Web3: The Biggest Mistake of Crypto Assets

Written by: Zeus

Compiled by: Block unicorn

Preface

In a recent article, I explored how cryptocurrencies have deviated from their original vision, prioritizing infrastructure innovation while neglecting the monetary foundation necessary to fulfill their promise of financial sovereignty. I traced how this deviation has led to a disconnection between technological achievements and sustainable value creation.

What I have yet to fully explore is how the industry fundamentally misjudged which applications are truly worth developing. This misjudgment is at the core of the current dilemma in cryptocurrency and indicates the direction in which true value may ultimately emerge.

Illusion of the Application Layer

The narrative of cryptocurrency has gone through several stages, but one consistent theme is the promise of revolutionary applications that go beyond 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”—the theory that, unlike the internet’s TCP/IP, which captures little value while Facebook and Google capture billions, blockchain protocols will accumulate most of the value.

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

But there is a fundamental misjudgment here: cryptocurrencies attempt to impose financialization on areas that are not naturally applicable, and these areas have almost no real value enhancement.

Unlike the internet, which digitalizes existing activities (business, communication, entertainment), cryptocurrencies attempt to inject financial mechanisms into activities that do not need or want them. The assumption is that everything from social media to gaming to identity management will benefit from financialization and being “on-chain.”

The reality is completely different:

Most social applications with tokens have failed to gain mainstream adoption, with user participation primarily driven by token incentives rather than underlying utility.

Gaming applications continue to face resistance from traditional gaming communities, who believe that financialization will weaken rather than enhance the gaming experience.

The identity and reputation system has 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, rather than an end in itself. Financializing activities such as social interactions 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 commodity or souvenir markets, rather than a fundamental change in how games operate.

When crypto games attempt to financialize actual game mechanics — making playing games explicitly aimed at making money — it fundamentally changes the player experience, often undermining the essence of what makes the 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

A key distinction often overlooked in crypto discussions is the difference between blockchain technology itself and the property of trustlessness. 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 where transactions can be executed without relying on a trusted third party.

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

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

The key insight is that trust is not needed in areas that have real value only in a few domains. 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 blockchain does not change this reality—it only changes the technology used to manage the records.

Cost - Benefit Analysis

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

Does the platform really benefit from removing trusted intermediaries?

Does this benefit outweigh the cost of achieving trustless efficiency?

For most non-financial applications, at least one answer to the question is “no”. Either they have not truly benefited from trustlessness (as external enforcement is still necessary), or the benefits do not outweigh the costs.

This explains why institutions adopting blockchain technology primarily focus 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 is seen as an improved infrastructure rather than a mechanism that replaces trust.

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

The Path of Adaptation

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

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.

Efficiency takes precedence over revolution: the focus shifts from replacing existing systems to making them gradually more efficient.

Value migration: Value mainly flows to specific applications with clear practicality, rather than to underlying infrastructure tokens.

Narrative Evolution: The industry is gradually readjusting its expression of value creation to adapt to technological realities.

This is actually a good thing: why would you let an event promoter siphon off all the value from value creators? This rent-seeking behavior is actually far from the capitalist ideals that most people believe underpin the entire movement. If the primary means 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 valuable and is likely to continue evolving and integrating with existing systems. However, the value distribution within the ecosystem may be vastly different from the early narratives.

Root of the problem: Abandoned original intention

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

The fundamental insight is not “everything should be on the chain,” but rather “currency should not rely on trusted intermediaries.”

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

This has caused a strange disconnection in the ecosystem:

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

The smart contract platform offers programmability but abandons monetary innovation, instead supporting the concept of “Blockchain for Everything.”

This divergence might be the most serious misstep of the industry. Instead of building more complex capabilities based on the monetary innovations of Bitcoin, the industry has shifted to financializing everything else—this regressive approach has misjudged both the problems and the solutions.

The Road Ahead: 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 by focusing on creating better currency.

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

Trustlessness is crucial: Unlike most other applications that require external enforcement, currencies can operate entirely within the digital realm, enforcing rules solely through code.

Native digital operation: Currency does not need to map numerical records to physical reality; it can exist natively in a digital environment.

Clear value proposition: Removing intermediaries from the monetary system can bring real efficiency and sovereignty advantages.

The natural connection with existing financial applications: The most successful crypto applications (such as trading, lending, etc.) are inherently linked to monetary innovation.

Perhaps most importantly, currency is essentially an infrastructure layer upon which everything else is built, without needing to engage deeply with it. Cryptocurrency has disrupted this natural relationship. The industry has not created a currency that seamlessly integrates with existing economic activities, but rather 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 restructure their entire business around monetary policy. Individuals store value without needing to become experts in monetary theory. Currency facilitates economic activity rather than dominating it.

On-chain currencies should operate in the same way—available for off-chain businesses through simple interfaces, just like digital dollars can be used without understanding bank 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 having to be part of it.

Instead of trying to build “Web3”—a vague concept that attempts to financialize everything—the industry will find more sustainable value by focusing on building better currencies. Not just 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 monetary 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 and the escalating geopolitical tensions create 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 trivial compared to the transformative potential of addressing the fundamental challenges of currency itself.

The next stage of evolution for cryptocurrency may not be through further expanding 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 think deeply about how it works.