IntoTheBlock co-founder: Web3 infrastructure is being overbuilt and we are acting blindly

Written by: Jesus Rodriguez, CEO and co-founder of IntoTheBlock; Translated by: Yangz, Techub News

The Web3 ecosystem 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 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 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 the case? It's 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 and bringing unique risks to its development. To explore this further, we need to understand how infrastructure technology trends typically create value, how Web3 deviates from this norm, and the risks of overbuilding infrastructure.  

The Infrastructure and Application Value Creation Cycle in the Tech Market 

Traditionally, value creation in the tech 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 such as Cisco, IBM, and Sun Microsystems powered the infrastructure layer of the Internet. However, even in the early days, the emergence of applications such as Netscape and AOL brought huge 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 such as Generative AI started as infrastructure plays for model builders, but applications such as ChatGPT, NotebookLM, and Perplexity quickly gained momentum. This in turn drives the creation of new infrastructure to support a new generation of AI applications, and this cycle is likely to continue multiple times. This constant 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? The Infrastructure Casino The key 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, where investor liquidity is usually achieved through company acquisitions or public stock offerings, both of which typically take a considerable amount of time, with most venture capital firms investing for a decade or more. While rapid capital formation is one of Web3’s strengths, it often misaligns team incentives 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 Challenges of Overbuilding Web3 Infrastructure 

1) Building without Adoption Feedback 

Perhaps the biggest risk of overbuilding infrastructure in Web3 is the lack of market feedback from applications built on top of 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) Extremely Fragmented Liquidity 

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 rate at which new capital has been pouring into the market. As a result, capital in Web3 is more fragmented than ever before, creating a huge challenge for 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 that infrastructure should generally abstract this complexity for end users. However, in Web3 (lack of application development), users are left interacting with increasingly complex blockchains, leading to friction in the adoption process.  

4) Limited Developer Community 

If the growth of Web3 infrastructure is outpacing the rate of capital formation, the challenge is even greater in terms of the developer community. 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 growing gap with Web2

Trends such as generative AI are driving a new generation of Web2 applications and redefining areas such as SaaS and mobile. The main trend in Web3 continues to be to build more blockchains rather than capitalize on this momentum.

Ending the vicious cycle

Launching L1 and L2 is profitable for investors and development teams, but it does not necessarily bring long-term benefits to the Web3 ecosystem. Web3 is still in its early stages, and while more infrastructure building blocks are needed, most builders in the industry are currently 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 continued to build infrastructure, launch tokens, and raise funds, but we were effectively flying blind.