The Web3 ecosystem is often seen as the next infrastructure of the Internet. However, almost a decade after the release of the Ethereum white paper, we still have very few mainstream applications running on that infrastructure. Meanwhile, we continue to see the emergence of new infrastructure building blocks everywhere: L1, L2 and L3 blockchains, rollups, ZK layers, DeFi protocols and many others. While we may be building the future of the Internet with Web3, there is little doubt that we are overbuilding the infrastructure layer. Currently, the relationship between infrastructure and applications in Web3 has no parallels in the history of technology markets.
Why does this happen? Simply because it is profitable to build infrastructure in Web3.
Web3 defies some of the conventional market adoption patterns in tech infrastructure, creating both a fast track to profitability and unique risks to its evolution. To further explore this statement, we need to understand how value is typically created in infrastructure technology trends, how Web3 deviates from this norm, and what risks result from infrastructure overbuilding.
Traditionally, value creation in technology markets fluctuates between the infrastructure and application layers, striking a dynamic balance between the two.
Take the Web1 era as an example. Companies such as Cisco, IBM and Sun Microsystems were the driving force behind the infrastructure layer of the Internet. But even in those early days, applications like Netscape and AOL emerged that could generate significant value. The Web2 era was powered by cloud infrastructure, which then spawned SaaS and social platforms, catalyzing the creation of new cloud infrastructure.
More recently, trends like generative AI started as an infrastructure play with modelers, but applications like ChatGPT, NotebookLM, and Perplexity quickly gained momentum. This, in turn, has led to the creation of new infrastructure to support a new generation of AI applications – a cycle that will likely continue for several more iterations.
This constant balance between application and infrastructure layers is a hallmark of technology markets, making Web3 a notable anomaly. But why is this imbalance so apparent in Web3?
The main difference between Web3 and its predecessors is the fast path to capital formation and liquidity in infrastructure projects. In Web3, infrastructure projects typically launch tokens that become tradable on exchanges, providing significant liquidity to investors, teams and communities. This contrasts with traditional markets, where investor liquidity is typically achieved through corporate acquisitions or public offerings, both of which typically take a long time to complete. Most venture capital firms operate on an investment cycle of ten years or longer. While rapid capital formation is one of the benefits of Web3, team incentives are often misaligned, discouraging long-term value creation.
This “infrastructure casino” is a risky pattern in Web3 because it encourages builders and investors to prioritize infrastructure projects over applications. After all, who needs applications when L2 tokens can reach multi-billion dollar valuations in just a few years with minimal usage? This approach poses several challenges, many of which are subtle and difficult to address.
1) Building without adoption feedback
Perhaps the biggest risk of overbuilding the 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 accompany new use cases in infrastructure. Without application feedback, Web3 risks building infrastructure for “imaginary” use cases that are disconnected from market reality.
2) Extreme liquidity fragmentation
The launch of new Web3 infrastructure ecosystems is one of the main drivers of liquidity fragmentation in the sector. New blockchains often require billions of dollars to increase liquidity and attract Tier 1 DeFi projects to their ecosystems. In recent months, the creation of new L1 and L2 blockchains has exceeded the influx of new capital into the market. As a result, capital in Web3 is more fragmented than ever, creating significant adoption challenges.
3) Inevitable, increasing complexity
Have you tried using some wallets, dApps and bridges for newer blockchains? The user experience is generally difficult. The technical infrastructure obviously becomes more complex and advanced over time. Applications built on that infrastructure typically abstract this complexity for end users. However, in Web3 – where there is a lack of application development – users are left to interact with increasingly complex blockchains, leading to friction in adoption.
4) Limited developer communities
If Web3 infrastructure has surpassed capital formation, then 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 draw talent from the same existing pool, which simply isn’t large enough to support the massive amount of infrastructure being built.
5) Widening the gap with Web2
A side effect of overbuilding the infrastructure in Web3 – without app adoption – is the widening adoption gap with Web2. Trends like generative AI are driving a new generation of Web2 apps and redefining industries like SaaS and mobile. Instead of tapping into this momentum, the dominant trend in Web3 remains building more blockchains.
Launching L1 and L2 blockchains is a profitable venture for investors and development teams, but that doesn’t necessarily translate into long-term benefits for the Web3 ecosystem. Web3 is still in its early stages, and while more infrastructure building blocks are certainly needed, most of the industry is currently building infrastructure without market feedback.
That market feedback typically comes from applications that use the infrastructure, but such applications are largely absent from Web3. Most of the Web3 infrastructure usage comes from other Web3 infrastructure projects. We continue to build infrastructure, launch tokens and raise capital, but we are essentially flying blind.
