Dead End: Web3 and NFTs

Abstract

Between 2020 and 2022 a set of blockchain technologies marketed as “Web3” absorbed tens of billions of dollars. Total cryptocurrency market capitalisation passed $3 trillion on 10 November 2021. NFT trading ran to $24.9 billion in 2021 against $94.9 million the year before, a single Beeple collage sold at Christie’s for $69.3 million, and virtual land in Decentraland changed hands at $2.4 million a parcel while the platform’s measurable daily users numbered in the hundreds. The Terra collapse in May 2022 erased about $45 billion in a week, FTX failed that November with an $8 billion hole in customer accounts, and by September 2023 an industry survey found 95% of NFT collections had a market capitalisation of zero. The technology still runs. The claim built on top of it, that blockchains would take the internet back from its intermediaries, did not survive contact with the intermediaries that Web3 itself required.

Blockchain and the Promise of Decentralisation

Bitcoin, described in a 2008 whitepaper by the pseudonymous Satoshi Nakamoto, showed that a distributed ledger maintained by a network of nodes could settle payments without a bank in the middle. The blockchain, a chain of cryptographically linked blocks of transactions, was the mechanism; a fixed-supply asset no government could inflate was the pitch. This history is covered in The Cryptocurrency Revolution.

Ethereum, proposed by Vitalik Buterin in 2013 and live in 2015, extended the idea to general computation. Its smart contracts are programs stored on-chain that execute when their conditions are met, and in principle a smart contract can stand in for any intermediary: escrow agent, insurer, exchange, record label.

The term Web3 came from Ethereum co-founder Gavin Wood. The argument was that the existing web (“Web2”) was a layer of corporate intermediaries (Google, Facebook, Amazon, Apple) extracting value from users whose data and relationships they controlled, and that decentralised protocols would replace them with direct ownership and direct exchange.

As a description of what platforms do to users, this was accurate. As an engineering plan it had problems that stayed invisible until very large sums had been committed.

The NFT Boom

A non-fungible token is a blockchain record asserting ownership of something specific: a particular image, a particular in-game item. Unlike a bitcoin, where any unit substitutes for any other, each token is distinct.

The idea long predates the boom. Kevin McCoy minted “Quantum” on the Namecoin blockchain on 2 May 2014, using a scheme he had developed with Anil Dash. CryptoPunks followed in June 2017, and CryptoKitties in late 2017, whose trading congested Ethereum in December of that year and gave the wider public its first look at what on-chain collectibles did to network capacity.

The market arrived in 2021. On 11 March, Christie’s sold Beeple (Mike Winkelmann) an NFT of “Everydays: The First 5000 Days” for $69.3 million, paid in 42,329 ether. The buyer was Vignesh Sundaresan, known as MetaKovan, who held a majority of the B20 tokens, speculative assets tied to a set of twenty other Beeple works whose price rose sharply during the auction coverage and fell afterwards. Winkelmann held 2% of the same tokens. Neither stake was disclosed as part of the sale.

Bored Ape Yacht Club launched in April 2021 at a mint price of 0.08 ETH, about $190. The floor price, the cheapest ape available, peaked at roughly 152 ETH, about $430,000, on 29 April 2022. Jimmy Fallon, Paris Hilton, Eminem and Post Malone bought apes and used them as profile pictures; Yuga Labs, the collection’s owner, raised money at a $4 billion valuation in March 2022. Art Blocks sold algorithmic works generated at mint for six figures. NFT trading volume across ten chains reached $24.9 billion in 2021, against $94.9 million in 2020.

What an NFT Actually Points At

An NFT record almost never contains the image. It contains a URL, and the token standard includes no hash commitment to whatever sits at that address, so whoever runs the server can change it. In January 2022 Moxie Marlinspike built dapps to test this and minted an NFT that returned a different image depending on who fetched it. The more instructive result came next: OpenSea removed the token from its marketplace, and it then disappeared from his crypto wallet as well, because wallets display holdings by querying OpenSea’s API rather than the chain. The record survived on Ethereum, indelibly, and was invisible everywhere a user would look. Marlinspike also found that his dapp and MetaMask both read chain state through Infura or Alchemy without verifying the responses. The decentralised system had roughly three companies in the middle of it.

The Metaverse Land Rush

Virtual worlds built on blockchains, Decentraland and The Sandbox, sold virtual real estate as NFTs on the theory that land in a populated metaverse would appreciate. Metaverse Group, a subsidiary of Tokens.com, paid about $2.4 million for a Decentraland parcel in November 2021; Republic Realm paid $4.3 million in The Sandbox. Proximity to Snoop Dogg’s plot was priced in. Samsung, JPMorgan and Atari opened branded spaces.

In October 2022 DappRadar counted 38 active wallets in Decentraland over 24 hours, in an ecosystem then valued around $1.3 billion. Decentraland objected that wallet transactions are not visits, said it saw about 8,000 daily and 56,000 monthly users, and DappRadar recalculated its method to 650 daily unique active wallets on 18 October. Every version of the count sits several orders of magnitude below the valuations.

The Collapse

Terra ran two linked tokens: Luna, a normal cryptocurrency, and UST, an algorithmic stablecoin meant to hold a dollar peg by arbitrage, burning UST to mint Luna and back. Deposits of UST in the Anchor Protocol earned an advertised 19.45%, paid out of reserves.

On 7 May 2022 large amounts of UST left Anchor and were sold into thin liquidity; whether this was a coordinated attack, an ordinary run, or the arithmetic of an unsustainable yield finally arriving is still argued. The mechanism did the rest. UST slipped below the peg, the protocol minted Luna to defend it, the new supply crushed Luna’s price, and the weaker Luna became the worse the defence worked. Terraform Labs halted the chain on 13 May with Luna down from $119.51 to effectively nothing and UST near ten cents. About $45 billion in market value was destroyed inside a week. Do Kwon was arrested in Montenegro on 23 March 2023, pleaded guilty to two fraud counts in August 2025, and was sentenced to 15 years in December 2025.

The failure propagated through everyone who had lent against these assets. Three Arrows Capital was ordered into liquidation. Celsius Network, with 1.7 million users, froze withdrawals in June 2022 and filed for bankruptcy in July. Voyager Digital filed the same month. In November 2022 FTX, run by Sam Bankman-Fried and marketed as the adult in the room with Tom Brady, Steph Curry and Larry David in its advertising and its name on the Miami Heat arena, collapsed when it emerged that customer deposits had been lent to its affiliated trading firm Alameda Research. The hole was about $8 billion. Bankman-Fried was arrested in December 2022, convicted on seven counts in November 2023, and sentenced on 28 March 2024 to 25 years with an $11 billion forfeiture order.

NFT prices followed the credit. The Bored Ape floor fell below 30 ETH in July 2023, touching 27.4 ETH, roughly 82% down in ether terms and 88% in dollars from the April 2022 peak. The clearest single case is Jack Dorsey’s first tweet: sold as an NFT for $2.9 million in March 2021, relisted at $48 million in April 2022, and closed with a top bid of about $280. A September 2023 survey of 73,257 NFT collections found 69,795 of them, 95%, with a market capitalisation of zero.

The Structural Problems

Throughput. Ethereum settles roughly 15 transactions per second. The comparison usually offered is Visa at 24,000 or 65,000, which are capacity claims; Visa’s actual average is around 1,700. The gap is still two orders of magnitude. The Merge of 15 September 2022 moved Ethereum to proof of stake and cut its energy use by about 99.95%, but it changed nothing about throughput, which was never its purpose. Capacity gains came from layer-2 rollups, which are themselves operated by companies.

Usability. Self-custody means that losing a private key loses the money, permanently and by design. Every transaction costs a gas fee that spikes when the network is busy. This is the opposite of the direction consumer software had been travelling for thirty years.

The oracle problem. A smart contract can only act on data that is on the chain. Anything from outside (a price, a score, a rainfall measurement) arrives through an oracle, and the contract is exactly as decentralised as that oracle. Crop insurance settled by smart contract still depends on whoever reports the weather.

Regulatory exposure. Many tokens were investment contracts in the legal sense: sold with an expectation of profit from other people’s efforts. The SEC opened enforcement actions against exchanges, issuers and, from 2023, NFT projects themselves.

Dead End

Web3 mixed real engineering, misaligned incentives, speculation and fraud, and the proportions varied by project. Distributed ledgers do useful work in cross-border settlement, provenance tracking and some derivatives.

The broad claim did not hold. Decentralisation trades performance, usability and recourse for censorship resistance, and the number of people who want that trade turned out to be small. Everyone else took the intermediaries, which is why Web3’s own users converged on OpenSea, Infura, Alchemy and a handful of exchanges: the same shape as the web it was going to replace, with worse latency and no refunds.

The NFT proved that digital goods can carry a price. It did not make the price about the goods. A JPEG is not altered by the existence of a record elsewhere saying who owns it, and when the record’s marketplace delisted Marlinspike’s token, the owner could not see it either.