Exploring the evolution of the innovation cycle: Why are excess returns often played people for suckers by secondary developers?

When new primitives emerge, it’s important not only to look at the direct impact but also to see who is best suited to promote, optimize, and expand the behaviors they support. This is often where the real realization of excess returns occurs.

Written by: Saurabh Deshpande

Compiled by: Felix, PANews

If you witness what is happening on-chain, you might feel that the "end of the world" is approaching. It can even be said that artificial intelligence has replaced cryptocurrency, becoming a breeding ground for future technological development. All of these statements have some merit, but it is best to view the issue from a more macro perspective.

This article explains how the innovation cycle gradually evolves to achieve a technology-market fit. Today's story will delve into the commonalities between Uber, Pendle, and EigenLayer. I hope it helps dispel the pessimistic rhetoric on Twitter and find a new perspective.

For thousands of years, it was believed that humans could not fly. In the 112 years since the first human flight, we have now found a way to capture rockets returning from space. Innovation seems to be a transitional entity that transcends eras.

The true magic of technology is rarely reflected in the initial invention; rather, it lies in the ecosystem that emerges around it. It can be viewed as compound growth, but it is innovation rather than money.

While the pioneers who create new things grab the headlines and secure venture capital, it is often the second wave of builders who can extract the greatest value—those who discover untapped potential within existing foundations. They see possibilities that others find hard to detect. History is full of such innovators, who never predicted how their inventions would reshape the world. They were just trying to solve the problems at hand. In the process, they unlocked possibilities far beyond the initial vision.

The best innovations are not the destination, but the launchpad that allows a brand new ecosystem to take off. Today's article will explore how this phenomenon presents itself in Web3. Starting with the global positioning system (GPS) that we use every day, and then tracing back to the cryptocurrency field through re-staking and incentive mechanisms.

A Weekend That Changed the Internet

The Global Positioning System (GPS) has been dedicated to precise location on Earth since its inception in 1973. However, Google Maps goes far beyond this, enabling billions of people to access, use, and understand this raw data.

Google Maps started with three strategic acquisitions at the end of 2004.

First is Where 2 Technologies, a small Australian startup working out of a bedroom in Sydney. They developed "Expedition", a C++ desktop application that achieves smooth navigation using pre-rendered map tiles. Compared to the clunky experience of MapQuest, its user experience is far superior.

At the same time, Google acquired Keyhole (satellite imagery technology) and ZipDash (real-time traffic analysis), integrating the core components of its mapping vision. These acquisitions collectively formed the foundation of Google Maps: merging interactive navigation, rich visual data, and dynamic information into a single application.

Expedition is a desktop application, but Larry Page insisted on a web-based solution. The initial attempts progressed slowly and were uninspired. Bret Taylor, a Stanford University graduate and former Google associate product manager, began to tackle the issue.

Bret Taylor rewrote the entire front end using asynchronous JavaScript and XML (AJAX). AJAX is an emerging technology that allows websites to update content without reloading the entire page. Before AJAX, web applications were static and cumbersome. But with AJAX, response times can rival desktop software. Maps became draggable, and new tiles could load without refreshing the page—this was a revolutionary user experience in 2005.

The real genius lies in the fact that Google released the Maps API later that year, transforming it from a product into a platform. Developers can now embed Google Maps and build on top of it, leading to thousands of "mashup" projects that eventually evolved into complete businesses. The existence of Uber, Airbnb, and DoorDash is all thanks to Bret Taylor making the maps programmable on a decisive weekend.

Bret Taylor's intuition reflects a recurring phenomenon in the tech industry: the most profound value often does not arise from the foundation itself, but from the results built upon that foundation by others. These "second-order effects" represent the true compounded magic of innovation—a breakthrough can empower an entire ecosystem, giving rise to unexpected applications.

After Google Maps became programmable, it triggered a chain reaction. Airbnb, DoorDash, Uber, and Zomato were the first to integrate GPS into the core of their services. Pokémon Go took it a step further by overlaying augmented reality technology on location data, blurring the lines between reality and the virtual world.

What is behind all of this? Of course, it's payment. Because if seamless payment is not possible, what use is on-demand service?

The GPS technology they rely on is not a new thing. But relying solely on GPS cannot create miracles. It is the culmination of decades of technological evolution, such as satellite positioning, mobile hardware, AJAX, APIs, and payment channels, all of which have quietly taken shape.

This is why second-order effects are so powerful. They rarely attract attention in the moment. But one day, when you look up, you will find that your daily affairs are being coordinated by an invisible network of innovations that have quietly accumulated over the years.

How Re-staking Drives Product Innovation

In June 2023, EigenLayer introduced the "re-staking" feature to the Ethereum mainnet, fundamentally changing the security landscape of Ethereum. This concept is novel yet simple to understand, and anyone interested in cryptocurrency can grasp it: "What if you could stake your ETH twice?"

In traditional staking, your ETH can earn a stable but moderate return of 3.5% - 7%. Re-staking essentially allows the same batch of ETH to serve a dual purpose, protecting both the Ethereum network and simultaneously safeguarding the EigenLayer protocol network—same funds, multiple income sources, and improved capital efficiency.

By April 2024, EigenLayer has transformed from a theoretical innovation into a fully operational system, achieving significant adoption. The data speaks for itself: 70% of new Ethereum validators chose to join the protocol immediately. By the end of 2024, over 6.25 million ETH (approximately $19.3 billion) will be locked in restaking. If ranked by GDP of the highest countries/regions, it should be around 120th place.

What is interesting is not only that EigenLayer has made re-staking a reality, but also that others have followed suit. EtherFi is a liquid staking provider that quietly launched in early 2023.

Ether. I expect that the staking of EigenLayer will be one of the most popular opportunities in DeFi. You stake ETH, receive ETH tokens, and then automatically re-stake on the feature layer. Additionally, as a reward, you can use ETH and play in other DeFi sandboxes. Pandel is one such sandbox. It's like doing the same thing to earn multiple rewards – crypto finance, folks.

Ether.fi expects that the re-staking of EigenLayer will become one of the most popular opportunities in the DeFi space. You stake ETH to obtain eETH tokens, and then automatically re-stake on EigenLayer. Additionally, as a reward, you can take eETH to experience other DeFi sandboxes. Pendle is one such sandbox. It's like everyone is getting multiple rewards for essentially doing the same thing.

What was the result? Quite impressive. By May 2024, the TVL of Ether.fi soared to around $6 billion. Their "Liquid Vault" offers an annual interest rate of about 10%, while regular staking at that time was less exciting.

Ether.fi's work on re-staked ETH is essentially the same as what Lido did previously for staked ETH. By creating liquidity, accessibility, and availability for re-staked ETH, it makes re-staking practical, mainstream, and profitable.

In addition to chasing yields, there is "points mining" where people not only pursue immediate returns but also accumulate "points" that may become valuable tokens in the future. If you like, you can call it a speculative flywheel. As more and more users re-stake through Ether.fi, more eETH tokens circulate and deeply integrate with other DeFi projects like Pendle, where you can trade future yields and even the points themselves, creating entirely new financial instruments out of thin air.

What happened to the points - after all, cryptocurrency is a paradise for efficient capital mercenaries. When the protocol began to use points as rewards, a large number of users emerged, trying to maximize points and manipulating the system in the process. The original intention behind points was to achieve a fairer and broader token distribution. But once it evolved into a competition, the results became skewed. The most active "miners" are not always the most consistent users. Although many projects still use points to distribute tokens, this strategy is no longer as attractive as it used to be.

Therefore, as usual, the lesson is that innovation is not the only important thing. More importantly, the biggest winners are often not those who create the things that people are buzzing about from the start. They are the latecomers who gain insight into the actual situation and create just the right things at the right moment.

Of course, EigenLayer laid the groundwork, but Ether.fi and other companies that have seen second-order effects also got a piece of the pie, ultimately occupying more than 20% of the Ethereum staking market by mid-2024. In the crypto space, being the first is far less important than knowing what others are doing.

Points and Pendle

After the huge success of the Jito airdrop, points became mainstream in December 2023. This Solana-based protocol made its debut with an FDV exceeding $1 billion, sparking a "gold rush." Suddenly, the entire ecosystem's protocols shifted from direct token distribution to a points system. They began rewarding users participating in the protocol with points, which could later be exchanged for governance tokens. This initially new distribution mechanism quickly evolved into the dominant strategy.

Pendle launched in June 2021, focusing on tokenization and future yield trading. The core innovation of Pendle is quite clever as it divides yield tokens into two parts: the principal token (PT) representing the underlying asset and the yield token (YT) that captures future yields. This separation allows users to trade these components separately, providing better control over their yield strategies than ever before.

When the points competition officially began, Pendle found itself in a favorable position thanks to a feature built for entirely different reasons. The platform's YT token created a mechanism equivalent to leveraged points mining. Users can earn both the fluctuating returns on their assets and any related points simultaneously, thus expanding their points accumulation without the need for additional capital.

Here's how it actually works. Let's say Sid wants to earn points from a protocol like EigenLayer that rewards liquidity providers. Traditionally, he would need to deposit ETH into EigenLayer's staking contract and lock up the funds for weeks or months. With the combination of liquidity restaking tokens (LRT) and Pendle, Sid can purchase yield tokens that represent future yields and credits (YT) without having to deposit ETH directly into EigenLayer.

For example, assuming the price of eETH is $2000, you can earn 24 EigenLayer points daily. pteETH represents fixed income tokens, and yteETH represents floating income tokens, priced at $200. pteETH holders forgo points in exchange for fixed income. yteETH holders, on the other hand, receive floating income and points. Now, with just $2000, Sid can earn 240 points (worth 10 ETH) daily instead of just 24.

Pendle's founder TN Lee provided a detailed analysis of this in a podcast. The team did not build a meta-architecture for points. They could not have predicted this. However, they built perfect infrastructure for this emerging behavior and secured substantial capital. Even if this trend eventually cools down and the TVL drops to around $2.5 billion, their market value is still 10-15 times higher than it was before points appeared.

Memecoins, Pump.fun and Raydium

Sometimes, second-order effects can emerge from the most unexpected places, revitalizing the entire ecosystem in the process. The revival of Solana in 2023-2024 is a brilliant case that fully demonstrates the rapid changes in cryptocurrency and how those who position themselves at critical crossroads can gain value.

At the end of 2022, after the collapse of FTX, many industry insiders wrote "obituaries" for Solana. This logic seemed reasonable. SBF and his company had a huge influence on the ecosystem, providing funding, liquidity, and market support. Without them, Solana struggled to survive. The technology was plagued by reliability issues, and the news of "Solana outages" became a joke. The blockchain that once positioned itself as the "Ethereum killer" seemed to be on its last legs.

However, an extraordinary transformation is taking place. Throughout 2023, Solana's technology has steadily improved. Downtime incidents have become increasingly rare. Transaction finality and user experience have become noticeably smoother. Developers who were attracted by Solana's technological foundation (such as high throughput, low cost, and sub-second finality) are beginning to return, although they are being cautious.

By early 2024, the situation had taken a decisive turn. With growing disappointment in traditional DeFi governance tokens and a general shift towards what is termed "financial nihilism," user attention and funds began to flow toward memecoins. These tokens typically have little utility beyond community ownership and cultural signals, yet they captured the market's imagination. Solana, with its lightning-fast transaction speeds and extremely low fees, provided the perfect environment for this new wave.

PumpFun will launch in January 2024. This "memecoin factory" simplifies the token creation process (once the domain of developers with programming skills) to be completed in just a few minutes. PumpFun democratizes token creation in a way that perfectly aligns with the experimental spirit of cryptocurrency finance. Almost overnight, thousands of new tokens named "BONK," "Dogwifhat," and "POPCAT" flooded into the Solana ecosystem.

The seemingly frivolous cryptocurrency quickly demonstrates its potential as a catalyst for complex value chains. These new tokens require something crucial: liquidity. Without trading platforms, even the most clever memecoin concepts will be worthless. The decentralized exchange Raydium within the Solana ecosystem is in an enviable position.

Since its establishment, Raydium has been committed to becoming a leading trading platform on Solana, focusing on improving capital efficiency and reducing slippage. The protocol is not specifically designed for memecoins. However, its technical architecture has proven to be similar to Uniswap's centralized liquidity pools and permissionless token listing process, making it well-suited to handle sudden influxes of new assets.

The timing is just right. Years of infrastructure development have created the solid foundation needed for this unexpected use case.

The listing on Raydium has become an important milestone for these emerging tokens, enhancing credibility and visibility in an increasingly crowded market. By early 2025, this symbiotic relationship becomes crucial, with over 40% of Raydium's swap revenue coming from tokens generated by PumpFun.

This relationship is mutually beneficial: PumpFun needs Raydium's existing liquidity pools to elevate its tokens from niche products to tradable assets, while Raydium thrives on the explosive trading volume brought by these tokens.

The economic benefits of the PumpFun team are also impressive: tokens traded exclusively on the PumpFun platform incur a 1% transaction fee, while Raydium's fee structure is 0.25%. This means Raydium needs to generate four times the trading volume to match the income from each token transaction of PumpFun. Due to its deeper liquidity and broader user base, Raydium consistently surpassed this threshold from August 2024 to February 2025.

Raydium is neither the original creator of memecoins nor the pioneer of the token factory concept. However, by providing a robust infrastructure for trading these assets and quickly responding to competitive threats, it has captured a significant portion of the value within the ecosystem.

The legendary story of Solana memecoin showcases a key aspect of the second-order effect: value often does not accrue to those who create new behaviors, but rather to those who facilitate new behaviors on a large scale. PumpFun simplified token creation, while Raydium enabled efficient price discovery and trading. Each innovation triggered further adaptations. PumpFun's vertical integration initiatives prompted Raydium to create LaunchLab, generating a series of secondary effects that reshaped the entire ecosystem.

This attention not only revitalizes the ecosystem but is also actively leveraged. As the craze for memecoins intensifies, tokens like Trump and Libra are likely launched for the hype. Their strategies rely on narrative, timing, and virality. Trump capitalizes on the energy of political memes, while Libra leans towards broader internet culture. Both tokens initially garnered tremendous attention and reached absurd valuations shortly after their launch.

But this energy did not last long. Attention comes quickly and goes quickly. The secondary market is cooling down. Traders have shifted their focus. The community is gradually diminishing. The success of these tokens lies in their ability to capture attention at the right moment and convert it into speculative gold. However, what they failed to do was maintain market value. They have no real utility or sustainable development roadmap, just a flash in the pan.

However, they proved a point: innovation can attract attention. And in the crypto space, attention is one of the most powerful raw materials. If used properly, it can spark new waves; if used improperly, it will quickly fade away.

For observers of crypto innovation, the lessons are clear. When new primitives emerge, it is essential not only to consider their direct impact but also to see who is best positioned to promote, optimize, and scale the behaviors they support. This is often where the real realization of excess returns occurs.

What should we do now?

At this point, you might be wondering what the next second-order explosion will look like. Perhaps you call it compound innovation, or maybe it's technological convergence, but the emphasis is the same. This article discusses the simultaneous collision of multiple technologies, resulting in a chain reaction that is greater than the sum of its parts.

We have witnessed the occurrence of this situation: re-staking has reshaped the DeFi incentive mechanism, memecoin infrastructure has revitalized the entire ecosystem, and yield protocols have unexpectedly achieved airdrop leverage. So, what will be the next domino to fall? Perhaps it's the EVM experience. Maybe. It is indeed being rewritten, redesigned, and refined to feel like real software—at least that's the promise. Whether it becomes the next great compounding layer or just another incremental upgrade remains to be seen.

However, if these links are smoothly connected, it could trigger an unprecedented chain reaction.

Behind the noise of the debates about L2 and the scaling wars, a competition is brewing—not only to scale Ethereum but also to enhance its utility by improving its usability. True usability means allowing others to build upon it without being hindered by issues like wallets, fees, or transaction failures. Because when friction disappears, innovation thrives. And when innovation thrives, compound returns can appear in the most unexpected places.

In the past few months, we have welcomed some outstanding individuals leading this transformation: Andre Cronje from Sonic, Keone Hon from Monad, and Shuyao Kong from MegaETH. Although their approaches vary, the goal is very clear: to eliminate delays. To eliminate friction. To even eliminate wallets. To replace them with something faster, smoother, and more intangible. To create a true software experience, rather than a cumbersome clicking process.

Both MegaETH and Monad claim to be able to process 10,000 transactions per second. That's the same speed as Solana, but with the semantics of Ethereum. It's important to know that the crypto space has a tendency to overdo it, and if it does, it will be the first EVM-based chain to put Solana in a passive position when it comes to user experience. (It's kind of funny considering that EVM blockchains have long been plagued by slow confirmations and hellish wallet pop-ups.) ）

Andre's promotional focus is not on pure speed, but on eliminating complexity. He stated that the performance ceiling of Ethereum has not yet been reached. According to him, its current operating capacity is only about 2% of the total capacity. This is not due to hardware limitations, but rather the way the Ethereum Virtual Machine (EVM) accesses and writes data. Sonic has already reduced data storage requirements by 98% through its new database structure. His Sonic development roadmap bets on abstraction—abstracting fees, abstracting accounts, and abstracting wallets. If all goes according to plan, by the end of this year, users won't even realize they are on a blockchain while still maintaining a considerable degree of decentralization. And that is the key.

So, in this brand new world, who will emerge victorious? It may not be the infrastructure teams busy refreshing TPS benchmarks, but rather the applications built on these infrastructures, like Pumpfun, which made $500 million in less than a year using Solana's infrastructure. Social protocols, in particular, may achieve breakthroughs. Projects like Farcaster have already demonstrated the potential to combine the permanence of cryptocurrency with the convenience of being native to the web. No more paying to post, no more MetaMask pop-ups. Just content sharing.

Then there is DeFi. The next generation of financial applications needs better inputs. Andre candidly stated, "We don't have on-chain volatility, implied volatility, or realized volatility." When these data points truly emerge, a real options market, coherent derivatives, and well-structured perpetual contracts are expected to arise - the financial layer that cryptocurrencies have long pretended to possess.

Perhaps the most exciting applications are those that have yet to be imagined. Because that's how things always develop. In 2005, no one would have looked at Google Maps and said, "Do you know what it needs? Ride-sharing services." But once the foundation changes, everything built on it will change as well.

So, individuals are skeptical. Those who have been in the crypto space long enough know that every time a promise of tenfold improvement is made, it usually results in just a slightly better dashboard and more Discord notifications, but there is also excitement. Because this time, the underlying technology feels real. And behind it, a new generation of builders is quietly working on the second-order magic that may reshape everything. Because for every groundbreaking underlying technology we see today, dozens of builders are already working on developing second-order applications that can truly showcase the value of that underlying technology.