A growing negativity is gaining momentum around the current infrastructure of crypto and its lack of applications for consumers.
This is a topic that has been discussed so often on social media, podcasts and other platforms. It has become almost a consensus opinion. Prior cycles have seen the development of blockchains with smart contracts, ICOs (included in DeFi), layer-2s, and NFTs. The bulk of this cycle’s tools is memecoins.
L2Beat has counted 71 L2s that are currently live, and another 82 L2s will be coming soon. Not to mention layer-3s. Why so many layer-3s? It’s obvious that it is profitable to start one.
Investors are scrambling for ways to make money in an industry that is still a newbie. “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. It is generally believed that because the larger L2s are valued at multibillions of dollars, they should command an equal share.
This is a testament to one of the most popular crypto investing themes. “Fat Protocol Thesis.” Joel Monegro, a partner at Union Square Ventures in 2016, wrote a thesis in 2016 that argues the Web3 infrastructure will accrue the highest value. In contrast to Web2, the TCP/IP/SMTP layers have leaked value into Big Tech’s walled garden.
The idea is largely true; 18 of today’s top 30 crypto-tokens, ranked by their market capitalization, are either L1s (lower level) or L2s.
Rollup-as-a-Service Providers like Conduit, and Caldera have made it easy to start a rollup network. This results in a jungle with rollups that are almost identical, all competing for the same mercenary funds.
Andrew Huang, the founder of Conduit, claims that his company is focused 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 tells Blockworks.
The rollup meta may finally be rejected by market participants. The hyped BlastL2 token launched at $2.7 billion, which was far below market expectations. Since then, it has fallen to just $1 billion.
Rollup proliferation is about more than massive marketing campaigns. Most application builders in a chain are also driven by cost minimization.
“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.”
Launching your own rollup for a specific app will allow dapps to capture this revenue. “It’s a perfectly rational business decision,” He said.
There is still a need for infrastructure
Despite infrastructure progress, some argue that it is not nearly enough. Limitations of existing rollups, both tangible and intangible, remain — like fragmented liquidity and other points of friction in the user experience.
Caldera’s CEO Matt Katz explained to Blockworks that Ethereum’s rollup-centric view is a problem. “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.”
Katz believes that apps and infrastructure must work together. “It’s a mistake to think of it as a zero-sum game,” He said.
Interoperability is another area that still needs improvement in terms of infrastructure. This goes beyond the cross-chain bridges. Sometimes this is referred to als “chain abstraction”The goal of this design philosophy is to eliminate all inconveniences associated with cross-chain movement for an average user.
Wei Dai, a research partner with 1kx, says that shared settlement bridges such as Polygon’s AggLayer or Zksync’s Elastic chain will be helpful.
“With better interoperability infrastructure, there’ll be less of a need to rely on external facilitators for high risk cross-chain transfers,” Dai tells Blockworks. “Shared sequencers can guarantee atomic swap transactions across rollup chains, which is a huge user experience improvement,” He said.
Dai confirmed that infrastructure is overfunded in many areas and some will fail. “But there are also underfunded areas such as AVS tooling and interoperability layers that are very much lacking,” he also added.
The thinking is that it may be premature to dismiss the importance of infrastructural development. It is not always obvious what the benefits of an infrastructure project are. The most popular consumer products of today are usually the unplanned, emergent results of decades-long improvements to infrastructure.
Netflix was, for example, a mail order movie rental service for 10 years, before the availability of broadband internet enabled on-demand quality streaming today.
Apps for consumers: just do it
What about consumer apps builders? Vitalik Buterin is one of those who believes that developers are ready. “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,” In a post on his blog in May, he said: “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.”
The valuation trap is not a new concept for venture funds. 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.
It’s clear that infrastructure builders are working hard, and consumer app makers are not sleeping at the wheels.
Seed Club is a DAO-organized venture fund that offers consumer-focused crypto accelerators. Josh Cornelius has confirmed this.
“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 is telling Blockworks.
The growth in blockspace, which is abundant and inexpensive, and the development of technologies like the embedded wallet are credited with the success of Farcaster and memecoins.
What’s the reason for this? 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.
No longer will the old strategies of going to market work.
“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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