The Dangers of Excessive Web3 Infrastructure Development

The Web3 ecosystem is widely regarded as the foundation for the next generation of the internet. However, nearly a decade after the release of the Ethereum white paper, there are very few mainstream applications utilizing this infrastructure. Meanwhile, new infrastructure components are emerging everywhere, including L1, L2, and L3 blockchains, rollups, ZK layers, and DeFi protocols. Although we may be building the future of the internet with Web3, it is undeniable that the infrastructure layer is being overdeveloped. The current ratio of infrastructure to applications in Web3 is unprecedented in the history of technology markets. This phenomenon is occurring because building infrastructure in Web3 is a lucrative venture. Web3 defies conventional market adoption patterns in tech infrastructure, creating a rapid path to profitability while also posing unique risks for its evolution. To further explore this thesis, it is essential to understand how value is typically created in infrastructure technology trends, how Web3 diverges from this norm, and the risks associated with overbuilding infrastructure. Traditionally, value creation in tech markets fluctuates between the infrastructure and application layers, achieving a dynamic balance between the two. The Web1 era, for example, was characterized by companies like Cisco, IBM, and Sun Microsystems powering the infrastructure layer, while applications like Netscape and AOL emerged to capture significant value. The Web2 era was driven by cloud infrastructure, which then triggered the development of SaaS and social platforms, catalyzing the creation of new cloud infrastructure. More recently, trends like generative AI began as an infrastructure play with model builders, but applications such as ChatGPT, NotebookLM, and Perplexity quickly gained momentum. This, in turn, drove the creation of new infrastructure to support a new generation of AI applications – a cycle that is likely to continue for several iterations. The main difference between Web3 and its predecessors is the rapid path to capital formation and liquidity in infrastructure projects. In Web3, infrastructure projects typically launch tokens that become tradable on exchanges, providing substantial liquidity for investors, teams, and communities. This contrasts with traditional markets, where investor liquidity is typically realized through company acquisitions or public offerings, both of which usually take considerable time. The 'infrastructure casino' is a risky pattern in Web3 because it incentivizes builders and investors to prioritize infrastructure projects over applications. After all, who needs applications when L2 tokens can achieve multibillion-dollar valuations in just a few years with minimal usage? This approach presents several challenges, and many of them are subtle and difficult to address. The most significant risk 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 use cases in infrastructure. Without application feedback, Web3 risks building infrastructure for 'imaginary' use cases that are disconnected from market reality. 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 to their ecosystems. Over the past few months, the creation of new L1 and L2 blockchains has outpaced the influx of new capital into the market. As a result, capital in Web3 is more fragmented than ever, creating significant adoption challenges. Have you tried using some of the wallets, dApps, and bridges for newer blockchains? The user experience is typically difficult. Tech infrastructure naturally grows more complex and sophisticated over time. Applications built on that infrastructure typically abstract away 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. If Web3 infrastructure has outpaced 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 pull talent from the same existing pool, which is simply not large enough to sustain the vast amount of infrastructure being built. A side effect of overbuilding infrastructure in Web3 – without app adoption – is the widening adoption 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. Launching L1 and L2 blockchains is a profitable business 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 using the infrastructure – but such applications are largely absent in Web3. Most usage of Web3 infrastructure comes from other Web3 infrastructure projects. We continue to build infrastructure, launch tokens, and raise capital, but we are effectively flying blind.