From narrative fatigue to valuation shrinkage, analyzing the current challenges and opportunities in encryption infrastructure.

Author: Yiping @IOSG

Reprinted: Lawrence, Mars Finance

Challenges Facing Crypto Infrastructure

Market fatigue and valuation decline

The cryptocurrency infrastructure sector is experiencing significant market fatigue. After years of explosive growth, the valuations of infrastructure projects are shrinking, and investors are becoming more selective. This trend reflects an increasingly mature market, where mere technological innovation is no longer sufficient to achieve high valuations.

Innovation Issues

Today's infrastructure projects face a critical dilemma: most offer similar functionalities with minimal differentiation. Despite advancements in technology, we have yet to see any breakthrough use cases that can support entirely new categories of applications. The ecosystem struggles to provide compelling value propositions for established Web2 platforms (such as X or Instagram) to migrate to blockchain. Aside from decentralization, these platforms have little reason to fundamentally change their existing operations. This fundamental adoption gap has made trading and speculation the dominant applications in most infrastructure layers, limiting the transformative potential of the field.

Overbuilding of infrastructure, vacant infrastructure

Many infrastructure projects often focus on pursuing forward-looking technological innovations while neglecting the actual needs of developers. They tend to pay too much attention to elements beyond core functionalities, such as privacy protection, trust assumptions, verifiability, and transparency. This overly advanced technological approach overlooks the importance of short-term market acceptance and practical application, which not only increases the difficulty of early market promotion but also makes it challenging for projects to obtain effective user feedback and validation.

The surge in such infrastructure projects has created a paradoxical situation—too many platforms competing for too few attractive applications. This imbalance has resulted in a large number of "ghost chains" with extremely low actual usage rates and almost no revenue generation, creating an unsustainable economic model that relies primarily on token appreciation rather than true utility.

For example, although ZKVM technology is quite advanced, the verifiability it offers does not effectively address the practical challenges faced by blockchain at this stage, nor does it promote greater integration of Web2 applications with blockchain technology. Therefore, ZKVM technology currently appears more as an idealized rather than a practical infrastructure product.

In contrast, cloud computing directly responds to the validated market demand of how to efficiently manage server resources with different configurations, at different times and locations. This demand itself has a relatively mature market foundation, and cloud computing platforms directly meet developers' practical needs in terms of rapid deployment, elastic scaling, and cost optimization through modular and interface-based server resources, database management, and storage services. It is precisely because it effectively addresses the pain points of enterprises and developers that cloud computing technology has quickly gained market recognition and has ultimately developed into an important infrastructure supporting the internet economy.

Break the feedback loop

A healthy crypto ecosystem requires an efficient feedback loop between application developers and infrastructure builders. Currently, this loop has been broken - application developers are troubled by infrastructure constraints, while infrastructure teams lack clear signals to understand which features can drive actual usage. Restoring this feedback mechanism is crucial for sustainable growth. Despite these challenges, infrastructure development remains profitable, with 35 of the top 50 cryptocurrencies by market capitalization maintaining their own infrastructure layers. However, the standards for success have risen significantly - new infrastructure projects must simultaneously demonstrate concrete use cases, substantial user appeal, and compelling narratives to achieve meaningful valuations.

The most successful new infrastructure of the past year

The evolution of blockchain infrastructure

The previous cycle of blockchain infrastructure mainly focused on addressing the limitations of Ethereum, with various projects positioning themselves as "faster and cheaper" alternatives while offering almost no truly innovative features. Today, the landscape has changed dramatically, with recently successful projects introducing more diverse and specialized infrastructure solutions.

The most influential new projects

In the past year, some infrastructure projects have achieved remarkable results through TGE or large-scale funding rounds. According to Cryptorank data, these projects represent the most influential new infrastructure in the primary and secondary markets:

Blockchain infrastructure

Movement: MoveVM Ethereum Layer2

Berachain: Proof of Liquidity, EVM Compatible Layer1 Monad: High-Performance EVM Compatible Layer1

Solayer: Re-staking based on Solana ecosystem, ultra-fast SVM

Succinct: ZK proof generation network and ZKVM

Emerging Infrastructure

Walrus: Blob Storage Solution

Aethir: GPU Computing Network

Double Zero: Decentralized Physical Fiber Optic Network Facility

Eigenlayer: Providing Ethereum security for new protocols

Humanity: Digital Identity Protocol Platform

The bridge between Web2 and Web3

Ondo: RWA Layer2

Plume: RWAFi Blockchain

Story: AI-driven IP programmable platform

The following is an overview table of project data (data as of 2024/4, for reference only):

Core Observation and Analysis

Based on the analysis of recent successful infrastructure projects and the current market environment, the following key observations can be distilled:

Market Maturity and Valuation Restructuring: From Technological Frenzy to Value Reversion

The most significant feature of the current market is the shift in valuation logic. The early model of attracting investment purely through technical narratives and high FDV (Fully Diluted Valuation) is facing serious challenges.

Unsustainable token economic model

Many projects exhibit characteristics of high FDV, low circulating market cap (MC), and low trading volume. This indicates that a large number of token unlocks in the future will bring sustained sell pressure. Even if the project makes technological progress, token dilution may lead to price declines, thereby eroding user confidence and forming a negative feedback loop. This suggests that a sound and sustainable token economic model is crucial for the long-term health of the infrastructure, being as important as the technology itself.

Valuation ceiling and exit challenges

Even successful projects seem to face an invisible ceiling of around 10 billion dollars in valuation. This means that for investors, achieving extraordinary returns (such as 100 times) requires entering at a very early stage (with a valuation below 50 million dollars), highlighting the importance of timing and early judgment. The market is no longer willing to easily pay for pure potential but demands clearer evidence of value.

Execution overcomes first-mover advantage

Not all projects that have created new narratives can achieve the highest valuations. For example, while Double Zero, Story, and Eigenlayer are pioneers in their respective fields, many subsequent projects have attained comparable or even higher valuations through stronger execution, better market timing, or more optimized solutions. This indicates that in an increasingly crowded market, the importance of high-quality execution, effective market strategies, and timing is becoming increasingly prominent.

Technological Pragmatism Rises: Focusing on Optimization, Integration, and Real Needs

The technological development direction of infrastructure shows a clear pragmatic tendency, with the market favoring solutions that can address real problems, optimize existing paradigms, or effectively connect to the real world.

The continuous value of "faster and cheaper"

Despite the market's pursuit of breakthrough innovations, the demand for optimization of core blockchain performance remains strong. Projects like Monad, Movement, Berachain, and Solayer have achieved significant valuations by enhancing the performance of existing virtual machines (EVM, MoveVM, SVM) rather than introducing entirely new paradigms. This indicates that improvements in speed, cost, and efficiency remain core value points of the infrastructure until the next generation of killer applications is found. Network layer optimizations (such as Double Zero) and security enhancements (such as Succinct and Eigenlayer) also fall into this category.

Embrace the real world, connect to Web2

Projects that connect with real-world applications and assets demonstrate strong market appeal. Ondo and Plume focus on RWA (real-world assets), while Story emphasizes the programmability of IP (intellectual property). These projects have all achieved high valuations. They apply blockchain technology to validated Web2 concepts (such as asset management and IP commercialization), injecting programmability, global liquidity, and new financial possibilities, reducing the understanding threshold for users and broadening application scenarios.

DeFi and AI have become value anchors.

From the perspective of target use cases, finance (DeFi, RWA) and artificial intelligence (AI) are the two fields currently most recognized by the market, capable of supporting high-valuation infrastructure. This indicates that infrastructure capable of providing underlying support for these two high-potential areas is more likely to attract capital and market favor.

Some new narratives have encountered a chill.

At the same time, some infrastructure narratives that were once highly anticipated, such as pure gaming chains, Rollup-as-a-Service (RaaS), dedicated validation layers, multi-VM chains, Agent chains, some DePIN and Desci, etc., have not yet given birth to billion-dollar leading projects during this cycle. This may reflect either insufficient technological maturity in these areas or the failure to find clear, large-scale market demand and sustainable business models.

Ecological Synergy and Precise Narration: The Dual Engine of Value Amplification

In addition to technology and market positioning, building a strong ecosystem and conducting effective market communication have become key levers for the success of infrastructure projects.

Network effects of the ecosystem

The vast majority of projects valued at over $1 billion are dedicated to building or integrating a dedicated ecosystem. Whether it’s L1/L2 attracting developers to build applications, or providing shared security for other protocols like Eigenlayer, it reflects the importance of network effects. An ecosystem with multiple composable projects can create value far exceeding that of isolated solutions, forming a positive feedback loop that attracts more users, developers, and capital.

Layered narrative, precise communication

Infrastructure needs to cater to two core groups: end users and developers, whose needs and concerns are vastly different. For end users, complex technology should be transformed into intuitive "experience" stories (such as fast transaction speeds, low costs, and convenience), emphasizing the direct benefits brought by the technology. For developers, a deep explanation of the technology's "capabilities" (such as performance metrics, development tools, scalability, and security) is required, providing professional and precise information for evaluation. Successful projects often adjust their communication strategies according to different audiences, effectively conveying their value proposition.

Future investment opportunities in blockchain infrastructure

Targeting the underserved Web2 market

The most promising infrastructure opportunities will target large Web2 markets that have not yet been adequately served by blockchain solutions. These projects can create globally accessible markets while introducing improved financialization mechanisms.

Create a new category of infrastructure

Compared to gradually improving existing infrastructure, the new category of infrastructure will generate significant value, such as:

Intent-based infrastructure: A protocol that allows users to express desired outcomes rather than specific transactions, automatically handling execution optimization.

Add privacy to each blockchain, the HTTPS infrastructure of Web3

Infrastructure that meets user needs and provides stable income.

As the blockchain industry matures, the long-term value of infrastructure is gradually returning to its core function: meeting real user needs and generating sustainable revenue. The early market frenzy may have been based on expectations and technological narratives, but ultimately, infrastructure that cannot effectively serve users and establish robust economic models will struggle to sustain itself.

A continuous stream of income is the lifeblood of a project's healthy operation. It not only needs to cover high operational costs but should also provide actual returns for ecological participants, such as token holders and validators, for example, through token buybacks and incentives for participants. Currently, some leading L2s like Base and Arbitrum have achieved considerable protocol revenues. Base's annual transaction fees are $27.5M, while Arbitrum and OP are around $7M. However, due to changes in investor preferences during this cycle, their token prices remain relatively low, reflecting a mismatch between revenue and valuation. Currently, the leading Layer 2's FDV is 500 times its annual protocol revenue. They are working to repair this mismatch through measures such as token buybacks.

Lack of revenue-backed infrastructure, relying more on the sale of tokens to keep the team running. This strategy is difficult to withstand the volatility of market cycles. A stable income is a direct proof that the market solves real problems and provides effective services. For developers, infrastructure can enable complex use cases that are already widely used or functions that were previously unattainable with a hundredfold degree of efficiency. For end users, it can bring a smoother experience, lower cost of use, and richer functions.

Web2 APP actively integrates blockchain

Creating revolutionary applications from scratch requires a significant amount of time and resources. A more efficient approach mimics the recent AI revolution: directly integrating blockchain functionalities into existing Web2 applications. The astonishing speed at which AI has been adopted is primarily driven not by standalone AI applications, but by thousands of established platforms incorporating AI capabilities into existing user experiences.

Therefore, blockchain infrastructure must prioritize seamless integration pathways to enable Web2 applications to gradually implement blockchain functionalities without disrupting their core user experience. The most successful infrastructure will allow familiar applications to offer ownership, transaction, and financial capabilities without requiring users to understand complex blockchain concepts or navigate entirely new interfaces.

Financial incentives may drive this wave of integration. Just as AI capabilities help Web2 companies create advanced tiers and new revenue streams, blockchain integration can unlock new monetization models through tokenization, fractional ownership, and programmable royalties. Infrastructure that makes these benefits easily accessible while minimizing technical complexity will catalyze the next phase of blockchain adoption in mainstream applications.