How to diagnose malfunctioning wifi? Nexus One, cleared internal user storage to near-factory settings using the boot menu.
My computer is connected to wifi, and I have a USB tether to my phone.

But when I click on "Connect to wifi" -- even in the virgin "user setup" menu -- No networks are found, and the device becomes unbearably slow.

The device had functioned properly for 1.5 years ... until yesterday.

I don't know whether the problem is hardware or software.
If it is in software, I would like to fix it... but I don't have wifi, and I don't have 3G.

What are the steps to diagnose this problem?

If it is a software problem, what are the steps to fix it?
Tap the Menu button on your handset.
Tap Settings.
Tap Wireless and Networks.
Tap Wi-Fi settings.
Tap the Menu button again.
Tap Advanced ( Figure B ).
Tap the Proxy setting and make sure your
Android device is not set up for a Proxy.
(Unless the Wi-Fi network you are on
requires a Proxy, this setting will get in the
way of your device's access to the computer)
If you tap on Proxy and see an IP address or
domain, delete it.