We’ve all heard about it, how infrastructure is way overvalued in crypto, while applications are criminally undervalued. There’s a common critique that “there’s nothing to do in crypto”. Meanwhile, on the opposite end, there’s a lot of hopium, excuses and entitlement like “we’re so early”, “build and they’ll come”.
As with most things, the truth is likely somewhere in the middle. No, we’re definitely not early - there’s tremendous value being settled on public blockchains today. It’s also true that a vast majority of the truly valuable applications happen to be financial in nature, and the last wave of application layer innovation ended in 2020. Since then, we have mostly seen remixes and mild evolution. Finance is not that complicated - indeed, simplicity and elegance is often key, and experimental apps may not be desirable when it comes to settling billions of dollars.
In the past, I have identified two key areas where public blockchains make sense - finance and identity, and applications that use these elements. While I do believe DeFi innovation will be more evolutionary going forward, and focused more on UX, real-world interfacing and onboarding, there’s still plenty of experiments to run with hybrid applications.
I’d define hybrid applications as mostly traditional applications, but with specific elements reading and/or writing to public blockchains, mainly with finance and identity. It can be a massively multiplayer game that runs on servers and peers, but value and exchange for its in-game assets is settled on its own network of many rollups. It can be a social media app that stores its content and data on IPFS or its own storage network, but identity and related metadata to its own validium. Or, perhaps, it can be a fully onchain game with its network of thousands of rollups or validiums, but still run some tasks peer-to-peer off chain - this is certainly less on the hybrid side, there’s always a spectrum. These have a better chance at being consumer applications than their financial counterparts.
That brings us back to the original complaint - infra is overinvested. Part of this is because the #1 usecase for crypto - far and away - is as alternate store-of-value. I have demonstrated in recent posts why almost entirety of BTC’s value and most of ETH’s value is derived from this vector. We’ve also seen L2s be valued similarly to L1s, which shows the market is certainly applying a monetary and speculative premium to infra multiples over and above their value as a computing platform.
So, here’s the idea - why should infra providers not run their own development studios? The big drawback is neutrality. That is certainly true, and particularly for an L1, it may undermine its credibility to the point no one will use it. But what about an L2? Yeah, you’d still want neutrality, but there have been many cases in recent history where it’s been perfectly viable for the platform to bootstrap with its own content.
Mind you, blockchains are their own unique breed, and none of these analogies apply, but they do give us an idea. Cloud services - it’s no coincidence that the three largest cloud providers are also the three largest users of said cloud services. Operating systems - they come with a whole slew of applications integrated, something that has only been expanding over time. At the same time, it also shows it’s important to balance neutrality, there’s particularly been outcry over Apple copying their third-party developers’ apps to be integrated into iOS. Game consoles and platforms - first-party developments are critical to a console’s success. Indeed, Halo played a big role in making Xbox a legitimate competitor out of the gate, while Half-Life 2 was a big moment for Valve’s Steam platform. Of course, Nintendo is all about building software for their consoles. Then there are media platforms - goes without saying it’s all about the originals. I could go on, but it’s pretty clear - first-party developments do work across a wide variety of platforms in the digital age.
Now, as mentioned, public blockchains are certainly its own thing and neutrality is much more precious. But here’s my argument - the infrastructure race is extremely crowded now with dozens of L2s (mostly Ethereum-based) and a few L1s in the running. There’s been a large surplus of blockspace supply over the last couple of years, with L2s and most alternative (i.e. other than Ethereum or Bitcoin) L1s alike barely being utilized. I believe it’s perfectly reasonable for an L2 to have a differentiated strategy that aims towards consumer applications and adoption rather than the neutrality thing that dozens of other infra providers already do.
So, here’s how it’s going to work. The infra provider runs its own development studios. They vertically control the stack - from developing applications, marketing them, and building the bespoke infrastructure required under-the-hood. The user simply interacts with the apps in a seamless manner, they don’t care about what L2 or whatever it run on just like no one cares what AWS server or whatever a traditional web app runs on. They can redirect most of their surplus funding from infra to application development. Of course, it’s critical for its different studios to recruit people specialised in their particular application usecases and to target specific niches. Trying to do it all is probably going to end up poorly, but targeting new niches that are currently unsatisfied is often the best recipe for adoption. I see Nintendo as a pretty apt model - the differentiated applications come first, the platform (the console for Nintendo, the rollup chain for the L2) is merely a means to that end. Yeah, there’s no neutrality, but build killer apps, the users will come, and eventually third-party developers will come too to reach out to these users. For those who want the neutrality, there’s more than enough options out there. Lastly, I’ll acknowledge there’s a middle ground where the infra provider invests in application developers - but this doesn’t quite get the benefits of vertical integration.
Is anyone actually going to do this, pivot from being primarily an infra provider to being primarily an application developer? Who knows, but as the space gets ever more crowded and mature, we’ll need to see more creative approaches.
Tangentially, I can also see application studios building their own bespoke infrastructure. For example, for an onchain game at scale, you may require hundreds or even thousands of chains (again, much like how traditional apps may require thousands of servers, and remember, the internet runs on 100,000,000 servers), the type of infrastructure that today does not exist (though granted, there are efforts ongoing). So, they may invest in building their own multi-rollup stack to accomplish this vision. And yes, I do mean 100x what the fastest possible chains today offer - the only way to accomplish this level of scale is through multiple rollup chains.
Either way, the hour is getting late, and it’s about time we focused on an application-centric view.