Are you investing in a “zombie blockchain”?

A look at multibillion dollar protocols that are dead in the water

Hey anon,

One of the most exciting things about crypto is the speed at which it moves. There’s nothing quite like it. The speed of innovation is such that folks are always busy working on “the next cool thing.”

However, as crypto moves on, several narratives fall by the wayside.

For example, the following chart shows how certain narratives have performed over the last three months.

Look at how far the L2 narrative has fallen! At the beginning of the year, L2s were one of the hottest narratives in the market.

Of course, this doesn’t mean that Layer 2 solutions, or any “dead” narratives, are no longer important. 

However, it's crucial to recognize that even the presence of intelligent individuals, well-coordinated teams, and significant financial backing cannot offset the challenges posed when public interest, mindshare, attention, and liquidity are increasingly directed towards new and shiny protocols. 

Recently, Forbes released a list of “zombie” tokens - that have little to no activity despite having more than a billion dollars in marketcap.

Let’s review some seemingly dead-in-the-water narratives/coins the market has moved on from. Our goal with today’s newsletter is to give you a different perspective on the state of the market. 

Would you rather inject your daily dose of hopium and pray for your XRP bags to “show mad gainz bruh,” or would you rather make pragmatic investment decisions? 

Hopefully, today's newsletter will teach you how to make the correct decision.

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#1 The Walking Dead

Cryptocurrency markets often feature what are termed "zombie blockchains," projects that continue to hold substantial market valuations despite showing minimal real-world utility or active user engagement. 

These blockchains persist largely because of speculative trading and initial funding rather than genuine technological or practical achievements. Projects like Ethereum Classic, Ripple, and Algorand exemplify this phenomenon, boasting multi-billion dollar valuations while generating negligible transaction fees, a clear indicator of low actual use.

The problem with zombie blockchains is not just their lack of adoption but also the misleading optics they create within the crypto market. Investors and newcomers might be drawn to their seemingly robust market caps without understanding that these valuations do not reflect true utility or a sustainable user base. 

This situation clouds the investment landscape and potentially diverts attention and resources away from more viable and innovative blockchain technologies that could genuinely transform industries or improve operational efficiencies.

Let’s take a look at Cardano. 

Despite having a marketcap of close to $16 billion, it generated less than $3 million in transaction fees in 2023.

And as we stated above, it has nothing to do with “bad tech” or a “lazy team.” 

Cardano prides itself on its research-first and functional programming approach. Plus, Cardano regularly ranks high when it comes to developer activity.

Cardano simply hasn’t been able to gain traction when it comes to user activity and liquidity.

With a little over $270 million liquidity locked up, Cardano is not even in the top 15 chains by TVL - this despite being the 11th largest coin in the world by marketcap.

Ok, let’s forget about DeFi. What about Dapps, in general?

The chart above from DappRadar ranks layer-1 platforms by the number of total unique active wallets (UAW) currently active on the chain's Dapps. With 53.62k UAW, Cardano once again fails to make the top 15.

As such, its safe to assume that Cardano is a textbook example of a zombie chain that’s currently overvalued thanks to speculative trading of its token.

#2 The Many Bitcoin Forks

Being the OG coin, it makes sense why Bitcoin was forked multiple times by various developers. 

Do you like Bitcoin? You are definitely gonna like Bitcoin lite..aka Litecoin! 

What about private Bitcoin, aka Dash? (They eventually changed their source code to no longer be just a fork.) 

Or, what about Bitcoin with bigger block sizes - Bitcoin Cash- and even bigger block sizes led by a fake Satoshi? Bitcoin SV.

So, yeah, the market got flooded by these forks, and they somehow managed to attract billions of dollars worth of marketcap.

How have they been performing, you ask? Well…here’s how much liquidity the top Bitcoin forks - Litecoin, Bitcoin Cash, and Bitcoin SV attracted in 2023:

  • Litecoin (LTC): $388,452

  • Bitcoin Cash (BCH): $49,225

  • Bitcoin SV (BSV): $49,863

Those are not good numbers.

However, to make things even more damning, let’s check how BCH has been doing when it comes to block space.

This is very important since the block size is extremely central to BCH’s identity. Here is a brief history lesson.

Back in 2017, the Bitcoin community got split in two since they failed to answer a simple question.

“Does size matter?”

Specifically…does block size matter.

Back then, Bitcoin’s block size was limited to 1 MB. The BCH community demanded 4 MB block sizes. The community eventually broke off with two blockchains - BTC and BCH.

BCH has since further increased its block size to 32 MB.

But how much of this block size is BCH using?

Well…not so much. Over the last 3 years, BCH blocks exceeded 1.5 MB just twice. In fact, most of the time, the block size barely exceeds 0.5 MB.

Let’s compare that with Bitcoin.

As you can see, Bitcoin's block size has hovered around 0.8 MB over the last 3 years. So, even with a larger block size than Bitcoin, BCH blocks are still lighter than Bitcoin’s on average!

It seems like “Bitcoin Forks” have been zombie chains for quite some time.

Moving on to some of the most interesting coins from the past, it seems they are turning into zombie chains despite their initial promise to revolutionize the crypto landscape, enter privacy coins.

#3 The Death Of Privacy Coins?

Remember coins like Dash, Zcash, and, most notably, Monero? These coins were among the largest in previous cycles, but it appears that interest in them has significantly waned. We're not dismissing privacy coins, but it seems that both the market and retail users have largely moved on from these coins over time. 

Interestingly, despite the decreased interest, these coins still maintain substantial market caps. Specifically, for Monero, many staunch supporters continue to believe in its technology and its role in a world where government intrusion into personal privacy is a growing concern.

Now, let's delve into the quantitative data regarding these once-prominent cryptos and assess the likelihood of their value surging during this bull cycle, especially if you currently hold positions in them.

Breaking it down

Let's examine the leading privacy coins by market capitalization. It's worth noting that post Bitcoin halving has seen a downturn across the market, and the current decline in these coins is reflective of broader market trends. 

Monero stands out as the largest privacy coin by market capitalization, with a valuation exceeding $2B.

Regulatory Crackdown

The decline of privacy coins can largely be attributed to concerns surrounding their regulation and the potential repercussions for holding them. Many crypto users appear reluctant to risk drawing the ire of government authorities, despite many believing in the importance of privacy rights. 

The prevailing fear of government intervention has significantly influenced the adoption of privacy-focused services like Tornado Cash, as well as the recent arrests of founders and developers associated with the Samurai wallet. This shift in user sentiment highlights the profound impact that regulatory concerns are having on the broader crypto landscape.

Additionally, major cryptocurrency exchanges, including Huobi, Binance, and Kraken, have responded to regulatory pressures by restricting or completely delisting privacy coins such as Monero. 

While the debate over the role of privacy technologies in society continues, the prevailing sentiment appears to prioritize caution in the face of potential regulatory scrutiny. Use of services such as Tornado Cash has dwindled by users across the globe, and not just in the US. 

Attention Economy vs Privacy Coins

The crypto market of earlier cycles was considerably simpler than it is today. Back then, the variety of available cryptos was much more limited, and regulatory oversight had not yet reached its current extent. Moreover, the narratives driving the crypto market were relatively few, making it easier for certain types of coins, such as privacy coins, to gain traction and flourish.

The on-chain volumes for Dash are presented below. Interest appeared to be consistent between each cycle top, but following the 2021/22 bull run, both interest and volumes have significantly declined.

Dash real volume. Source: Messari.

Over time, however, the factors that once favored privacy coins have shifted. Today's market is characterized by a broad array of cryptos and a complex web of activities and purposes that each aims to serve. This diversification, coupled with increased regulatory scrutiny, has made the environment more challenging for privacy-focused cryptocurrencies.

A significant factor that has grown in importance in the crypto world is the narrative surrounding coins and their potential to generate substantial profits within a very short time frame. Often, the allure of high returns overshadows the underlying technological or philosophical aspects that might have initially driven interest in these coins. 

Unfortunately, the majority of cryptocurrency users are more motivated by potential financial gains than by a genuine interest in the technology or a commitment to privacy. This trend has been detrimental to privacy coins, which have largely fallen victim to these changing market dynamics.

This shift reflects a broader trend in the cryptocurrency market, where speculative interests often overshadow foundational technological innovations. Another example of this can be seen with Zcash, which was once one of the most popular privacy-oriented coins. Interest and trading volume for Zcash have plummeted, and it is unlikely that they will recover.

Zcash real volume. Source: Messari.

In summary, it's clear that a multitude of factors continuously influence how the market reacts to and values various projects. It is rare for older projects to experience a revival; instead, the most compelling and current narratives tend to drive interest and produce the highest returns.

Looking To The Future

If you're holding onto the projects mentioned in today's letter, it's unlikely they will deliver the returns you're seeking. However, that's where we come in! We consistently cover the latest trends, providing insights into the numerous narratives currently unfolding in the crypto space. Take a look at the dune dashboard below as an example of the ever-growing list of segments evolving in the market.

To avoid being stuck with non-performing assets from a zombie chain, it's essential to stay dynamic and continuously seek out high-quality information. Publications like Crypto Pragmatist can be invaluable as they provide updates on evolving narratives and developments across various fronts, including regulatory changes, market trends, and new technologies.

Another crucial strategy is recognizing when a narrative has run its course, making it a strategic moment to either switch to stables and wait for market conditions to play out or pivot to emerging narratives.

The emergence of "zombie blockchains"—projects that maintain substantial market caps despite minimal real-world utility—serves as a stark reminder of the risks of investing based on surface-level metrics like market capitalization alone. Investors must delve deeper into actual usage, development activity, and community engagement to assess the true viability of a project.

Ultimately, successful crypto investing requires a balance between emotional detachment and keen market insight. Engaging with knowledgeable communities and continuously educating oneself about new market trends and technologies can significantly enhance an investor's ability to make informed decisions. 

By adopting a dynamic approach to investment, which is based on a deep understanding of the broader crypto ecosystem and its various influences, investors can better position themselves to capitalize on opportunities while mitigating numerous risks, such as holding onto coins from chains that are essentially dead in the water.

Do you think it’s right to call Cardano a zombie?

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That wraps it up for today, anon! 

We trust you found this issue insightful. Remember, instead of getting emotionally attached to a narrative, learn which ones are helpful and which ones are dead and buried.

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