Web3: The Biggest Mistake of Crypto Assets

How have Crypto Assets deviated from their original vision, prioritizing infrastructure innovation while neglecting the monetary foundation needed to fulfill their financial sovereignty commitments?

Written by: Zeus

Compiled by: Block unicorn

Introduction

In a recent article, I explored how Crypto Assets have deviated from their original vision, prioritizing infrastructure innovation while neglecting the monetary foundation needed to fulfill their commitment to financial sovereignty. I traced how this deviation has led to a disconnect between technological achievements and sustainable value creation.

What I have not fully explored is how the industry fundamentally misjudged which applications are truly worth developing. This misjudgment is at the core of the current predicament of Crypto Assets and indicates the direction in which true value may ultimately emerge.

Illusions of the Application Layer

The narrative of Crypto Assets has gone through several stages, but a consistent theme has been the promise of revolutionary applications that transcend finance. Smart contract platforms are positioned as the foundation of the new digital economy, with value flowing back from the application layer to the infrastructure. This narrative has accelerated with the "Fat Protocol Theory"—which posits that unlike the internet's TCP/IP capturing little value while Facebook and Google capture billions, blockchain protocols will accumulate most of the value.

This forms a specific mental model: a layer of blockchain (L1) gains value by supporting a diversified application ecosystem, just as Apple's App Store or Microsoft's Windows creates value through third-party software.

But there is a fundamental misjudgment here: Crypto Assets attempt to impose financialization on fields that are not naturally applicable, and these fields have almost no real value addition.

Unlike the digitalization of existing activities (business, communication, entertainment) through the internet, Crypto Assets attempt to inject financial mechanisms into activities that do not require or desire them. The assumption is that everything from social media to gaming to identity management will benefit from being financialized and "on-chain".

The reality is completely different:

1. Most social applications with tokens have failed to achieve mainstream adoption, with user participation primarily driven by token incentives rather than underlying utility.
2. Game applications continue to face resistance from traditional gaming communities, who believe that financialization will weaken rather than enhance the gaming experience.
3. Identity and reputation systems have difficulty demonstrating clear advantages over traditional methods when it comes to token economics.

This is not just a matter of "we are still in the early stages." It reflects a deeper truth: the purpose of finance is to serve as a tool for resource allocation, not an end in itself. Financializing activities such as social interaction or entertainment misunderstands the core role of finance in society.

Differences in the Gaming Market

It is worth discussing some seemingly counterexample cases, such as the CS:GO skin market or microtransaction systems in popular games. These successful markets seem to contradict the argument of game financialization, but they highlight an important distinction:

These markets represent a closed ecosystem of optional accessories or collectibles that coexist with gameplay, rather than attempting to financialize the core gameplay itself. They are more like a market for goods or souvenirs, rather than a fundamental change in how games operate.

When crypto games attempt to financialize actual game mechanics—making playing the game explicitly aimed at making money—it fundamentally alters the player experience, often undermining the essence of what makes a game appealing. The key insight is not that games cannot have a market; rather, turning the gameplay itself into a financial activity changes its fundamental nature.

Blockchain Technology and Trustless Systems

A key distinction often overlooked in crypto discussions is the difference between blockchain technology itself and the trustless properties. These two are not synonymous:

• Blockchain technology is a set of technical capabilities used to create distributed, append-only ledgers with consensus mechanisms.
• Trustlessness is a specific attribute that allows transactions to be executed without relying on a trusted third party.

Trustlessness brings tangible costs—in terms of efficiency, complexity, and resource requirements. These costs require clear justification and only exist in specific use cases.

When entities such as Dubai use distributed ledger technology to manage property records, they primarily leverage the technology to enhance efficiency and transparency, rather than pursuing a trustless model. The land department remains a trusted authority, and blockchain merely serves as a more efficient database. This distinction is crucial as it reveals the true source of value within these systems.

The key insight is that trust is not needed in only a few areas that have real value. From property records to identity verification to supply chain management, most activities fundamentally require trusted entities for real-world execution or verification. Migrating the ledger to the blockchain does not change this reality—it merely changes the technology used to manage the records.

Cost - Benefit Analysis

This brings a direct cost-benefit analysis for each platform:

1. Does the platform really benefit from the removal of trusted intermediaries?
2. Does this benefit outweigh the efficiency costs of achieving trustlessness?

For most non-financial applications, the answer to at least one question is "no." Either they do not truly benefit from the trustless nature (as external enforcement is still necessary), or the benefits do not outweigh the costs.

This explains why institutional adoption of blockchain technology is primarily focused on efficiency improvements rather than trustlessness. When traditional financial institutions tokenize assets on Ethereum (a situation that is becoming increasingly common), they leverage the network for operational advantages or to enter new markets while maintaining traditional trust models. Blockchain serves as an improved infrastructure rather than a mechanism to replace trust.

From an investment perspective, this creates a challenging dynamic: the most valuable part of the blockchain (the technology itself) can be adopted without necessarily bringing value to a particular chain or token. Traditional institutions can implement private chains or use existing public chains as infrastructure, while maintaining control over the most valuable layers – assets and monetary policy.

The Path of Adaptation

As this reality becomes clearer, we see a natural adaptation process unfolding:

1. Technology adoption without a token economy: Traditional institutions adopt blockchain technology while bypassing speculative token economies, using it as a better "pipeline" for existing financial activities.
2. Efficiency takes precedence over revolution: the focus shifts from replacing existing systems to making them gradually more efficient.
3. Value Migration: Value primarily flows towards specific applications with clear utility, rather than underlying infrastructure tokens.
4. Narrative Evolution: The industry is gradually readjusting its expressions of value creation to adapt to technological realities.

This is actually a good thing: why would you let a promoter of an event siphon off all the value from value creators? This rent-seeking behavior is actually far from what most people think supports the entire movement's capitalist ideals. If the primary way of value acquisition is TCP/IP, rather than the applications built on top of it (as the "fat protocol theory" suggests), the face of the internet would be very different (almost certainly worse!). This industry is not in decline - it is finally facing reality. The technology itself is very valuable and is likely to continue to evolve and integrate with existing systems. But the distribution of value within the ecosystem may be vastly different from earlier narratives.

Root of the Problem: Abandoned Original Intention

To understand how we got to this point, we must go back to the origins of Crypto Assets. Bitcoin did not emerge as a universal computing platform or a basis for the tokenization of everything. It clearly emerged as a currency— a response to the 2008 financial crisis and the failure of centralized monetary policy.

The fundamental insight is not that "everything should be on-chain", but that "currency should not rely on trusted intermediaries."

As the industry develops, this original intention is being diluted or even abandoned by more and more projects. Projects like Ethereum have expanded the technical capabilities of blockchain, but at the same time, they have also diluted its focus.

This has created a strange disconnection in the ecosystem:

Bitcoin retains its status as a currency center, but lacks programmability beyond basic transfer functions.

The smart contract platform offers programmability but sacrifices currency innovation in favor of supporting the concept of "Blockchain for Everything."

This divergence may be the most serious misstep of the industry. The industry has not built more complex capabilities on the basis of Bitcoin's monetary innovation, but instead has turned to financializing everything else—this regressive approach has misjudged the problems and solutions.

The Path Forward: Returning to Currency

In my opinion, the way forward is to reconnect the significantly improved technological capabilities of blockchain with its original monetary goals. Not as a universal solution to all problems, but rather focusing on creating better currencies.

The reason why currency perfectly aligns with blockchain is as follows:

1. Trustlessness is crucial: Unlike most other applications that require external enforcement, currency can operate entirely within the digital realm, with rules enforced solely by code.
2. Native digital operations: Currency does not need to map numerical records to physical reality; it can exist natively in a digital environment.
3. Clear value proposition: Removing intermediaries from the monetary system can bring real efficiency and sovereignty advantages.
4. Natural connection with existing financial applications: The most successful Crypto Assets applications (such as trading, lending, etc.) are naturally associated with currency innovation.

Perhaps most importantly, currency is essentially an infrastructure layer upon which everything else is built, without the need to deeply engage with it. However, Crypto Assets have disrupted this natural relationship. The industry has not created a currency that seamlessly integrates with existing economic activities, but instead attempts to rebuild all economic activities around blockchain.

The power of traditional currency is reflected in this practical approach. Businesses accept dollars without needing to understand the Federal Reserve. Exporters manage currency risks without having to rebuild their entire operations around monetary policy. Individuals store value without needing to become experts in monetary theory. Currency facilitates economic activity rather than dominating it.

On-chain coins should operate in the same way—providing a simple interface for off-chain businesses, just like digital dollars can be used without understanding banking infrastructure. Businesses, entities, and individuals can remain completely off-chain while leveraging the specific advantages of blockchain-based currencies—just as they use traditional banking infrastructure today without needing to be a part of it.

Instead of attempting to construct "Web3"—a vague concept trying to financialize everything—the industry will find more sustainable value by focusing on building better coins. Not merely as speculative assets or inflation hedges, but as a complete monetary system equipped with mechanisms that enable it to operate reliably under different market conditions.

As we consider the global currency landscape, this focus becomes even more pronounced. The evolution of the global monetary system faces unprecedented coordination challenges. The inherent instability of the current system, coupled with escalating geopolitical tensions, has created a genuine demand for neutral alternatives.

The tragedy of the current situation lies not only in the misallocation of resources but also in the missed opportunities. While incremental improvements in financial infrastructure are indeed valuable, they seem insignificant compared to the transformative potential of addressing the fundamental challenges of the currency itself.

The next phase of evolution for Crypto Assets may not be through further expansion of its scope, but rather by returning to and achieving its original goals. Not as a universal solution to all problems, but as a reliable monetary infrastructure that provides a solid foundation for everything else—without the need to deeply consider how it works.