As DeFi takes over the cryptosphere, will the zombie projects remain dead after the great repricing?
Data by crypto analytics firm Messari shows that many of the projects once favored by the market are still far from their all-time high. Matt Casto, an analyst at CMT Digital, tweeted a compilation of 410 crypto assets that hit their all-time high in 2017 or later, which showed an average loss of 65.71% for all the projects combined.
Out of the 410 assets analyzed, 157 hit their all-time high in 2018, having lost since then an average of 90.71% in value. A further 67 assets hit their all-time high in 2019 and have since lost 73.33%. In contrast, projects that have hit their all-time high in 2021 have only shed 13.82% of their value.
According to Casto, holding assets that have hit their all-time high in the last three years is “a massive lost opportunity cost for deploying capital.” The data illustrates how the market favors hype cycles and speculates on coins that often have little to add to the cryptosphere as a whole.
While the current crypto rally has also been reflected in many of these coins, they are still far from their all-time high, as the data shows. In the meantime, tokens in the DeFi ecosystem have been breaking their all-time highs continuously, showing that for many of these coins, their best days are yet to come and that it’s happening at the expense of the zombies.
The great repricing
While Bitcoin (BTC), the oldest cryptocurrency, has continued to show gains throughout the years, most other “old” coins have not shown the same tendency. Data from Messari further confirms the concept of the “great repricing,” which states that many of the top altcoins in the market will be replaced by newer sectors such as decentralized finance.
When asked about the great repricing, Ryan Watkins, senior research analyst at Messari, told Cointelegraph that it’s “definitely not just hype” but rather “real fundamentals, high growth, strong product-market fit.”
These once-prevalent altcoins are becoming known as “zombie projects” and are usually layer-one blockchain protocols, many of which compete directly with Bitcoin and Ethereum, either as a form of currency or platforms for asset issuance, smart contracts and more. With both BTC and Ether (ETH) maintaining their relevancy, many of these projects are now generally seen as being obsolete or having failed.
As for DeFi, the ability to generate yield from cryptocurrencies and stablecoins, along with the possibilities for decentralized and superior financial services, makes it one of the most interesting (and risky) investment choices of 2021. As such, capital that once flowed into these assets during the alt season of 2017 and 2018 is now being redirected to the promising DeFi sector, most of which is hosted on the Ethereum network.
Why do projects become irrelevant?
While many of the aforementioned zombie projects started out with potential, they were often launched with a single feature or purpose in mind: coins that focused on privacy or speed or projects providing a specific service such as file-sharing or asset issuance.
However, as Ethereum continues to be the go-to place for developers to create new functionalities in crypto, many of these features or purposes have been incorporated within the Ethereum ecosystem itself, making many layer-one projects obsolete. The same can be said for Bitcoin, whose developers continue to strive to make faster and anonymous payments a reality through projects such as the Lightning Network and more.
Throughout the years, Ethereum has garnered what is known as the “network effect,” where all the services required by users are found in one place. Therefore, it’s more convenient to stay inside a single network and to use only one cryptocurrency to pay for these services, the most popular of which has become DeFi’s yield-generating protocols, such as Yearn.finance and Compound.
It’s also worth noting that many of the coins that hit their all-time high in 2018 were competitors to Bitcoin and Ethereum. The two top cryptocurrencies have turned out to be resistant to the test of time. Bitcoin’s superior safety has proven itself in comparison to competitors that have been victims to 51% attacks on the networks.
On the other hand, the hype generated around initial coin offerings also had a huge role in making these projects relevant, to begin with, as the cryptocurrency bubble of 2017 and 2018 pushed the prices of these tokens to unrealistic levels.
Once the hype is gone, the crypto community seems to have lost the appetite for these projects, while some have been all but forgotten. Ilya Abugov, advisor at DApp statistics aggregator DappRadar, told Cointelegraph: “Startups fail at a very high rate, so it is only natural that many of the projects from the 2018 wave will not recover.”
Why are zombie projects still going?
Despite being far from their all-time high, a small number of these projects has shown gains during the current bull market, some of which have shown four-figure percentage gains.
Many projects are kept going by their community of investors who believe in long-term success. Some of these have made strides in some features or shown success in the DeFi realm.
However, it’s hard to say if this will last, especially as Ethereum continues to dominate the DeFi sector. According to Abugov, this may soon change since “it takes time for useful DApps to emerge on a platform. Ethereum had a head start.” He added further:
“It wouldn’t be surprising if some of the challengers start to show some meaningful activity this year. Market cap rankings don’t show developer activity. For some chains, the market may be trying to price in prospects of future growth.”
Is DeFi here to stay?
As the top altcoins from yesteryear fade out of the spotlight, the DeFi sector continues to take the world by storm with projects such as Aave, Uniswap and SushiSwap being among the top gainers in January, rising over 200% in the last 30 days. Isa Kivlighan, digital marketing manager at Aave, told Cointelegraph that “DeFi is just getting started,” adding:
“After recent trends in the TradFi space, people are calling for permissionless finance with none of the traditional exclusionary ‘gatekeepers.’ DeFi is becoming more accessible to the mainstream every day.”
The initial DeFi boom in the first quarter of 2020 counted with a lot of overhyped projects, some scams, rug pulls and hacks, and some compared it to the ICO craze of 2017–2018 when worthless projects were pumped for no apparent reason other than pure speculation.
Although hype is still part of the current scenario, the second surge of DeFi seems to favor promising projects with an already-working product, with pre-DeFi projects still lagging behind, as Dr. Octavius, co-founder of DeFi protocol OctoFi, told Cointelegraph:
“A vast majority of the most active market participants weathered the storm and are now well equipped with a crypto quiver. Their due diligence extends beyond skimming a white paper, and that’s because there are real products now. Nothing beats getting your hands dirty and taking something apart to see how it works. Or simply pressing the wrong button and seeing it blow up in your face.”
Meanwhile, new sectors of the cryptosphere have been gaining traction, especially nonfungible tokens. These types of tokens allow nonfungible assets, virtual or physical, to be represented in a digital setting, facilitating proof of ownership, transactions and sales. NFTs are often used to represent in-game items, digital artwork and more.
While NFTs may become increasingly popular in the future, there seems to be a synergy between them and decentralized finance, where DeFi concepts, such as decentralized trading, can be applied to the NFT sector, and NFTs can be used to gamify DeFi apps, among other examples. Abugov believes that DeFi is here to stay, despite the growth of other sectors in crypto. He told Cointelegraph:
“DeFi is a sector, and it’s not going away, just like L1 infrastructure didn’t go away because a lot of L1 projects haven’t been successful. The competitive landscape may change, but DeFi provides vital utilities to the market, so it is here to stay.”