Layer One: Rethinking crypto’s “zombie chain” problem

Welcome to Layer One: the newsletter and podcast on the intersection of crypto and the real world. Hosted by The Block's Kelvin Sparks and John Wu, President of Ava Labs, Layer One brings you inside the institutional conversations driving blockchain forward.

In our upcoming episode, we’ll be joined by Matias Antonio, CIO at the Avalanche Foundation, and Eric Lu, Lead Economist at the Avalanche Foundation, to talk about their research into network economics.

In this week's newsletter, we're examining the “zombie chain” phenomenon and whether the multibillion-dollar valuations of some networks can still be justified by the economic activity taking place on them.

Ava Labs CBO says “zombie chains” are still a problem in crypto, suggests M&A as a solution

This Tuesday, Ava Labs CBO John Nahas spoke at the Wyoming Blockchain Symposium on the crypto industry’s “puberty phase.” In an informal interview with Jeff John Roberts, Finance and Crypto Editor at Fortune magazine, Nahas discussed the growing legitimacy of blockchain solutions across finance and enterprise, drawing a stark contrast with the speculative projects that thrived over the past decade.

He added that even following this sea change in the market, some of those legacy projects refuse to roll over despite failing to deliver on their goals. These are the so-called “zombie chains”: blockchains that maintain significant mindshare and market caps, despite measurably low adoption.

Of course, this dreaded designation is not an official label. Whether a particular network qualifies as a zombie chain is a matter debated, often tooth and nail, by its critics and supporters. This was evidenced by a controversial Forbes article from 2024 that named XRP — now the fifth largest cryptocurrency — as a zombie, alongside 19 other networks.

Forbes’ methodology was to take the market caps of major tokens, then divide these by their annual transaction fees. The higher the resulting number, the greater the implied disparity between the network’s value and its fee-generating activity.

However, the market has changed significantly in the two years since that piece was published: blockspace is no longer at a premium and average transaction fees have dropped drastically. As Antonio and Lu argue in the upcoming episode of Layer One, taking these in isolation is not a reliable measure of network activity; fee generation has largely shifted to the application layer, while the blockchains themselves are vying to recapture that value.

To account for this, we’ve revisited the question, this time including the annual application fees generated on each network — a combined figure we’ll call “ecosystem fees.”

To be clear, the goal of this exercise is not to label any particular networks as zombie chains; it is to quantify divergences between perceived value and observable economic activity. The result is a spectrum rather than a binary designation. This is also far from a comprehensive list — instead, we have included a snapshot of examples from different parts of the spectrum.

On one end are the benchmark cases: networks whose total economic activity appears more commensurate with their valuations. Hyperliquid is a standout example in this regard.

On the other are some high-profile blockchains that were previously billed as “Ethereum killers,” but have yet to gain anything near its traction. Internet Computer Protocol (ICP), for example, still maintains a market cap of over $1.3 billion, yet logged only $2,165,000 in ecosystem fees over the past year.

Cardano is another contender that has seen relatively limited network activity, although its supporters say it remains one of the most technologically accomplished chains. This is reflected in the figures, with a $7.5 billion market cap against just $11,470,620 in annual ecosystem fees. Founder Charles Hoskinson has himself addressed these challenges, saying earlier this year that market conditions could lead to a “wave of failures” across the network's DeFi and infrastructure projects in the coming months, citing funding logjams.

Merlin Chain and Movement Network, whose original developer filed for bankruptcy last month, are two examples from the newer cohort of blockchains whose market caps and network activity have fallen in tandem. Within the past four years, many new networks have raised vast sums from venture capital and launched at valuations over $1 billion, yet now sit below $50 million with limited ecosystem activity.

As for the future of these smaller, struggling blockchains, Nahas predicted that a “winnowing” is both necessary and desirable: “We don't need 57 different EVM chains that are a little bit cheaper, a little bit faster, a little bit ‘insert gimmick of the month.’”

One theoretical solution he proposes is a system of mergers and acquisitions, with larger, more successful chains absorbing smaller ecosystems. Whether this is a realistic possibility, or if the zombie chains will simply continue on until their treasuries run dry, remains to be seen.

Podcast Preview: Matias Antonio and Eric Lu on the Avalanche Foundation's Economic Research Agenda

In the Headlines: The stories driving the conversation this week

• Layer One co-host John Wu has stepped down as President of Ava Labs. In a blog post announcing the change, Wu named the firm’s COO Charley Cooper as his successor. Cooper previously served as COO at the CFTC, along with holding other major positions in traditional finance. Wu himself will be continuing as a Senior Advisor to the company. 
• TVL on Robinhood Chain has breached $540 million, with an additional $640 million in stablecoins on the network. The blockchain continues to gain traction as this summer’s breakout success story, despite concerns that its early success was due to an explosion in memecoin trading activity. The Block reports that the chain’s RWA volume, although up 120% for the month at $32 million, has largely lagged behind its wider TVL. 
• Rain CEO Farooq Malik has revealed that the firm now processes stablecoin payments for 100,000 merchants via the Visa network. During a conversation with Layer One co-host Kelvin Sparks at the Wyoming Blockchain Symposium, Malik added that most or all of those merchants are entirely unaware their transactions are settling via stablecoins — an example of blockchain rails becoming the invisible plumbing for commerce.

Top of the Charts: Most newer blockchains have suffered heavy losses, following billion-dollar valuation peaks

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Layer One is brought to you in collaboration with Avalanche.