The rapid and unbalanced development of Web3 infrastructure has created a number of risks for the ecosystem. While infrastructure has grown exponentially, application development has lagged significantly. Potential pitfalls of this trend highlight the necessity to understand the historical context and unique characteristics driving Web3’s current state. Historically, technology markets followed a cyclical pattern, balancing infrastructure and applications. This balance ensures technological advancements align with real-world use cases and needs. However, Web3 seems to have deviated from this norm, presenting challenges to its sustainable growth.
Historical Context and Value Creation Cycles
In traditional technology markets, value creation typically follows a cyclical pattern, oscillating between infrastructure and application layers. Previous eras of technological advancement, such as Web1 and Web2, observed this dynamic balance. In the Web1 era, companies like Cisco, IBM, and Sun Microsystems built the foundational infrastructure for the internet, and soon after, applications like Netscape and AOL followed, capturing significant value and user engagement.
Similarly, the Web2 era saw the rise of cloud infrastructure, which spurred the development of SaaS and social platforms, leading to further advancements in cloud technologies to support these new applications. More recently, the advent of generative AI followed a similar pattern. Initially, the focus was on model builders and infrastructure, but applications like ChatGPT, NotebookLM, and Perplexity quickly garnered attention and market share. This balance between application and infrastructure has been a hallmark of technological progress, ensuring that infrastructure development is guided by actual use cases and market needs.
Imbalance in Web3
Unlike its predecessors, Web3 has deviated from this balanced approach. Nearly a decade after the release of the Ethereum white paper, mainstream applications leveraging Web3 infrastructure remain scarce. Meanwhile, the ecosystem continues to see the proliferation of new infrastructure projects, including Layer 1 (L1), Layer 2 (L2), and Layer 3 (L3) blockchains, rollups, zero-knowledge (ZK) layers, decentralized finance (DeFi) protocols, and more. This has resulted in an unprecedented ratio between infrastructure and applications, with infrastructure vastly outpacing application development.
The main distinction between Web3 and earlier technological trends lies in the rapid path to capital formation and liquidity available for infrastructure projects. Traditionally, investors realize liquidity through company acquisitions or public offerings, processes that generally take a substantial amount of time. In contrast, Web3 projects often launch tokens that become tradable on exchanges almost immediately, providing significant liquidity for investors, teams, and communities. This rapid capital formation can misalign team incentives, encouraging short-term gains over long-term value creation.
The Infrastructure Casino
This phenomenon, which Rodriguez terms the “infrastructure casino,” incentivizes builders and investors to prioritize infrastructure projects over applications. In this highly liquid environment, infrastructure projects can achieve multibillion-dollar valuations with minimal actual usage, making it difficult to justify the effort and investment required to build applications that drive user adoption and deliver real-world value.
One of the most significant risks associated with overbuilding infrastructure in Web3 is the lack of feedback from real-world applications. Applications represent the ultimate expression of consumer and business use cases and typically drive new infrastructure development by highlighting emerging needs and use cases. Without this feedback loop, Web3 risks creating infrastructure that is disconnected from market realities, addressing “imaginary” use cases rather than actual user needs.
Key Challenges of Overbuilding Web3 Infrastructure
The constant launch of new infrastructure projects contributes to liquidity fragmentation within the Web3 ecosystem. New blockchains often require massive amounts of capital to bootstrap liquidity and attract top-tier DeFi projects to their platforms. Over the past several months, the creation of new L1 and L2 blockchains has outpaced the influx of new capital into the market, leading to increased fragmentation of capital and significant challenges in achieving widespread adoption.
Technological infrastructure naturally grows more complex over time, and Web3 is no exception. As new blockchains, rollups, and protocols emerge, the overall ecosystem becomes more intricate. Typically, applications built on this infrastructure help abstract away complexity for end users, making technologies more accessible and user-friendly. However, in the current state of Web3, where application development is lagging, users are often left to navigate this complexity themselves, resulting in higher levels of friction and lower rates of adoption.
Effective application development hinges on strong and active developer communities. However, most new Web3 infrastructure projects operate with very limited developer communities, drawing talent from a finite pool that is not large enough to sustain the vast number of infrastructure initiatives. This lack of developers hampers the creation of innovative applications that can drive user adoption and further infrastructure refinement.
Widening Gap with Web2
Another consequence of overbuilding infrastructure without corresponding application development is the widening adoption gap between Web3 and Web2. While trends like generative AI are powering a new generation of Web2 applications and redefining entire sectors like SaaS and mobile, Web3 continues to focus predominantly on building more blockchains. This insular approach results in missed opportunities to integrate with and leverage the momentum of Web2 advancements, thereby widening the gap between the two ecosystems.
Rodriguez argues that for Web3 to achieve its full potential, a more balanced approach to infrastructure and application development is essential. This means recognizing the importance of applications in driving real-world use cases and guiding infrastructure evolution. While the profitability of launching new infrastructure projects is undeniable, a more sustainable and long-term vision for Web3 must prioritize the creation of applications that deliver tangible value, attract users, and foster a robust feedback loop for continual improvement.
Ending the Vicious Circle
The ongoing cycle of launching new infrastructure projects, minting tokens, raising capital, and achieving high valuations in a short period must be addressed if Web3 is to progress meaningfully. Without substantial application development and adoption, the Web3 ecosystem risks becoming a speculative arena rather than a transformative technological frontier.
To break this cycle, Rodriguez suggests several approaches: Greater emphasis and support should be placed on developing applications that address real-world problems and use cases. This includes investment in developer education, tools, and resources to build a more vibrant and diverse developer community. Applications that deliver clear and undeniable value to end users can help drive adoption and provide essential feedback for further infrastructure development. This requires understanding and addressing the needs and pain points of both consumers and businesses.
Conclusion
The rapid and uneven development of Web3 infrastructure has introduced numerous risks to the ecosystem. While the infrastructure of Web3 has expanded significantly, application development has not kept pace, creating an imbalance. This trend underscores the importance of understanding both the historical context and the unique attributes driving Web3’s current trajectory. Traditionally, technology markets have adhered to a cyclical pattern that maintains a balance between infrastructure and applications. This equilibrium has historically ensured that technological advancements meet real-world needs and applications. However, Web3 appears to have strayed from this conventional path, leading to challenges for its sustainable growth. Specifically, the mismatch between the advanced infrastructure and the lagging application development could hinder the practical application of Web3 technologies. Without a concerted effort to align these developments, the ecosystem risks facing instability and unfulfilled potential. Therefore, it’s crucial to address this disparity to ensure a balanced and sustainable growth of the Web3 ecosystem.