Narratives come and go within crypto and market participants are constantly trying to front-run and identify the narratives before they go full-fledged. It’s this ‘being early’ concept that gives market participants the opportunity to reap huge profits. But if we were to take a step back to have an overview of the market, it seems that we often hear the argument, "Nah, this infrastructure is not needed, it’s not solving any problem.' That makes me wonder whether certain infrastructures are just early and are waiting patiently for the use cases to materialize to leverage them. In this article, I share my perspective on what the infrastructure <> dApps cycle looks like and how it's akin to an endless game of catching. I will also highlight how the discrepancies in the market present themselves as investment opportunities.

Note: In each of the following phases, I will describe what it looks like in crypto, and provide one or two real world analogies for ease of understanding.

Disclaimer: Views are my own. I’m just a talking Cookie.

Phase 1: Infrastructure Plays The Catcher

Infrastructure is the starting point, and dApps have to leverage it to be able to build out use cases. When the Ethereum Virtual Machine (EVM) was first launched, there were hardly any dApps built on it. This is a function of the novel infrastructure, which requires time for people to comprehend its potential, play around to understand what’s possible with it, and actually create a working product.

Real-world example: Cookies stands on a big plot of grassland and thinks, I should construct a building here, a shopping mall. Once built, it is just an empty building, and we have to wait for shops to start setting up.

The above real-world example will be used in the following sections of the article.

Phase 2: Infrastructure Catches dApps

Once people have experimented sufficiently with the infrastructure to understand its capabilities, dApps are built and launched for users. Since the dApps build using the infrastructure, in most cases the infrastructure layer flips on their fee switch. With that, economic rewards begin to accrue to the infrastructural layer. Examples include

• dApps paying oracles (e.g. Chainlink) for data

• Transaction fees are paid to base layer infrastructure: e.g. Ethereum

Due to the diverse profile of market participants, there will be a large variety of dApps being created. Case in point, within each L1 blockchain there are various verticals: DeFi, NFT, SocialFi, Games etc. And each of these verticals have a whole suite of specialized sub-categories. DeFi itself, for example, is split into different product such as DEXs, staking, money markets, stablecoins etc.

Real-world example: Business owners begin to rent spaces within the shopping mall to set up their own stores. And evidently, shopping malls have a variety of stores to cater to customers and their different needs: food, lifestyle, entertainment, fashion etc. And within each of these categories, there is usually multiple stores. We can’t expect everyone to come to a shopping mall and want to eat McDonalds right? (Disclaimer: I do love my fillet o fish). But at the end of the day, the shopping mall is now crowded with people.

At this point, we need to make a distinction between user facing infrastructure and non-user facing infrastructure. User facing infrastructure include wallets and bridges, amongst many others. While non-user facing infrastructure could be oracles, data storage, staking hardware etc. Running back to our shopping mall example, user facing infrastructure would be things like the escalators and doors, while non-user facing infrastructure refer to the wiring and air conditioning hardware.

Phase 3: dApps & Users Takeover as Catchers

The good days are numbered.

As more dApps build on the existing infrastructure, coupled with the increasing number of users, the infrastructure layer begins to experience the following problems:

1. Limited Infrastructure Capacity

   A fairly common occurrence with infrastructure projects, which arises due to the architectural constraints. This was evident when Ethereum was unable to sustain increased DeFi and NFT activity, which led to network congestion. This eventually manifested in the form of sky-high gas fees (sometimes my gas fees cost more than my NFTs, but it doesn’t matter because most of my NFTs are worth zero now). At this point, both the dApps and users start demanding more and begin to seek alternatives.

   In the real world, a shopping mall will eventually run out of space if it attracts an excessive number of customers. It becomes difficult for people to move around; lifts become congested, and it takes an extremely long time before people are able to make their way up the levels to the store they would like to visit. One other example would be that as more and more people start driving cars, the roads eventually get congested, increasing travel time.

2. Changing User Demographics

   The market size constantly grows. New users come in, and that’s how an industry is sustained. However, within crypto, there exists a huge barrier to entry: onboarding. The average crypto transaction is too tough for a layman to execute. I remember the first time I tried to get money on MetaMask, I had to keep asking my friends whether I had lost my money or if the funds were just there somewhere. Having to interact with a crypto wallet without prior knowledge is difficult because of the lack of intuitive design (not too much of a design problem, but more of a technological constraint).

3. New User Demands

   As a function of technological advancements, user demands constantly shift. Or rather, the innovation on the dApp layer and the increase in users accelerate far ahead of what the infrastructure has to offer or is able to accommodate.

   This was one of the key reasons why alt L1s such as Solana gained the favor of the market. The high speed that Solana’s architecture featured attracted developers, as it meant that the dApps they built would not be subjected to slow transaction times, which compromise the level of user experience (UX), resulting in user churn.

   On the user front, the low transaction fees were highly appealing. Imagine a few cents compared to a few hundred dollars; which would you rather pay? (Definitely the few hundred dollars because we balling). But no. Spend your money wisely, Anon.

   And there we have it: the combination of dApps and users moving out of the existing infrastructure to elsewhere. The chart below shows Solana’s TVL increasing by 1,870% from $507.5 million in July 2021 to $10 billion in November 2021.

The above paragraphs are indicative of the phenomenon that the technological innovation of dApps and user needs moves at a speed that’s faster than what the infrastructure layer has to offer. And this essentially results in dApps and users leaving the existing infrastructure in search of a new home that has more to offer. And this is where things get interesting.

Phase 4: Infrastructure as Catcher Again. But This Time It’s Different

With the dApps and users now far from home, the infrastructure team has some soul-searching to do to figure out how to attract dApps and users back again.

There are two possible outcomes when infrastructure has to take on the role of a catcher again:

1. Infrastructure Goes Obsolete

   All this running has tired out the infrastructure team. Cardio tough. When this happens, the team stops innovating and improving the infrastructure and leaves it to die out like a candle. Back in the good ol' days, we had Nokia as the dominant phone maker, which has since been replaced by Apple.

2. Accept Its Fate

   Despite the churn, there are still dApps and users on the infrastructure. Some might think that these loyal supporters are sufficient, and there isn’t any pressing need to attract more users. Evidently, we're not preparing for future churn, but it’s okay, live in the present, right?

3. Infrastructure Chases

   Then we have the heavy hitters. These are teams that will look at the current constraints of their infrastructure, and start making innovations. Very evidently, we have Ethereum within this field. Congestion? We change from proof-of-work (PoW) to proof-of-stake (PoS). Still not fast enough? Rollups. Still not fast enough? Sharding. UX sucks? ERC-4337. Evidently, there are a lot of innovations being incorporated to maintain or even grow the market share they can capture.

Wait, wait, but things look a bit different this time around, don’t they?

The first time infrastructure took on the role of a catcher, they didn’t really know who they were catching. They were just running. Infrastructure was built, but the use cases weren’t exactly obvious. This time around, there is a distinct problem that has to be solved. From here, we begin to see a divergence in the type of infrastructure.

1. Generalized Infrastructure

   Building a very generalized piece of infrastructure that does not have an existing market that recognizes its potential use cases. This has sometimes been discounted by investors, who think that the lack of an apparent use case gives it a very slim chance of success.

2. Specialized Infrastructure

   A very apparent product-market fit exists for specialized infrastructure, where they are tackling particular problems that exist within the space. For example, congestion on the Ethereum network: rollups handle the execution and reduce the bottlenecks experienced on Ethereum.

Side Note: Some Infrastructure Die Out

The market is never stagnant. There are some scenarios where the infrastructure innovations occur at a pace that’s too slow. A feature that was demanded by the market just a few months ago to solve a problem might no longer be required due to either market needs changing or other infrastructure innovations having solved the problem.

Mature Industry: Specialized Infra > Generalized Infra

I personally find that as time passes, the infrastructure market finds itself filled with a significantly larger number of specialized infrastructures. This phenomenon is most likely a result of the ease of building when there’s a tangible problem to be solved, rather than working in a white space with no particular direction to work in. We do see this existing in the crypto industry in this day and age, where infrastructure projects tend to solve one, if not all, parts of the blockchain trilemma: speed, scalability, and security.

So How Do We Invest?

I am going to paint rather broad strokes here. But with the market cycle described above, it seems there might be some pirate maps investors can follow to get a general sense of where to invest.

1. Generalized Infrastructure | White Spaces

   If you want to invest in Cookies building a shopping mall, yes, that is possible. This probably comes with the highest risk, given that there is no existing market to tap into, making the potential revenue a question mark and leaving one scratching their head on how it could be monetized. But with this high risk, comes high rewards, as generalized infrastructure can house a lot more dApps and use cases.

2. Specialized Infrastructure | Tackling Existing Problems

   This is the low-hanging fruit. See a problem that exists today? Find a solution to it.

3. Specialized Infrastructure | Tackling Future Problems

   If we believe that, it is indeed a cycle. Every infrastructure solution is eventually followed by a problem. One could scrutinize these solutions and identify areas in which they might be lacking, which would eventually turn into an addressable problem based on certain market changes.

Conclusion

This has genuinely been me rambling on about what I think about the infrastructure landscape. But to summarize, infrastructure and dApp innovation are in a cycle. At times, the infrastructure is waiting for dApps to build using it, and at other times, the dApps are waiting for the infrastructure to improve to accommodate them. We eventually arrive at an equilibrium where projects are broadly split into generalized or specialized infrastructure, presenting various investment opportunities. Remember, a problem represents an opportunity.