Crypto’s infrastructure bloat — are we building too much?

The growing negative sentiment around crypto’s current infrastructural bloat and absence of consumer applications is reaching a fever pitch.

It’s such a familiar talking point across social media and podcasts that it has largely become a consensus view. Prior cycles saw the innovation of smart contract-enabled blockchains, ICOs, DeFi, layer-2s and NFTs, but the bulk of the present cycle’s new tools are memecoins and increasingly redundant infrastructure.

By L2Beat’s count, there are already 71 live L2s, with another 82 incoming. And that’s not even counting layer-3s. Why so many? The most obvious explanation is that it’s profitable to launch one.

In an industry where investors are still scrambling to figure out methods of “fundamental” valuation, the standard way to value a new upcoming L2 is to do a comparative analysis — or “comps” — to the biggest L2s to determine its potential value. The general idea is that since the largest have amassed multibillion dollar valuations, newer L2s riding that market narrative should at least command a sizable fraction too.

It’s testament to perhaps one of crypto’s most successful investing themes, the “Fat Protocol Thesis.” Written by Union Square Ventures’ Joel Monegro in 2016, the thesis argues that value accrual to the infrastructural layer of Web3 will amass the greatest value, in stark contrast to Web2 where value has leaked from the TCP/IP/SMTP protocol layers into the walled gardens of Big Tech.

That idea has played out for the most part; of the top 30 crypto tokens by market capitalization today, 18 are L1s or L2s.

And thanks to Rollup-as-a-Service (RaaS) providers like Conduit and Caldera, launching a rollup chain today has never been easier. The result is a jungle of almost identical rollups competing for mercenary capital.

Conduit Founder Andrew Huang claims his company’s focus is on projects with “unique differentiation from day one.”

“I don’t disagree that there are copy and paste L2s with little differentiation creating user fatigue between rollups,” Huang told Blockworks.

Market participants may be finally expressing their rejection of the rollup meta. For instance, the hyped Blast L2 launched its token at a $2.7 billion FDV, falling severely short of market expectations. It has since cratered to just over $1 billion.

There’s more than outsized marketing plays behind the rollup proliferation story. For most application builders on a chain, cost-minimization is also a driving factor.

“We’re seeing a pattern of more rollup deployment because as dapps become popular, the ‘rent’ they pay to the L1/L2 becomes prohibitively expensive,” Huang said. “Chains like Base receive $50 millions in fees but dapps don’t receive a cent.”

Launch your own app-specific rollup, however, and dapps capture that revenue. “It’s a perfectly rational business decision,” he said.

We still need infra

Despite the infrastructural progress, there are those who argue it’s still nowhere near enough. Limitations of existing rollups, both tangible and intangible, remain — like fragmented liquidity and other points of friction in the user experience.

Ethereum’s rollup-centric vision is exacerbating the situation, Caldera CEO Matt Katz told Blockworks, “with potentially tens of thousands more in the future.”

“These rollups are isolated and struggle to communicate with each other,” Katz said, noting that connecting via Ethereum mainnet is slow and expensive. “There needs to be a more efficient way.”

In Katz’ view, apps and infrastructure have to work together. “It’s a mistake to think of it as a zero-sum game,” he said.

Another area where infrastructural development is still lacking is interoperability, which extends beyond cross-chain bridges. This is sometimes referred to as “chain abstraction”, a broad design philosophy that aims to remove all the inconveniences of cross-chain movements for the average onchain user.

Shared settlement bridges like Polygon’s AggLayer and Zksync’s Elastic Chain will help, according to Wei Dai research partner at 1kx.

“With better interoperability infrastructure, there’ll be less of a need to rely on external facilitators for high risk cross-chain transfers,” Dai told Blockworks. “Shared sequencers can guarantee atomic swap transactions across rollup chains, which is a huge user experience improvement,” he said.

Yes, some areas of infrastructure are overfunded and many will fail, Dai said. “But there are also underfunded areas such as AVS tooling and interoperability layers that are very much lacking,” he added.

Dismissing infrastructural build out may be premature, the thinking goes. After all, the value of infrastructural development is often not immediately obvious. Many of today’s cherished consumer innovations are largely emergent and unplanned outcomes, resulting from the painstaking work of piecemeal improvements in infrastructure over decades.

Netflix, for instance, was a mail-order movie rental business for ten years before broadband internet availability enabled quality on-demand streaming at scale today.

Consumer apps: Just do it

So is the infrastructure ready for consumer app builders? Vitalik Buterin, for one, believes developers “no longer have any excuse.”

“Up until a couple of years ago, we were setting ourselves a low standard, building applications that were clearly not usable at scale, as long as they worked as prototypes and were reasonably decentralized,” he wrote in a May blog post, “Today, we have all the tools we’ll need, and indeed most of the tools we’ll ever have, to build applications that are simultaneously cypherpunk and user-friendly.”

Venture funds may already be catching on to the valuation trap. In the second quarter this year, the share of crypto infrastructural investment has fallen to 15% — down from 24% quarter-over-quarter, according to Galaxy Research.

share of crypto vc deal count by category - pie chart

Infrastructure builders are hard at work, but it’s not like consumer app builders are asleep at the wheel.

Seed Club, a venture fund organized as a DAO that runs consumer crypto-focused accelerators saw 350 project applications in its last accelerator, according to Josh Cornelius, Partner at Seed Club.

“Historically, we haven’t been able to build great consumer products cheaply on the blockchain and bring them to market easily until the last six months,” Cornelius told Blockworks.

He attributes the success of memecoins and protocols like Farcaster to the growth of abundant and cheap blockspace and developments like embedded wallet technology.

Why, then, haven’t consumer applications taken off? For Cornelius, one big sticking point that remains is marketing — “the sociocultural side of things.”

“The hardest challenge for consumer builders is getting users to understand the novel, differentiated experiences that crypto and blockchains are bringing,” Cornelius said.

Old go-to-market strategies won’t cut it anymore.

“We need founders who are great brand builders plugged in culturally outside of crypto, and can just go tell the stories of what’s happening here in accessible and culturally-relevant ways,” he said.

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