This past summer, the Web3 world was ablaze with the latest gold rush: node sales and the explosive hype surrounding Decentralized Physical Infrastructure Networks (DePINs) and AI integration. Slick marketing campaigns promised untold riches, passive income streams, and a chance to be part of the next technological revolution. Investors threw caution to the wind, pouring money into projects without so much as a second glance at the underlying economics.

But beneath the glossy veneer and grandiose promises lies a stark reality: Many of these projects are already teetering on the brink of collapse, doomed by their reckless disregard for fundamental supply and demand dynamics. In their frenzied pursuit of quick cash, they’ve locked in crippling supply-side costs without cultivating the demand necessary to sustain their networks.

Drawing lessons from Warren Buffett’s time-tested investment wisdom, particularly his focus on productive assets, we’ll expose how this rampant negligence isn’t just irresponsible—it’s a recipe for disaster. Buckle up, because we’re about to unveil the uncomfortable truths that the slick salesmen of the Web3 hype machine don’t want you to see.

Part 1: The Summer of Delusion—Node Sales and DePIN Hype Run Amok

The Frenzied Node Sale Circus

This summer wasn’t just hot; it was feverish with the mania of node sales. Projects sprang up overnight, each peddling nodes like snake oil merchants at a 19th-century fair:

  • “Get in early and earn guaranteed passive income!“
  • “Be part of the decentralized revolution and watch your investment skyrocket!“
  • “Limited nodes available—don’t miss out on this once-in-a-lifetime opportunity!“

The fear of missing out (FOMO) was expertly weaponized. Investors, blinded by greed and the allure of easy money, snapped up nodes without a second thought. But what were they really buying? In many cases, overpriced hardware or software licenses for networks that had no real user base, no proven demand, and no viable path to profitability.

DePIN and AI Hype: The Emperor’s New Clothes

Not to be outdone, other projects draped themselves in the buzzwords of the moment: DePINs and AI. They promised to revolutionize industries, disrupt the status quo, and deliver unparalleled value—all through vaguely defined “innovations” that often amounted to little more than smoke and mirrors.

Behind the grandiose claims, a common thread emerged: A complete disregard for actual market needs. These projects weren’t building solutions to real problems; they were constructing elaborate façades to lure in unsuspecting investors.

Part 2: Warren Buffett’s Timeless Warning Ignored

Productive Assets vs. Speculative Gambles

Warren Buffett didn’t become one of the world’s most successful investors by chasing hype. His philosophy centers on investing in productive assets—businesses that generate real value by meeting genuine demand.

Buffett’s approach is a stark contrast to the reckless speculation we’ve seen in the Web3 space:

  • He invests in companies with solid fundamentals, not in fleeting trends.
  • He looks for sustainable competitive advantages, not gimmicks.
  • He values proven demand over hopeful projections.

The Toll Bridge Parable

Buffett often cites the example of a toll bridge:

  • Essential Service: People need to cross the river daily.
  • Consistent Revenue: Every crossing generates income.
  • Low Maintenance Costs: After construction, the ongoing expenses are minimal.

Now, imagine building a toll bridge in the middle of nowhere, where no roads lead to it and no one needs to cross. Sounds absurd, right? Yet, that’s precisely what many of these utility token projects are doing—erecting infrastructure with no consideration for whether there’s any demand to use it.

Part 3: The Inevitable Collapse—How Ignoring Economics Leads to Disaster

Locked-In Supply Costs: A Self-Inflicted Wound

These projects have committed the cardinal sin of business:

  • Massive Upfront Expenditures: They’ve sunk enormous amounts of capital into building networks and selling nodes.
  • Fixed Operational Costs: They’re burdened with ongoing expenses that can’t be adjusted in response to market conditions.
  • Token Inflation: Any network with a fixed number of nodes has to share the earnings broadly, resulting in wider inflation of the output token and increased sell pressure as each noe only makes just enough to cover fixed costs.
  • Zero Flexibility: With costs locked in, they have no room to maneuver when things go south.

Ironically, when the sharing economy products first took off, such as Uber or AirBnb, their main value driver was unseating ‘licensed markets’ such as Taxi Medallions and Hotel Permits. Now, it seems, web3 has come full circle to reinventing the licensing markets and ultimately building back the gatekeeping that created these opportunities in the first place. Good news, though - Real DePINs can recapture these markets easily with elastic supply!

The Demand Mirage

But where are the users? Where’s the demand that’s supposed to make these networks viable?

  • Nonexistent User Base: Many projects have failed to attract any meaningful number of users.
  • Lack of Value Proposition: They haven’t offered compelling reasons for users to adopt their platforms.
  • Negligent Marketing Efforts: They’ve spent more on hyping node sales than on understanding and cultivating their target market.

The Token Value Death Spiral

The consequences of this negligence are dire:

  1. Oversupply of Tokens: With no demand, the market is flooded with tokens that no one wants.
  2. Plummeting Token Prices: Basic economics dictates that excess supply with low demand leads to falling prices.
  3. Investor Exodus: As token values crash, early investors panic and sell off, exacerbating the decline.
  4. Network Instability: Nodes drop off the network due to lack of profitability, leading to degraded performance.
  5. Project Abandonment: Ultimately, the project collapses under its own weight, leaving a trail of financial wreckage.

Part 4: The Root Cause—A Blatant Disregard for Supply and Demand Dynamics

Economic Illiteracy or Willful Ignorance?

It’s hard to tell which is worse: that these project leaders didn’t understand basic economics, or that they chose to ignore it in pursuit of quick cash. Either way, the result is the same—a catastrophic failure that’s entirely self-inflicted.

The Illusion of “Build It and They Will Come”

This misguided belief has led many projects to:

  • Overinvest in Infrastructure: Without validating market need, they’ve built networks no one asked for.
  • Neglect Demand Generation: They’ve failed to engage potential users or understand their needs.
  • Assume Automatic Adoption: They’ve naively believed that technology alone would drive user engagement.

Real-World Consequences

The fallout isn’t just theoretical; it’s happening right now:

  • Disillusioned Investors: People who’ve sunk their money into these projects are facing substantial losses.
  • Damaged Industry Reputation: These failures tarnish the credibility of the entire Web3 space.
  • Lost Opportunities: Resources wasted on doomed projects could have been invested in ventures with real potential.

Conclusion: Wake Up Before It’s Too Late

The Web3 community needs a reality check. The reckless abandon with which projects have ignored fundamental economic principles is not just foolish—it’s dangerous.

Key Takeaways:

  • Demand Must Precede Supply: Building without a proven need is a fool’s errand. (some exceptions apply, see reflexivity, and how markets can create momentum - George Soros)
  • Flexibility Is Essential: Locked-in costs are a ball and chain that can drag a project under.
  • Economic Principles Matter: Supply and demand dynamics are not optional considerations; they are the bedrock of any successful venture.

A Call to Action:

It’s time for investors, developers, and the entire Web3 community to pull their heads out of the sand:

  • Investors: Do your due diligence. Don’t be swayed by hype or grandiose promises. Demand solid business plans that prioritize demand generation and economic sustainability.
  • Developers and Project Leaders: Stop chasing quick cash through node sales and token offerings. Focus on creating real value by solving genuine problems.
  • The Community at Large: Hold projects accountable. Don’t let flashy marketing overshadow the need for substance.

In our next post, we’ll explore how embracing elastic supply models and leveraging market forces can lead to more sustainable decentralized networks. We’ll delve into how the DePIN Projects that exemplify this approach can balance supply and demand, avoiding the pitfalls that have plagued recent projects.

Read Part 2: Embracing Elastic Supply—How DePINs can be designed to reward investors AND node operators, without compromising on performance

Disclaimer: This post is for informational purposes only and does not constitute financial advice. Always conduct your own research before making any investment decisions.