Zombie companies are primarily companies that are heavily indebted, have low productivity, and rely primarily on external capital to service operating costs. Especially in times of crisis or when financing costs rise, these companies are quickly on the verge of collapse. But we can apply the term not only to companies but also to blockchain protocols.
Zombie Cryptocurrencies: What Makes Them Special?
The ICO hype of 2017 as well as the crypto hype phase of 2020 and 2021 flushed a lot of money into blockchain protocols. The crucial question now is: what happens to the money? Will it be used to further develop the protocols or will the founders make a good living out of it? Does the protocol also attract open source developers outside the company or foundation who are not on the payroll?
In addition to metrics such as the number of transactions or the total value locked in DeFi protocols, it is above all the developer activity that provides information about the future potential of a cryptocurrency. If you consider that the vast majority of developers are spread over the leading smart contract protocols, especially Ethereum with around 25 percent, then it stands to reason that very little is happening with the majority of cryptocurrencies. This is reflected in the developer contributions on GitHub by so-called commits. They make it easy to see which protocols receive a lot of submissions and which tend to have fewer or none at all.
A smart contract protocol where almost no transactions take place and in which virtually no developers are interested is practically doomed and with it the token holder’s investment. Therefore, unlike a company, it will be quite appropriate to designate a cryptocurrency as a zombie protocol, even if there is still sufficient money tied up in the fund or with the shareholders.
No intention, but lack of focus
Particularly vulnerable are projects that have lost their original focus, that have already lived through their heyday and now do not know exactly which applications to focus on. Instead of working out their USP, they jump from trend to trend. It has been shown, for example, with the emergence of NFTs, where many protocols from 2016, 2017 and 2018 have released uninspired and half-hearted NFT applications in a short period of time.
With enough money in the Foundation and in-house developers, many years can go by where a mature product doesn’t really come out, but every employee gets their salary at the end of the month. As an investor, one can only hope that at some point there will be a major breakthrough or a reorientation that will bear fruit.
Developer activity: The winners and losers
Reports such as those from Outlier Ventures or Electric Capital can be useful to get a classification of the development activity. The following protocols can claim the highest number of submitted pledges: Ethereum, Bitcoin, Polkadot, Cosmos, and Solana. The Solana and Avalanche protocols have seen particularly strong growth in recent months. The number of active developers is often related to the submitted commits, with Cardano in particular standing out here.
On the other hand, the following cryptocurrencies show a sharp decline, i.e. with significantly decreasing commit numbers: Bitcoin Cash, Axie Infinity, THORchain, BitTorrent and Dogecoin. In addition, the well-known Tron or EOS protocols stand out negatively in terms of the number of active developers. However, Bitcoin Cash leads the list of the fewest active developers. From the end of 2021, there should be only one active developer.
Typical crypto zombies: hard fork coins
Hard fork cryptocurrencies such as Bitcoin Cash or Bitcoin Satoshi Vision have a noticeably high zombie potential. If they were shares and not cryptocurrencies, then in this case one would talk about custodial assets. For example, millions of people still have Bitcoin Cash in their wallets from the hard fork at the time, even though the project can be described as a practical failure. Even Litecoin comes off particularly poorly in Outlier Ventures’ report in terms of commits and developer activity.
The situation is the same with Ethereum Classic, although this coin experiences a little hype from time to time, as is currently the case with the flight of the GPU miners who can no longer mine Ethereum. However, this brief boom is unlikely to be sustainable – not much is happening here from the developer side anymore.
Similar to zombie companies, zombie cryptocurrencies are also harmful to the entire ecosystem. Because they also tie up resources such as capital and, in particular, scarce talent. The latter in particular is desperately sought after by those projects where something actually happens.
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