmentation
The launch of new Web3 infrastructure ecosystems is one of the main contributors to liquidity fragmentation in the space. New blockchains often require billions of dollars to bootstrap liquidity and attract tier 1 DeFi projects. In recent months, the creation of new L1 and L2 blockchains has outpaced the influx of new capital into the market, resulting in more fragmented capital than ever before and creating significant adoption challenges.
Inevitable, Increasing Complexity
As tech infrastructure grows more sophisticated over time, applications built on that infrastructure typically abstract away this complexity for end users. However, in Web3, where application development is lacking, users are left to interact with increasingly complex blockchains directly, leading to friction in adoption. The user experience of newer blockchains’ wallets, dApps, and bridges is often difficult and cumbersome.
Limited Developer Communities
If Web3 infrastructure has outpaced 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 with very limited developer communities because they pull talent from the same existing pool, which is simply not large enough to sustain the vast amount of infrastructure being built.
Widening Gap with Web2
A side effect of overbuilding infrastructure in Web3 without corresponding app adoption is the widening gap with Web2. Trends such as generative AI are powering a new generation of Web2 apps and redefining sectors like SaaS and mobile. Instead of tapping into this momentum, the predominant trend in Web3 continues to be building more blockchains, further isolating the ecosystem from mainstream adoption.
Ending the Vicious Circle
While launching L1 and L2 blockchains may be profitable for investors and development teams in the short term, it doesn’t necessarily translate into long-term benefits for the Web3 ecosystem as a whole. Web3 is still in its early stages, and although more infrastructure building blocks are certainly needed, the industry is currently building infrastructure largely without market feedback.
We continue to build infrastructure, launch tokens, and raise capital, but we are effectively flying blind.
– Anonymous Web3 industry expert
To break this vicious circle, the Web3 ecosystem must prioritize application development and seek real-world adoption feedback. By focusing on building applications that solve genuine user problems and create tangible value, Web3 can cultivate a healthier balance between infrastructure and applications, driving sustainable growth and mainstream adoption.
The risks posed by overbuilding infrastructure in Web3 are significant and multifaceted. From misaligned incentives and liquidity fragmentation to increasing complexity and limited developer communities, these challenges threaten to hinder the ecosystem’s evolution. As Web3 matures, it is crucial for the industry to recognize these risks and work towards a more balanced approach that prioritizes application development and real-world adoption.
Only by fostering a vibrant application layer and seeking continuous market feedback can Web3 hope to realize its full potential as the next generation of the internet. The path ahead may be challenging, but by addressing these risks head-on and focusing on building real value, the Web3 ecosystem can emerge stronger, more resilient, and better positioned to drive the future of decentralized technologies.
