Current State of Encryption Infrastructure: Challenges and Opportunities

Written by: Yiping @IOSG

Challenges Facing Crypto Infrastructure

Market fatigue and declining valuations

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 relying solely on technological innovation is no longer sufficient to achieve high valuations.

Innovative Issues

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

Excessive infrastructure construction, infrastructure vacancy

Many infrastructure projects often focus on pursuing cutting-edge technological innovations while neglecting the actual needs of developers. They tend to place too much emphasis on elements that extend 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 applications, 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 led to a large number of "ghost chains" with very low actual usage rates and almost no revenue generation, creating unsustainable economic models that rely mainly 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 addresses the verified market demand for efficiently managing server resources with different configurations at various times and locations. This demand itself has a relatively mature market foundation, and cloud computing platforms meet the actual needs of developers for 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 tackles the pain points of businesses and developers that cloud computing technology has quickly gained market recognition and ultimately evolved into a crucial 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 hindered by infrastructure limitations, 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 lucrative, with 35 out of the top 50 cryptocurrencies by market cap maintaining their own infrastructure layers. However, the standards for success have significantly increased — new infrastructure projects must simultaneously demonstrate concrete use cases, substantial user appeal, and compelling narratives to achieve meaningful valuations.

The most successful new infrastructure in 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 little in terms of truly innovative features. Today, the landscape has changed dramatically, and recently successful projects have introduced more diversified 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: Liquidity Proof, EVM Compatible Layer1 Monad: High Performance EVM Compatible Layer1

Solayer: A high-quality re-staking based on the 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 Facilities

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 Hype to Value Reversion

The most notable feature of the current market is the shift in valuation logic. The early model that relied solely on technical narratives and high FDV (Fully Diluted Valuation) to attract investment is facing severe challenges.

Unsustainable token economic model

Many projects exhibit characteristics of high FDV, low circulating market cap (MC), and low trading volume. This signals that the future unlocking of a large number of tokens will lead to sustained selling pressure; even if the project makes technical progress, the price may still drop due to token dilution, thereby eroding user confidence and creating a negative feedback loop. This indicates that a sound and sustainable token economic model is crucial for the long-term health of the infrastructure, and its importance is on par with the technology itself.

Valuation Ceiling and Exit Challenges

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

Execution trumps 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 achieved considerable 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 marketing strategies, and timing is becoming increasingly prominent.

Pragmatism in Technology Rises: Focusing on Optimization, Integration, and Real Needs

The technological development direction of infrastructure shows a clear pragmatic tendency, and the market favors solutions that can solve practical problems, optimize existing paradigms, or effectively connect 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 such as 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 the core value points of infrastructure before the next generation of killer applications is found. Network layer optimizations (such as Double Zero) and security enhancements (such as Succinct, 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, lowering the understanding threshold for users and expanding application scenarios.

DeFi and AI become value anchors

In terms of target use cases, finance (DeFi, RWA) and artificial intelligence (AI) are currently the two most recognized areas in the market that can support high-valuation infrastructure. This suggests that infrastructure that can provide underlying support for these two high-potential areas is more likely to be favored by capital and the market.

Some new narratives are encountering a chill.

Meanwhile, some infrastructure narratives that were once highly anticipated, such as pure gaming chains, Rollup-as-a-Service (RaaS), dedicated verification layers, multi-VM chains, Agent chains, partial DePIN, and Desci, have not yet yielded billion-dollar leading projects during this cycle. This may reflect that these areas either lack technological maturity or have not yet found 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 more than $1 billion are dedicated to building or integrating into a dedicated ecosystem. Whether it's L1/L2 to attract developers to build applications, or to provide shared security for other protocols like Eigenlayer, the importance of network effects is exemplified. An ecosystem with multiple composable projects can create value far beyond siloed solutions, creating a positive cycle that attracts more users, developers, and capital.

Layered narrative, precise communication

Infrastructure needs to cater simultaneously to two core groups: end users and developers, whose needs and concerns are fundamentally different. For end users, complex technologies need to be transformed into intuitive "experience" stories (such as fast transaction speeds, low costs, and ease of use), emphasizing the direct benefits brought by technology. For developers, it is necessary to delve into the "capabilities" of the technology (such as performance metrics, development tools, scalability, and security), providing professional and precise information for evaluation. Successful projects are often able to adjust their communication strategies according to different audiences, effectively conveying their value propositions.

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, a 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, automating the execution optimization.

Add privacy to every blockchain, Web3's HTTPS infrastructure

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 hype may have been based on expectations and technological narratives, but ultimately, infrastructure that cannot effectively serve users and establish a robust economic model will be difficult to sustain.

A continuous revenue stream is the lifeblood of a project's healthy operation. It not only needs to cover high operational costs but should also provide actual returns to ecosystem participants, such as token holders and validators, for example, through token buybacks and incentives for participants. Currently, some leading Layer 2 solutions, such as Base and Arbitrum, have achieved significant protocol revenue. Base's annual fees are $27.5M, while Arbitrum and Optimism are around $7M. However, due to a shift in investor preferences during this cycle, their token prices remain relatively low, reflecting a mismatch between revenue and valuation. Currently, the top Layer 2's fully diluted valuation is 500 times the annual protocol revenue. They are taking measures such as token buybacks to rectify this mismatch.

Infrastructure lacking revenue support relies more on selling tokens to maintain team operations. This strategy is difficult to withstand the fluctuations of market cycles. Stable income is a direct proof that the market addresses real problems and provides effective services. For developers, infrastructure can achieve widely applied complex use cases with hundredfold efficiency or realize functions that were previously unattainable; for end users, it can provide a smoother experience, lower usage costs, and richer features.

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 functionality 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 integrating AI features into existing user experiences.

Therefore, blockchain infrastructure must prioritize seamless integration pathways that allow Web2 applications to gradually implement blockchain functionalities without disrupting their core user experience. The most successful infrastructure will enable familiar applications to offer ownership, transaction, and financial functionalities 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 higher 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.