Exploring the Evolution of the Innovation Cycle: Why Are Excess Returns Often Harvested by Secondary Developers?

Original Title: When Innovation Compounds: The Second-Order Effects of Crypto Primitives

Original Author: Saurabh Deshpande

Original Compiler: Felix, PANews

If you witness what is happening on-chain, you might feel that the "end of the world" is imminent. It can even be said that artificial intelligence has replaced cryptocurrency as the breeding ground for future technological development. There is some truth to all these statements, but it is best to look at the issue from a more macro perspective.

This article explains how the cycle of innovation gradually evolves to achieve a technological market fit. Today's story will delve into the commonalities between Uber, Pendle, and EigenLayer. Hopefully, it will help 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 ways to capture rockets returning from space. Innovation seems to be a * gradual transformation * 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 of creating new things grab headlines and attract 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 perceive. History is full of such innovators who never predicted how their inventions would reshape the world. They were simply trying to solve the problems at hand. In the process, they unlocked possibilities far beyond the initial vision.

The best innovations are not endpoints but launchpads that allow entirely new ecosystems to take flight. Today's article will explore how this phenomenon manifests in Web3, starting with the global positioning system (GPS) that we use every day, then tracing back through restaking and incentive mechanisms to the realm of cryptocurrency.

A Weekend That Changed the Internet

Since its inception in 1973, the global positioning system (GPS) has been dedicated to accurately locating positions on Earth. But Google Maps is far more than that; it enables billions of people to access, use, and understand this raw data.

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

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

At the same time, Google acquired Keyhole (satellite imaging 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 was a desktop application, but Larry Page insisted on a web-based solution. The initial attempts progressed slowly and were uninspired. Bret Taylor, a Stanford 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 was an emerging technology that allowed websites to update content without reloading the entire page. Before AJAX, web applications were static and cumbersome. But with AJAX, responsiveness could rival that of 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 was that Google later released the Maps API, transforming it from a product into a platform. Developers could now embed Google Maps and build on top of it, sparking thousands of "mashup" projects that ultimately evolved into full-fledged businesses. The existence of Uber, Airbnb, and DoorDash can all be attributed to Bret Taylor making maps programmable during a decisive weekend.

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

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

What lies behind all this? Of course, payments. Because if seamless payment is not possible, what use is on-demand service?

The GPS technology they relied on was not something new. But GPS alone 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 often go unnoticed in the present. 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 accumulated over the years.

How Restaking Gives Rise to Products

In June 2023, EigenLayer introduced the "restaking" feature to the Ethereum mainnet, fundamentally altering the security landscape of Ethereum. The concept is novel yet simple enough for anyone interested in cryptocurrency to understand: "What if you could stake your ETH twice?"

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

By April 2024, EigenLayer had 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) had been locked in restaking. If ranked by GDP, it would place around 120th.

What’s interesting is not just that EigenLayer made restaking a reality, but that others quickly followed suit. EtherFi, a liquid staking provider, quietly launched in early 2023.

Ether.fi anticipates that EigenLayer's restaking will become one of the most popular opportunities in DeFi. You stake ETH, receive ETH tokens, and then automatically restake on the feature layer. As a reward, you can use the ETH and play in other DeFi sandboxes. Pendle is one such sandbox. It’s like getting multiple rewards for doing essentially the same thing—crypto finance, folks.

Ether.fi expects EigenLayer's restaking to become one of the most sought-after opportunities in the DeFi space. You stake ETH, receive eETH tokens, and then automatically restake on EigenLayer. As a reward, you can take eETH to other DeFi sandboxes to experience. Pendle is one such sandbox. It’s like everyone gets multiple rewards for doing essentially the same thing.

What’s the outcome? Quite impressive. By May 2024, Ether.fi's TVL soared to around $6 billion. Their "Liquid Vault" offers about a 10% annual yield, while traditional staking was less exciting at the time.

The work Ether.fi did for restaked ETH is essentially the same as what Lido did for staked ETH before. By creating liquidity, accessibility, and usability for restaked ETH, they made restaking practical, mainstream, and profitable.

Beyond chasing yields, there’s "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 users restake through Ether.fi, more eETH tokens circulate and deeply integrate with other DeFi projects like Pendle, where you can trade future yields or even the points themselves, creating entirely new financial instruments out of thin air.

What happened with the points—after all, cryptocurrency is a playground for efficient capital mercenaries. When protocols began using 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 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. While many projects still use points to distribute tokens, this strategy is no longer as appealing as it once was.

Thus, as always, the lesson is not just that innovation is important. More importantly, the biggest winners are often not those who create the buzzworthy things from the start. They are the latecomers who grasp the reality and create the right things at the right time.

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

Points and Pendle

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

Pendle launched in June 2021, focusing on tokenizing and trading future yields. Pendle's core innovation is quite clever, as it divides yield tokens into two parts: Principal Tokens (PT) representing the underlying asset and Yield Tokens (YT) capturing future yields. This separation allows users to trade these components separately, enabling better control over their yield strategies than ever before.

When the points race officially began, Pendle found itself in a favorable position thanks to a feature built for entirely different reasons. The platform's YT tokens created a mechanism equivalent to leveraged points mining. Users could earn both the floating yield of the asset and any associated points simultaneously, thereby expanding their points accumulation without needing additional capital.

Here’s how it works in practice. Suppose 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 that capital for weeks or months. With the combination of Liquid Restaking Tokens (LRT) and Pendle, Sid can purchase Yield Tokens (YT) representing future yields and points without directly depositing ETH into EigenLayer.

For example, suppose the price of eETH is $2,000, and it yields 24 EigenLayer points daily. pteETH represents the fixed yield token, while yteETH represents the floating yield token, priced at $200. pteETH holders forfeit points in exchange for fixed yields. yteETH holders receive floating yields and points. Now, with just $2,000, Sid can earn 240 points (worth 10 ETH) daily instead of just 24.

Pendle founder TN Lee elaborated on this in a podcast. The team did not build a meta-architecture for points. They could not have predicted this. But they created the perfect infrastructure for this emerging behavior and reaped substantial capital. Even if this trend eventually cools and TVL drops to around $2.5 billion, their market cap remains 10-15 times higher than before points emerged.

Memecoins, Pump.fun, and Raydium

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

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

However, an extraordinary transformation was underway. Throughout 2023, Solana's technology steadily improved. Outage incidents became less frequent. Transaction finality and user experience became noticeably smoother. Developers attracted by Solana's technological foundation (such as high throughput, low costs, and sub-second finality) began to return, albeit cautiously.

By early 2024, the situation underwent a decisive turnaround. As disappointment with traditional DeFi governance tokens grew and people generally turned towards so-called "financial nihilism," user attention and funds began to flow towards memecoins. These tokens often had little use beyond community ownership and cultural signaling, 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 launched in January 2024. This "memecoin factory" simplified the token creation process (once the domain of developers with programming skills) to be completed in just a few minutes. PumpFun democratized token creation in a way that perfectly aligned with the experimental spirit of cryptocurrency finance. Almost overnight, thousands of new tokens named "BONK," "Dogwifhat," and "POPCAT" flooded the Solana ecosystem.

What seemed like frivolous cryptocurrencies quickly demonstrated their potential as catalysts for complex value chains. These new tokens needed something crucial: liquidity. Without trading platforms, even the most clever memecoin concepts would be worthless. Solana's decentralized exchange Raydium was in an enviable position.

Since its inception, Raydium has aimed to become the leading trading platform on Solana, focusing on improving capital efficiency and reducing slippage. The protocol was not designed specifically for memecoins. However, its technical architecture, similar to Uniswap's concentrated liquidity pools and permissionless token listing processes, proved well-suited to handle the sudden influx of new assets.

The timing was perfect. Years of infrastructure development created the solid foundation needed for this unexpected use case.

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

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

The economic benefits for the PumpFun team were also impressive: tokens traded exclusively on the PumpFun platform charged a 1% fee per transaction, while Raydium's fee structure was 0.25%. This meant Raydium needed to generate four times the trading volume to match PumpFun's revenue per token. Due to its deeper liquidity and broader user base, Raydium consistently surpassed this threshold from August 2024 to February 2025.

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

The legendary story of Solana memecoins highlights a key aspect of second-order effects: value often does not accrue to those who create new behaviors but to those who facilitate and scale those 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 second-order effects that reshaped the entire ecosystem.

This attention not only revitalized the ecosystem but was actively leveraged. As the memecoin craze intensified, tokens like Trump and Libra were likely launched for the hype. Their strategies relied on narrative, timing, and viral spread. Trump harnessed the energy of political memes, while Libra leaned towards broader internet culture. Both tokens initially garnered significant attention and reached absurd valuations shortly after launch.

But this energy did not last long. Attention came quickly and left just as fast. The secondary market cooled. Traders shifted their focus. The community gradually dwindled. The success of these tokens lay in their demonstration of how to capture attention at the right moment and turn it into speculative gold. However, they failed to maintain market value. They lacked real utility and a sustainable roadmap, merely being fleeting phenomena.

Nonetheless, they proved a point: innovation can attract attention. And in the crypto space, attention is one of the most powerful raw materials. If harnessed correctly, it can spark new waves; if mishandled, it can quickly fade away.

For observers of crypto innovation, the lesson is clear. When new primitives emerge, it’s essential to look not only at the direct impacts but also at who is best positioned to facilitate, optimize, and scale the behaviors they support. This is often where the true excess returns are realized.

What Now?

By 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 point remains the same. This article discusses the collision of multiple technologies simultaneously, triggering a chain reaction greater than the sum of its parts.

We have witnessed this phenomenon: restaking reshaping DeFi incentive mechanisms, memecoin infrastructure revitalizing the entire ecosystem, and yield protocols unexpectedly achieving airdrop leverage. So, what will be the next domino to fall? Perhaps it’s the experience of EVM. 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 layer of compounding or merely another incremental upgrade remains to be seen.

But if these links connect smoothly, they could trigger an unprecedented chain reaction.

Behind the debates about L2 and the noise of the scaling wars, a race is brewing—not just to expand Ethereum but to enhance its utility by improving its usability. True usability means enabling others to build on top of it without being hindered by wallets, fees, or transaction failures. Because when friction disappears, innovation flourishes. And when innovation flourishes, compounding returns appear in the most unexpected places.

In recent months, I have hosted some outstanding individuals leading this transformation: Andre Cronje from Sonic, Keone Hon from Monad, and Shuyao Kong from MegaETH. Although their approaches differ, their goals are very clear: eliminate latency. Eliminate friction. Even eliminate wallets. Replace them with something faster, smoother, and more intangible. Create a true software experience rather than a cumbersome clicking process.

MegaETH and Monad both claim to handle 10,000 transactions per second. That’s comparable to Solana’s speed but with Ethereum’s semantics. It’s worth noting that the crypto space has a tendency to overpromise, but if achieved, this would be the first EVM-based chain to put Solana at a disadvantage in terms of user experience. (Given that EVM blockchains have long suffered from slow confirmations and hellish wallet pop-ups, this is somewhat amusing.)

Andre’s pitch focuses not on pure speed but on eliminating complexity. He states that Ethereum's performance ceiling is far from being reached. According to him, its current operating capacity is only about 2% of total capacity. This is not due to hardware limitations but rather how the Ethereum Virtual Machine (EVM) accesses and writes data. Sonic has reduced data storage requirements by 98% with its new database structure. His Sonic development roadmap bets on abstraction—abstracting fees, abstracting accounts, 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’s the key.

So, who will win in this new world? Perhaps not the infrastructure teams busy refreshing TPS benchmarks but rather the applications built on top of that infrastructure, like Pumpfun, which leveraged Solana’s infrastructure to profit $500 million in less than a year. Especially social protocols 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’s DeFi. Next-generation financial applications need better inputs. Andre bluntly states, "We don’t have on-chain volatility, implied volatility, or actual volatility." When these data points truly emerge, we can expect to see real options markets, coherent derivatives, and well-structured perpetual contracts—the financial layer that cryptocurrency has long pretended to possess.

Perhaps the most exciting applications are those yet to be imagined. Because that’s how things always develop. In 2005, no one looking at Google Maps would say, "You know what it needs? A ride-sharing service." But once the foundation changes, everything built on top of it will change as well.

So, personally, I am skeptical. I’ve been around long enough in the crypto space to know that every promise of a tenfold improvement usually just gets you a slightly better dashboard and more Discord notifications, but I’m also excited. Because this time, the underlying technology feels real. And behind it, a new generation of builders is quietly working on those second-order magics that might reshape everything. Because for every groundbreaking underlying technology we see today, dozens of builders are already working on second-order applications that will truly showcase the value of that underlying technology.