“One can compare the zeal and the ardor displayed by the civilized nations of today in their establishment of railroads with that which, several centuries ago, went into the building of cathedrals.”
— Michel Chevalier, 1852
The quote above reveals a truth about human nature. Whenever a new technological paradigm emerges, we experience a near-religious fervor for building out its infrastructure.
In the distant past, that has meant feverishly installing railroads or the electric grid. In more recent history, it’s been highways for automobiles or fiber optic cables for the internet. Today, in the context of crypto/web3, it is Layer 1 and Layer 2 blockchains.
Infrastructure is important because it provides a new and formerly scarce resource upon which the new technology can be deployed. For rail transportation, the raw resource was trackage, the lines of a railway upon which goods could be shipped. The equivalent of trackage in crypto is blockspace.
Blockspace is shorthand for the compute and data resources that decentralized applications consume. VCs have poured billions of dollars into L1s and L2s over the last few years precisely because these networks produce blockspace. Chris Dixon articulated the investor thesis most succinctly, “blockspace is the best product to be selling in the 2020s.”
But there’s currently a glut of blockspace. Fees paid to consume blockspace are near zero on most chains because the corresponding demand doesn’t yet exist. Yet expensive chains like Ethereum have extensive scaling plans on the roadmap to drive fees even lower. And new L1 and L2 projects continue to be announced every month.
What gives? Well, a simple and fatalistic answer is that we’re doomed to repeat history. Just like there are thousands of miles of railway tracks abandoned today, there will inevitably be hundreds, potentially even thousands, of zombie chains and rollups in the future.
That said, the famous adage, “history doesn’t repeat itself, but it often rhymes” comes to bear here. Though the frenzy to install infra is real, the reasons driving it may be more nuanced than human nature just being myopic.
So, let’s look at the more idiosyncratic and incentive-driven reasons why we continue to spend time and money building blockchains.
1) Engineers get nerd sniped by infrastructure
First of all, L1 and L2 infrastructure is just flat out cool. Unstoppable, permissionless state transition functions that run on computers across the world, secured by digitally native money – it’s a cypherpunk dream.
Additionally, web3 sits at the intersection of hard computer science problems. Engineers get to wrangle with peer-to-peer networking, BFT consensus, novel cryptographic primitives and more. The surface area for complexity is endless, which attracts the best minds.
As vgr put it:
“I’m periodically reminded that crypto is tech by the clever people, of the clever people, for the clever people. It’s what the world would be like if designed by cryptic crossword and sudoku fans.”
Clever people want to work on cool and hard problems that require intellectual off-roading. Throw in Rust, and you can probably convince a cadre of smart engineers to build a chain.
Finally, as with anything cool, it ends up becoming a competition. Infrastructure nerds want to compete with other nerds and be first to market with their new cool nerd toy. As a result, instead of working together on one vision, we have schisms that lead to more blockchains.
2) Business people get nerd sniped by platforms
The business equivalent of a challenging engineering problem is a massive total addressable market (TAM). MBAs have been taught for years by Harvard, MIT, UChicago, and other top business schools that platforms are the best products, partly because they have large TAMs.
As digital platforms ate the world after the dotcom boom, businesspeople learned to build businesses that could capture large multi-sided markets with strong vendor lock-in and high take rates (ie. common characteristics of a platform).
In web3, where business models don’t really exist, that either means starting an exchange, or… you guessed it – a blockchain!
If we apply the characteristics above, blockchains have:
A two-sided application marketplace of developers and consumers
Lock-in through liquidity, developer adoption of VMs and languages, and wallet installs
Gas fees to compensate the platform for intermediating transactions
In theory, blockchains could enable a robust marketplace of apps where consumers pay healthy fees to both developers and the network for value-add decentralized services. The TAM for this could be massive!
In practice, this means having an anon dev team deploy a Uniswap fork on your chain, while launching a meme coin that degens think will pump. Not exactly a massive TAM, but we take what we can get.
Though market-sizing assumptions about blockchain platforms have underperformed in reality, the consolation prize is that blockchains need a gas token, which brings us to our last reason…
3) Everyone wants to be rich
Engineer or businessperson, the common desire in the crypto industry is to become rich.
Everyone who has been in crypto for longer than a few years has experienced or seen someone experience a profound change in net worth, which is usually as a result of owning tokens. Consequently, everyone wants to secure a bag.
L1s and L2s tokens are the best bet on this front. There’s almost no utility to most crypto assets. Stablecoins are clearly useful as are alternative store-of-value assets (BTC, ETH), but everything else is either speculation or cult delusion. L1 and L2 tokens however, have “utility” because as described above, both devs and users have to pay for gas using the gas fee token.
However, this supposed utility doesn’t actually confer much value to an asset, relative to speculative belief in its monetary premium. Again, without demand, we’re left with a supply glut where blockspace producers are constantly having a firesale.
That said, nobody cares because you can launch a new Cosmos SDK or OP stack chain chain and with sufficient marketing reach an FDV of $100M:
But if everyone wants to build infrastructure…
…who will build on top of it?
Excellent question, and the right one to ask at the local infra maxima of the app-infra cycle.
This is the perfect time to build an application and take advantage of the last two years of infrastructure development. Blockspace is ubiquitous and cheap, and only continues to get cheaper as more rollups and data availability layers launch. Developer tooling is improving by leaps and bounds thanks to increasingly robust frameworks and great SaaS products. And user adoption, while still muted from the speculative mania, is growing slowly but surely due to on/off-ramps, stablecoins, and growing liquidity.
If we continue building infrastructure at this point, we’ll end up with bridges to nowhere (both figuratively and literally). Certainly, as novel research came to fruition, an infrastructure boom was needed. But, we’ve installed plenty of infra, and the turn of the wheel has arrived at the application phase.
So, as an industry, it’s time to make a shift away from what is cool or profitable to what is useful – it’s time to build applications!
