Title: The Rise Of Crypto's Billion Dollar Zombies

By: Steven Ehrlich, Maria Gracia Santillana Linares, and Nina Bambysheva, Forbes reporters

Compiled by: Luffy, Foresight News

In 2012, blockchain pioneers Jed McCaleb, Arthur Britto, and David Schwartz founded Ripple Labs and created the cryptocurrency XRP, envisioning a new global financial standard that would enable banks to transfer money quickly and at minimal cost. In the first decade after Ripple's establishment, dozens of financial institutions, including Bank of America and Santander, signed agreements with it to test Ripple's new network. To support this ambitious project, Ripple executives created 100 billion XRP tokens and sold $1.4 billion worth of XRP to the public. By early 2018, at the peak of the cryptocurrency frenzy, XRP's market capitalization reached $132 billion, and co-founder and executive chairman Chris Larsen's net worth soared to $8 billion.

In terms of global capital flows, Ripple Labs has made little progress, and few believe it will disrupt the Belgian banking cooperative SWIFT, which facilitates $5 trillion in interbank transfers daily. Despite failing to accomplish its primary mission, the Ripple blockchain (XRP ledger) continues to operate. It is essentially useless, yet the market capitalization of XRP tokens remains at $36 billion, making it the sixth-largest cryptocurrency by value. Larsen remains a billionaire, with a net worth of about $3.2 billion. According to Messari data, last year, the Ripple blockchain network generated only $583,000 in transaction fees. Wall Street estimates this would give XRP a "price-to-sales ratio" of 61,689. The hottest stock on the market, Nvidia, has a market capitalization of over $2 trillion and revenue of $61 billion, with a price-to-sales ratio of 37.

Ripple Labs is a zombie cryptocurrency company. Its XRP tokens remain active in the trading market, with daily trading volumes of about $2 billion, but they have no utility beyond speculation. Not only is SWIFT thriving, but there are now better ways to conduct international payments via blockchain, such as stablecoins like Tether, which is pegged to the dollar and has a circulating value of $100 billion.

Ripple is not alone. A Forbes investigation found that, despite only a few blockchains achieving significant development beyond Bitcoin and Ethereum, there are currently over 50 blockchains valued at over $1 billion, with at least 20 being functional zombie networks. After the U.S. Securities and Exchange Commission approved a spot Bitcoin ETF, the cryptocurrency market surged. Forbes analyzed 20 blockchains, whose grand ambitions range from universal world computers to untraceable payment networks, with a total market capitalization of $116 billion, most of which are rarely used.

But don’t expect cryptocurrencies like XRP to stop operating anytime soon; these companies have billions of dollars in funding that allow them to continue existing for many years. Ripple currently holds $24 billion worth of XRP tokens that can be sold over the next four years. The San Francisco company has 900 employees and continues to issue press releases about recent events, such as its acquisition of digital asset custody business Standard Custody & Trust. More than a decade after its founding, it is still collaborating with central banks in places like Georgia and the Pacific island nation of Palau to run pilot cryptocurrency programs.

Matt Hougan, Chief Investment Officer of Bitwise Asset Management, stated, "It's like early venture capital funds or companies that raised too much money and don't know how to utilize it effectively, nor do they have a way to return the funds to investors."

Moreover, in the bizarre world of crypto assets, wealthy zombie blockchains do not face the issues that traditional companies do. There are no shareholders or regulators demanding financial disclosures, and shorting tokens is relatively difficult. As long as there are enough speculators willing to trade the tokens, wealthy zombie blockchains will continue to roam the crypto space.

A venture capitalist who wished to remain anonymous remarked, "There is no clear liquidation process for crypto protocols that are already dead."

The following 20 blockchains have a total market capitalization exceeding $10 billion, but they are virtually useless aside from speculative cryptocurrency trading. Most blockchain projects are well-funded, yet they report neither to shareholders nor to regulators.

Zombie blockchains can be broadly categorized into two types: those that are derivatives of early blockchains like Bitcoin and Ethereum, or those that are direct competitors. Derivative (also known as "hard fork") zombies include Bitcoin Cash, Litecoin, Monero, BSV, and Ethereum Classic. These five blockchains currently have a total valuation of $23 billion. They largely result from disagreements among programmers about how Bitcoin or Ethereum should operate. Since the underlying code of these blockchains is open-source, anyone can repurpose it for any reason. When disagreements arise among programmers, some of them split off and create a new network, a process known as a hard fork. Each time a new chain is created this way, it shares the same history as the original chain. Like stock derivatives, this means that all token holders at the time of the fork receive the same number of tokens on the new chain as they held on the original chain.

Litecoin is an early branch of Bitcoin. Launched in 2011, it is a faster and cheaper version for payments. It generates blocks four times faster than Bitcoin, producing a block every 2.5 minutes compared to Bitcoin's 10 minutes. Like Bitcoin, Litecoin processes transactions through proof of work, meaning many computers are idling (and consuming power) to solve meaningless mathematical equations. Litecoin's token supply is also strictly limited to 84 million, while Bitcoin's is capped at 21 million. Today, Litecoin has a market capitalization of $6.5 billion, but last year it generated only $389,000 in transaction fees, compared to Bitcoin's $800 million. Blockchain users pay fees to miners to incentivize them to process transactions in the next block. The fees generated by zombie blockchains like Litecoin are negligible, indicating insufficient demand for the platform. These blockchains also struggle to attract developers. According to Electric Capital's developer report, as of the end of 2023, Litecoin had only 74 monthly active open-source developers, while Bitcoin had over 1,000 and Ethereum had over 7,000.

Bitcoin Cash has an even higher market capitalization than Litecoin, at $7.9 billion, but it has only 30 active developers, with fee revenue of $49,000 in 2023. Bitcoin Cash was born out of a heated debate in 2017 over whether Bitcoin should increase its block size. This struggle was quite obscure. Essentially, supporters of Bitcoin Cash believed that cryptocurrencies should primarily serve as a medium of exchange (in other words, you should be able to buy things with it), while other community members wanted to prioritize its value storage function.

Bitcoin SV (BSV) is more controversial, as its spokesperson is Australian computer scientist Craig Wright, who has long claimed to be the inventor of Bitcoin, Satoshi Nakamoto. "I created Bitcoin," he stated in a 2023 interview with Forbes. In March, the UK High Court disagreed with this claim, ruling that there was "overwhelming" evidence that Wright did not write the original Bitcoin white paper, is not Satoshi Nakamoto, and did not create the "Bitcoin system." BSV was delisted by Coinbase in January but still maintains a market capitalization of $1.6 billion.

Among the zombie blockchains, Ethereum Classic (ETC) is unique as it is actually the original Ethereum chain. The Ethereum chain widely referred to today is actually a fork of ETC, created in 2016 to recover $60 million worth of stolen funds from an ETF (valued at $11.5 billion today). A significant portion of Ethereum supporters were concerned that altering the ledger history to recover funds would create moral hazards, so they decided to keep ETC as the original and unaltered codebase. One of the biggest supporters of this blockchain is Grayscale Investments in Connecticut, the world's largest crypto asset management firm, whose billionaire founder Barry Silbert is an outspoken ETC bull. ETC has a market capitalization of $4.6 billion, but it generated less than $41,000 in transaction fees in 2023.

Among the five derivative blockchains analyzed by Forbes, none of the crypto industry insiders or data analytics firms we consulted could point to any serious use for these platforms beyond simply trading their tokens.

"What keeps these zombie companies alive is liquidity," said one venture capitalist. "Litecoin was one of the first tokens supported by Coinbase, and many people hold Litecoin."

Bob Summerwill, Executive Director of the Ethereum Classic Cooperative, added, "ETC is listed on almost all exchanges due to its history, which generates quite a bit of trading volume, much of which is speculative."

ETC's trading price has risen 31% from a year ago, while ETH has increased 77%. Bitcoin Cash has outperformed Bitcoin, which has risen 121% over the past 12 months and hit an all-time high in mid-March, while Bitcoin Cash rose 164% during the same period.

The largest group of zombie networks consists of potential challengers to Ethereum. Most claim to have made technical improvements on the Ethereum foundation established by Vitalik Buterin in 2014, as Ethereum can only handle a dozen transactions per second and incurs high fees during peak usage. Tezos, established in late 2014, was one of the first blockchains to use proof of stake (instead of proof of work) to create new tokens. The details are confusing, but proof of stake is favored by many crypto enthusiasts because it does not require the energy-intensive computational power needed for Bitcoin mining.

Tezos raised $230 million in its initial coin offering (ICO) in 2017, and its XTZ token currently has a market capitalization of $1.2 billion. However, it processes about 130,000 transactions daily, while Ethereum handles 1.2 million, and its total value locked (TVL) on the network is only $66 million. For blockchains like Ethereum, TVL is widely used as a measure of health, as these blockchains aim to host a variety of applications ranging from cryptocurrency exchanges to video games and NFTs. Ethereum has over 4,500 applications with a TVL of $48 billion.

In terms of "baking" (the term used in the Tezos community) fees, revenue in February 2024 was $5,640, while the total revenue for 2023 was $177,653. Arthur Breitman, who co-founded Tezos with his wife Kathleen, insists that this figure is far below the actual total. According to Breitman, 75% of the total fees paid to the network are in the form of XTZ tokens, which are often taken out of circulation (or "burned"), thus not counted in the reported fee figures. Breitman estimates that the Tezos treasury has $700 million in funds and insists that only 20% of the funds are held in the form of XTZ tokens. "There are a lot of Bitcoins, and the rest is a diversified portfolio of stocks and bonds," he said.

His claims cannot be verified. Tezos development is funded by the Switzerland-based nonprofit Tezos Foundation. Its mission is "to promote the Tezos protocol through grants and other capital deployment tools." In the first half of 2023, the Tezos Foundation awarded up to $18 million in grants to 31 beneficiaries.

There’s also Algorand, which has a market capitalization of $2 billion and is well-funded. Algorand was once seen as an "Ethereum killer" due to its ability to process 7,500 transactions per second, but in 2023, its blockchain transaction fees were only $63,000. "Their technology may be on par with other blockchains, but there isn't much activity on-chain because they lack a commendable community and talent outside of the founders," said a prominent crypto strategist.

Eric Wragge, responsible for business development at the Algorand Foundation in Singapore, countered, "We are in an Uber model—every person who gets in the car is losing us money." Their executive team is rapidly depleting. Over the past two years, the Algorand Foundation has hired a new CEO and completely restructured its entire executive team.

Some zombie blockchains seem to survive entirely on the popularity of their creators. Another competitor to Ethereum, Cardano, launched in 2017 when its co-founder Charles Hoskinson fell out with Ethereum co-founder Buterin. Cardano has a market capitalization of $23 billion and a total value locked of $396 million. Although the Cardano Foundation itself states that it has not completed its development phase, it generated $3 million in transaction fees last year.

Hoskinson himself is also quite a character. He owns an 11,000-acre ranch in Wyoming, funds an organization that claims to hunt aliens, and recently opened an anti-aging and regenerative medicine center in Gillette. He is not always a reliable narrator. He claims to have dropped out of the math PhD program at the University of Colorado Boulder, but the school states that Hoskinson was an undergraduate student who did not complete his degree. For years, he has hinted that he worked for DARPA, the Pentagon's famous research department. What he has done is boast about Cardano to his 980,000 followers on X.

Matt Hougan of Bitwise stated, "Is Cardano a blockchain that has yet to become profitable and is still building its architecture, or is it just a future pilot that will never materialize?"

The 20 zombie blockchains we listed are just the most obvious examples in digital asset trading, completely disregarding the practicality or viability of their underlying projects. There are many more zombie blockchains lurking around. According to CoinGecko, there are over 13,000 cryptocurrencies listed on various exchanges, most of which exhibit characteristics of speculative penny stocks, simply representing ownership of nothing. With the surge in Bitcoin, the total value of all cryptocurrencies today is about $2.5 trillion.

This seems like a great shorting opportunity, but according to cryptocurrency trading firms, it is difficult to bet against zombie blockchain tokens because borrowing large amounts of underlying tokens to short is not easy. Additionally, given the irrational and volatile trading history of cryptocurrencies, the risks of shorting are extremely high. Any token could suddenly transform into a meme coin based solely on a late-night tweet from Elon Musk.

Take Ethereum Classic as an example. In August 2020, when ETC's trading price was about $6 per token, it suffered three so-called 51% attacks within a month. This occurs when a single token holder controls more than half of the network's computing power, which is used to create blocks and "manage" the platform. If these "malicious takeovers" were permanent (which they are not), they could allow the blockchain's supposedly immutable ledger to be altered. In other words, anyone with 51% of the computing power could reverse previously settled transactions or mint an unlimited number of tokens for themselves. Despite Ethereum Classic exposing security issues three times in a month, it survived a potentially fatal blow in the summer of 2020, and its current trading price is $31.

The Department of Justice and the U.S. Securities and Exchange Commission's approach to combating cryptocurrency fraud and theft is to trace large cryptocurrency exchanges. FTX has been shut down, and its founder Sam Bankman-Fried is in prison. Binance founder Changpeng Zhao has been ousted from the company, and last year, Zhao admitted to violating anti-money laundering and sanctions regulations, forcing his exchange to pay a $4.3 billion fine.

Two other major exchanges, Coinbase and Kraken, have also been sued by the SEC for acting as unregistered securities brokers and exchanges. Several zombie blockchain tokens, including Cardano and Algorand, are considered securities.

Will token holders be able to access the billions of dollars stored in the "treasuries" of these blockchain zombie companies? Unfortunately, that may be out of reach. Yesha Yadav, Vice Dean of Vanderbilt University Law School, stated, "It requires a basis for litigation and actual damages such as fraud." She noted that past cases have had disagreements over whether decentralized organizations or foundations should be held accountable.

In September 2022, the federal government sued participants in a decentralized autonomous organization called Ooki DAO, accusing them of selling unregistered commodity futures. In June, a California court ordered the organization to pay a $644,000 fine. This money was supposed to be deducted from its "decentralized" treasury, but the government is still waiting for payment. Two months later, a federal judge in New York dismissed a lawsuit against the decentralized cryptocurrency exchange Uniswap, ruling that there was no centralized entity as a "recognizable defendant."

Don’t expect any well-funded, inactive blockchains to shut down anytime soon. They are busy spending money on projects with no prospects. In March of this year, the Stellar Development Foundation announced it would invest $100 million in companies planning to use its new smart contract platform, a nonprofit organization managing the zombie Stellar's $2.5 billion funds, which is seeking to diversify its business beyond its nearly nonexistent payment operations.