Metaverse, AI, VR: Did overhype kill Web3?

Fast forward to 2024, and the landscape looks starkly different. The promise of a decentralised web seems to have failed to materialise, leaving many to question: What really happened to Web3?

The year 2021 was widely celebrated as the ‘year of Web3,’ but the subsequent cooling period has raised questions about the technology’s future.

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Matthieu Merchadou Melki, Co-founder and CEO of Magma, attributes the cooling off to the initial overhype. “Like every other technology, it has been overhyped as the killer tech. The same happened with the Metaverse, AI, and VR,” he told Arabian Business.

However, he believes that the idea of Web3 declining is not necessarily true, citing significant institutional interest.

“Put the claim that the hype has cooled down into perspective: central banks are working on CBDCs, and presidential candidates in the US defended cryptos. Governments in the Philippines, Brazil, Paraguay, and others showed interest. Cryptos ETFs have been launched with a lot of inflow; BlackRock, JPMorgan, Goldman Sachs, Citi, and other big financial institutions have made investments in cryptos or Web3 solutions like blockchains and tokenisation,” he said.

Other than major financial players, even mainstream brands are finding practical applications: Starbucks has implemented blockchain for its loyalty program, while Disney has sought patents for blockchain-based ticket fraud prevention.

Sasha Ivanov, Founder of Waves and Units, argues that Web3 faces a foundational challenge: “The problem with the lack of Web3 adoption goes deeper – internet infrastructure on which Web3 is deployed is very centralised itself. We’re trying to build a decentralised world on top of a very centralised underlying infrastructure.”

Ivanov sees a path forward in redefining the basic infrastructure, what he calls “Web Zero.”

He added, “What we really need is not Web3, but Web Zero – a new infrastructure for the basic internet layer.”

The rise and fall of a movement

Web3’s origin story began with a vision: a decentralised internet where users, not tech giants, would control their data and digital assets. This narrative gained tremendous momentum during the pandemic, as cryptocurrency prices soared and NFTs captured mainstream attention.

“The only Web3 sector which has gained significant traction is retail crypto trading, and it mostly happens on the centralised Web2 platforms, which shapes a negative perception of Web3 as being only about speculation and meme coin trading,” Ivanov said.

According to reports, Web3 startups raised over $35 billion in venture capital during 2021-2022. By 2023, that figure had plummeted by over 80 per cent. Many high-profile projects that raised millions have since shut down or exist as shadows of their former selves.

“Following a period of rapid fundraising and expansion in 2021, the Federal Reserve’s aggressive interest rate hikes began draining liquidity from the system. As funding tightened, major crises like LUNA and FTX shook the market, leading to widespread losses,” Shubh Varma, Co-Founder & CEO at Hyblock Capital explained.

Are NFTs dead?

NFTs (Non-fungible tokens) took the internet by storm during its peak with several advocates and investments flowing into ‘digital art’ with designs of apes, penguins and more. In 2021, NFT sales were estimated at $10.7 billion for the third quarter.

A ‘digital revolution’ – the internet called it, the power of the NFT was exclusivity, rarity and uniqueness, making it nearly impossible to counterfeit.

The most expensive NFT ever sold was ‘The Merge’ at a whopping $91,800,000. However, this was purchased not by one but by over 20,000 people with the NFT being split into 312,686 coins distributed among buyers.

Fast forward to 2024, a report published by NTFevening said that 95 per cent of NFTs are considered ‘dead’. Currently, an average NFT owner is experiencing a loss a rate of 44.5 per cent.

Laetitia Berthet, COO of LAKE (LAK3) argued “The most resilient Web3 use cases are Decentralised Finance (DeFi), non-fungible tokens (NFTs) with utility, decentralised identity solutions, and gaming with Play-to-Earn (P2E) models.”

• DeFi protocols like Uniswap, Aave, and Compound have addressed a real need for decentralised financial services. 
• NFTs have evolved beyond speculative art to utility-driven applications like ticketing, gaming, and membership communities. 
• Gaming and P2E models, such as Axie Infinity, have proven resilient by creating immersive experiences where players can earn rewards and truly own their in-game assets, making blockchain gaming a sustainable use case.

One of the most intriguing aspects of Web3’s evolution is its apparent pivot from purely democratising the internet to serving as a crucial infrastructure. However, Melki suggests this is a false division.

“It is both,” he explained. “As a foundational layer, Web3 enables secure, trustworthy data exchange through technologies like encryption and decentralised wallets. These tools not only protect the content and data created by individuals but also reward them for their contributions.”

Where did it all go wrong?

The technology gap

One of Web3’s core challenges was the disconnect between its ambitious vision and technological reality. While proponents promised a seamless decentralised internet, the user experience remained clunky and complex.

Berthet explains that there are several hurdles that impacted the popularity of Web3:

• Education: Many potential users do not have a clear understanding of Web3 technologies making it difficult to adopt the Web3 codes. Developing resources to demonstrate how the technology works, what are the benefits, the functionalities.
• Non-user-friendly interface: Current Web3 platforms can be complicated and confusing, which makes it challenging for non-technical users to participate. Developers need to focus on seamless integration.
• Scalability: Many blockchains struggle to handle transaction speed and volumes. That’s the reason why we can see emerging layer 2  to improve it and also reduce fees.
• Security: The numerous hacks and scams can diminish trust in Web3 platforms. The Web3 environment needs to increase security protocols and encourage best practices to protect users’ assets.
• Lack of Web3 infrastructure: Developing countries often lack the necessary Web3 infrastructure, and in some cases, it is even banned, rendering Web3 unavailable. Governments have to be encouraged to adopt the web3 ecosystem including regulatory frameworks if needed. Countries need to partner with Web3 platforms to allow its democratisation.
• Real utility: Many projects in the past had no real utility in the Real World and on top of that, too often investors or crypto enthusiasts get interested in projects which never delivered. We need to see more utility projects/tokens allowing people to get access to real services and goods.

The speculation problem

The speculative nature of crypto markets ultimately proved toxic for Web3’s development. Rather than focusing on building useful products, many projects prioritised token prices and short-term gains.

“Focusing on real utility and better governance can stabilise token economies. Security and privacy issues also persist, requiring advancements in zero-knowledge proofs and robust security measures. Lastly, smooth integration with traditional systems through middleware and APIs is essential for Web3’s widespread adoption,” Varma explained.

The regulatory landscape proved particularly challenging for Web3 projects. The SEC’s aggressive stance on cryptocurrency classifications and enforcement actions sent shockwaves through the industry.

“Many Web3 companies that had secured significant investment struggled to meet revenue forecasts and failed to achieve user growth at expected levels. This resulted in severe cost-cutting measures and slowdown in the development of Web3 product market fit, causing optimism to fade,” Varma said.

On the other hand, Berthet believes that the future of Web3 lies in several key aspects:

• Mass Adoption: If more and more user-friendly apps are developed with real utility and offering benefits, a growing number of individuals and businesses will adopt Web3 technologies. Mass adoption will allow to have the whole process on chain allowing even more trust.
• Real utility: We will see the emergence of more practical applications of Web3 in various industries, such as finance, healthcare, charities, etc
• Unlocking opportunities: Web3 will enable unbanked individuals to access essential services, allowing them to start businesses, engage in trade, and enjoy the same opportunities as many others.
• Community Empowerment: More projects are expected to embrace decentralised governance models, giving communities a voice in decision-making.
• RWA: An increasing number of projects are aiming to bridge the gap between digital and physical assets. We can expect an even bigger rise in the tokenisation of various asset classes, which will make asset ownership more inclusive, efficient, and transparent. At LAKE, we are also witnessing an evolution in the RWA landscape, with initiatives like LAKE (LAK3) providing access to a Real-World asset: water, without the need to tokenise the asset itself. 

Infrastructure development continues

While public attention has waned, significant progress continues in Web3 infrastructure:

• Zero-knowledge proof technology has advanced considerably
• Account abstraction is making wallets more user-friendly
• Cross-chain bridges are becoming more secure and efficient
• Layer-2 scaling solutions are reducing transaction costs

The Web3 correction has yielded valuable insights for the industry:

• Technology first: Successful projects now prioritise technical development over marketing and tokenomics
• Regulatory compliance: Many survivors have adopted a proactive approach to regulatory compliance
• User experience: The focus has shifted to making products accessible to mainstream users
• Sustainable economics: Projects are building business models that don’t rely solely on token appreciation

While the grand vision of the next generation of the internet may have been premature, the core ideas behind it remain relevant. Decentralisation, digital ownership, and user-controlled data continue to resonate, especially as concerns about big tech’s power grow.

“The future of Web3 holds the potential to fundamentally reshape the internet,” Varma said.

“As Web3 evolves, it promises a more user-centric internet where individuals have greater control over their data, identity, and digital assets.”

Several trends could shape the technology’s future evolution:

• Real-world assets: The tokenisation of traditional assets like real estate and securities
• Gaming: Web3 gaming projects focusing on gameplay over tokenomics
• Enterprise adoption: Major companies experimenting with blockchain technology
• Identity solutions: Decentralised identity and reputation systems

Rather than a complete shift, Web3’s focus has evolved, emphasising infrastructure as a critical step toward achieving its original goal of democratising the internet,” Varma said.

“This pivot toward building secure, scalable, and interoperable infrastructure is a practical response to the challenges of enabling decentralised applications to thrive. The community recognised that philosophical ideals alone wouldn’t suffice—Web3 needed technological advancements that could support real-world use cases, ensure security, and foster ecosystem-wide interoperability,” he explained.

The future of Web3 lies not in replacing existing systems but in complementing them. Melki outlines several integration possibilities:

“Web3 can complement with smart contracts,” he explained. “Smart contracts can automate processes like loans, approvals for trade settlements, trigger automatic payouts for insurances, automate royalty programs.”

Additionally, tokenisation creates new investment opportunities and enables fractional ownership, while blockchain technology provides transparency and traceability of operations.

Looking ahead, experts envision a convergence of technologies.

“Integration with AI and IoT → web3 will enable secure, transparent and traceable data record and sharing along with decentralised protocols for better security and avoid a central authority,” Melki predicted.

The technology’s true potential may lie not in its ability to replace existing systems, but in its capacity to enhance them through improved security, transparency, and automation.

“The next decade will shape the future of Web3. Either it will remain focused solely on financial aspects of blockchain technology and provide a new form of money, or it can go beyond that, changing the very fabric of society. This will definitely require going beyond purely financial applications,” Ivanov concluded.