The State of the Crypto Industry's Application Layer: A Barren On-Chain Space and Crowded Infrastructure
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The State of the Crypto Industry's Application Layer: A Barren On-Chain Space and Crowded Infrastructure
If user demand for the application doesn't increase by an order of magnitude, all this scalability will be meaningless.
Navigating Web3 tides with focused insightsAuthor: polynya
Compiled by: TechFlow
In early 2022, I focused my attention on discussing application-layer innovation. Prior to that, at the end of 2021, my main focus was scalability, making it easy to assert:
If demand for applications doesn't increase by several orders of magnitude, all this scalability will be meaningless.
Regrettably, years later, little has changed. Today, there are too many L2s and L1s with almost no usage of block space, yet people remain obsessed with infrastructure (understandably so—many L1s/L2s sit in investors’ portfolios).
What frustrates me most in crypto is this persistent “entitlement mentality” and blind optimism, both misdirected by irrelevant analogies.
(Editor’s note: “This entitlement mentality” may refer to a mindset within the crypto space where certain individuals believe that merely creating a technology or blockchain space entitles them to users and adoption.)
No, just because you built block space doesn’t mean it will be used—it will only be fully utilized when meaningful applications offer 10x improvements over existing products and there is significant user demand.
Dozens of smart contract blockchains have now run for 5–7 years—in digital terms, practically an eternity—and nearly all exhibit almost no non-spam activity. We already have multiple first-stage decentralized, application-specific Ethereum L2s, and even general-purpose smart contract chains like Arbitrum One have existed for over three years—yet still far from saturation.
By now, there is overwhelming evidence that blind entitlement and optimism do not lead to block space saturation.
I remain open to evolving my theoretical framework around "meaningful blockchain applications," but currently, all evidence points to one reality: the window for using blockchains meaningfully is extremely narrow. Specifically, it must satisfy all of the following conditions:
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Peer-to-peer operations: This includes P2P software such as IPFS, BitTorrent, multiplayer games, messaging apps, and yes, blockchains. Note that if your goal is simply to eliminate a centralized entity and decentralize an app, in most cases you can achieve P2P functionality without using a blockchain.
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Strict global consensus: This is the unique property blockchains provide—strict global consensus, ensuring every peer worldwide agrees on the exact same output.
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Objectivity: However, a limitation of blockchains is that they can only resolve objective outcomes.
I further speculate this implies blockchains are meaningful primarily in two major categories—objective money and objective identity. Of course, you can build various applications that aren’t inherently blockchain-based but incorporate blockchains solely for objective money and/or objective identity, or hybrid models. You can also introduce subjectivity via governance.
Farcaster is a strong recent example of a hybrid application. It uses the blockchain for objective identity (ownership) and objective money (fees), while everything else—as far as I know—is coordinated off-chain. As I’ve discussed previously, we may see a spectrum where most centralized apps include just one blockchain component.
Looking at today’s application layer, aside from very few exceptions like Farcaster, there has been almost no progress. Meanwhile, existing applications continue to solidify their positions. We know that alternative stores of value remain the top use case. Stablecoins have firmly established themselves as the second-largest use case, transacting over $25 billion daily even during bear markets.
It is now clear these two represent crypto’s primary use cases and will likely account for over 90% of economic value in the foreseeable future. A distant third is gambling and speculation, though elements of this are already embedded within the first category.
A few years ago, I held a 50/50 stance between improving proven product-market fits and pushing forward application-layer innovation. Over time, it now seems we should instead allocate more time and capital toward enhancing proven areas like stablecoins, DeFi, and value storage.
For instance, beyond Bitcoin and Ethereum, USDT on Tron is the dominant application. I’ve written about how we might improve this use case. In short, my recommendation today is to abandon most infrastructure projects and instead pursue only truly meaningful new applications, while directing the majority of investment toward expanding the use of stablecoins, value storage, and similar proven areas.
To be clear, application-layer innovation will happen—but we must also recognize a reality: most reasonable blockchain applications have already been built.
I’ll close with one exception—fractal scaling. Faster chains—whether L1s or L2s—can handle hundreds to thousands of transactions per second (depending on transaction complexity).
However, for certain applications, you need hundreds or thousands of such chains. Think of traditional applications distributed across thousands of servers. A concrete example is fully on-chain multiplayer games. If a game reaches millions of users, you’d need thousands of today’s fastest chains running in parallel.
Currently, such infrastructure does not exist, but multiple teams are actively developing it.
We know the best way to achieve this—zk rollups/validiums with aggregation proofs. Whether these applications will find product-market fit, I don’t know—but it’s certainly worth trying.
As for other infrastructure projects touting scalability—we’ve already wasted billions, perhaps hundreds of billions, on (relatively) empty chains. It’s too late now; it’s time to move forward.
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@apolynya
