Exploring Crypto’s Billion-Dollar Blockchains With Very Few Users

Forbes

Steven Ehrlich, the director of Forbes Digital Assets, joins ‘Forbes Talks’ to discuss blockchains worth over $1 billion despite having few users.  0:00 Introduction 2:25 Steve Explains The Zombie Presence In Crypto/Bitcoin Right Now 4:39 How Did These Blockchains Acquire Treasuries? 6:45 Can Blockchain Come Back To Life? 9:28 How To Get Your Hands On A Bitcoin Treasury  Read the full story on Forbes: https://www.forbes.com/sites/stevenehrlich/2024/03/27/the-rise-of-cryptos-billion-dollar-zombies/?sh=cbcf07954b86  Subscribe to FORBES: https://www.youtube.com/user/Forbes?sub_confirmation=1  Fuel your success with Forbes. Gain unlimited access to premium journalism, including breaking news, groundbreaking in-depth reported stories, daily digests and more. Plus, members get a front-row seat at members-only events with leading thinkers and doers, access to premium video that can help you get ahead, an ad-light experience, early access to select products including NFT drops and more:  https://account.forbes.com/membership/?utm_source=youtube&utm_medium=display&utm_campaign=growth_non-sub_paid_subscribe_ytdescript  Stay Connected Forbes newsletters: https://newsletters.editorial.forbes.com Forbes on Facebook: http://fb.com/forbes Forbes Video on Twitter: http://www.twitter.com/forbes Forbes Video on Instagram: http://instagram.com/forbes More From Forbes:  http://forbes.com  Forbes covers the intersection of entrepreneurship, wealth, technology, business and lifestyle with a focus on people and success.

Transcript

00:00 (upbeat music)

00:03 With Bitcoin setting all time highs,

00:05 it's bringing up the rest of the market,

00:06 but before investors buy in,

00:09 it's best to understand how much activity

00:12 is actually occurring on each of these platforms.

00:15 I'm Rosemary Miller here with Stephen Ehrlich,

00:17 the Director of Forbes Digital Assets,

00:19 here to tell us more.

00:21 Thank you so much for joining me today, Steve.

00:23 - All right, thanks Rosemary.

00:25 - So Steve, you mentioned something about a zombie blockchain.

00:30 Could you tell us what that is?

00:32 - Absolutely.

00:34 So what we published earlier this week

00:37 was the results of a multi-month investigation by myself

00:41 and two of our colleagues,

00:42 Nina Bamisheva and Maria Garcia Santana-Lenares.

00:46 And what we really were looking at were,

00:49 we were looking for zombie blockchains.

00:54 Essentially we were, I guess, zombie hunters in a way,

00:57 because we were trying to understand

01:00 how many blockchains out there had prices and fundamentals

01:04 that were completely detached

01:06 from their metrics and usage rates.

01:08 The real question, I guess with crypto in general,

01:12 and because it's still as much of an idea

01:15 as an actual platform with real mainstream use cases,

01:19 there's always a bit of prognostication and predictions

01:23 into how much future use will come to these platforms

01:27 and that will sort of be reflected in the price.

01:30 But what we found is that

01:31 there are 50 different blockchains right now,

01:35 and that just means blockchains like Ethereum or Solana,

01:38 although those are not on the list,

01:40 platforms that are meant to just support

01:42 a wide range of applications

01:43 that are worth at least $1 billion

01:46 in terms of the value of all circulating tokens.

01:50 And just intellectually, that seems unlikely,

01:53 at least to be something that can be supported at scale

01:57 because there just isn't enough use

01:58 and these platforms can become commoditized to some extent.

02:01 So we were looking at these and trying to figure out,

02:03 well, how much are people actually using these platforms?

02:06 How many transactions do they have per day?

02:08 How much money are locked up

02:09 in all the different applications

02:10 that are running on top of them?

02:11 And then in particular,

02:13 how much do people pay to use these networks

02:15 on an annual basis?

02:17 And the numbers that we found were pretty shocking,

02:19 like multi-billion dollar blockchains

02:22 are generating less than a million dollars

02:25 or $500,000, or sometimes even less than $1,000

02:28 annually in fees.

02:30 And again, although it's not a perfect transition

02:35 to traditional metrics used to evaluate stocks,

02:38 these numbers were just startlingly low,

02:41 especially when you consider

02:43 that we really tried to focus on blockchains

02:45 that have been around for several years at this point,

02:48 ones that raised hundreds of millions of dollars

02:50 during the ICO boom in 2017 and 2018,

02:52 and still haven't found that traction

02:55 even while the rest of the ecosystem has developed

02:57 and sort of moved beyond these all-in-one types

03:00 of blockchains that they offer.

03:01 So that's one piece of the puzzle that we found there.

03:05 But then the second part,

03:06 and it's sort of why we decided to call them zombies,

03:08 are if these were traditional fintech companies or products,

03:13 at some point, they would have to go back

03:16 to private markets and try to get,

03:19 raise another round of funds.

03:21 And at that point, if they don't have metrics

03:24 to sort of meet investor expectations,

03:26 then they would have to either take what's known

03:28 as a down round, which means that you raise money

03:30 at a lower valuation than you did previously,

03:32 maybe declare bankruptcy or look at an acquisition

03:37 or take some type of emergency measures.

03:40 But what we also found in the study

03:42 is that these projects, despite these challenges,

03:45 have treasuries or reserve funds that can be deployed

03:49 to help provide grants and still try

03:52 to further develop the ecosystem,

03:55 worth hundreds of millions of dollars, billions of dollars.

03:59 The biggest one that we saw was Ripple Labs,

04:02 which has a treasury for,

04:04 or has about $26 billion worth of a token called XRP

04:09 held in escrow that will become available

04:11 over the next few years that it can just sell

04:13 into the market as it pleases.

04:15 So these companies will never have to,

04:17 or these foundations or these projects

04:19 will never have to go to retail markets

04:22 or anywhere to ask for more money again.

04:24 They have more money than they could probably spend

04:27 in a lifetime.

04:28 So they can just kind of keep persisting,

04:30 develop, sending out updates and putting out press releases

04:34 without actually gaining traction.

04:36 So that's sort of why we call them blockchain zombies.

04:39 - So how did these blockchains get such a big treasuries?

04:42 - A few ways.

04:44 I mean, some of them, I mean, it's important

04:47 that there's a couple of different types of zombies

04:49 that we talk about in the report.

04:52 Some are known as like fork zombies,

04:55 spin-offs of like Bitcoin and Ethereum

04:59 and all blockchain code is open source.

05:01 So anytime there's a disagreement among developers

05:04 or enthusiasts on sort of how a blockchain should be run

05:06 or particulars over things like its throughput

05:11 or fee structure or whatever,

05:12 they can create a new blockchain

05:14 and run it as they wish.

05:16 And there are a few prominent examples of this,

05:18 like Bitcoin Cash, Ethereum Classic.

05:23 And these actually don't have very large treasuries

05:25 because they were just started as forks

05:28 without any sort of seeding funding.

05:29 But that hasn't stopped them

05:30 from getting multi-billion dollar evaluations

05:32 despite low fees.

05:33 The other ones that we talk about,

05:35 a lot of them raised significant money in the ICO boom,

05:41 like Algorand and Tezos.

05:44 Tezos was created in 2014

05:47 as sort of a competitor to Ethereum.

05:49 And that firm, the foundation behind it,

05:54 raised more than $200 million in its ICO.

05:57 Today, that treasury has grown to about $700 million,

06:01 even though ironically, they only keep 20% of it

06:04 in the native token for the Tezos blockchain, XTZ.

06:07 There's other ones like Internet Computer,

06:09 decentralized cloud structure

06:11 that's supposed to compete with AWS

06:13 that has a treasury of at least like $1.2 billion or so.

06:16 And Cardano is another one that has a massive treasury.

06:19 And they raise these funds

06:22 and then they create these token issuance schedules

06:26 that reserve a certain allotment

06:28 of the total supply of tokens for the founding team,

06:31 many cases that will be held in escrow for years to come.

06:34 But we can calculate the market value of those

06:36 and it is just gargantuan.

06:39 - So what does the future look like for these blockchains

06:42 and can they ever come back to life?

06:44 - Sure, I mean, there is a possibility

06:47 for them to come back to life.

06:48 I mean, there are projects, Stacks is one,

06:51 it's sort of seen as compatible blockchain to Bitcoin

06:55 that's getting a lot of attention.

06:56 We put them on the list

06:57 because it just has had very little activity historically,

07:00 although that has surged a bit of late

07:02 and they are supposed to implement

07:04 what's they call a major upgrade in April

07:07 that theoretically could make the blockchain more usable

07:11 and because it's so closely associated with Bitcoin,

07:13 that's one that maybe could move out

07:15 of sort of blockchain purgatory for lack of a better term.

07:19 But at the same point, where crypto is going now,

07:24 it's moving away from these all in one blockchains

07:28 that comprise like a transaction layer,

07:30 a consensus layer, a data availability layer,

07:33 so on and so forth, to this sort of like mix and match world

07:35 of what's called modular blockchains

07:38 where people can sort of customize a blockchain

07:40 to fit very specific use cases.

07:42 So the real question is,

07:44 like how many all in one blockchains

07:48 will the market support?

07:49 Well, there's Bitcoin with a very specific use case,

07:51 like scarce digital gold.

07:53 Ethereum is by far the world's biggest

07:55 like multipurpose blockchain.

07:57 Solana has, I think, solidified itself as number three

08:01 and then there's a few more that,

08:03 Avalanche is another one that's got some traction,

08:05 but then once we go beyond that,

08:07 we look at like compatible blockchains with Ethereum,

08:10 like Optimism and Arbitrum.

08:12 Coinbase recently launched one called Base

08:14 that's getting a lot of activity.

08:15 So we see the user attention going to these platforms

08:20 and not necessarily these all in one blockchains

08:23 that we write about in the story.

08:25 So that's important to note.

08:26 But at the same point, they're not gonna go away.

08:28 Aside from the treasuries that I described for you earlier,

08:34 these blockchains also just,

08:35 they're very, they have strong liquidity

08:38 throughout the world.

08:40 They are listed at most exchanges

08:43 and it's also very difficult,

08:44 even if somebody wanted to try to short any of these tokens

08:48 to do it successfully.

08:50 I mean, it's hard to get a large enough stake to do it.

08:53 It's relatively capital inefficient.

08:56 We spoke to some people for the article

08:57 to kind of get a sense of how that would work.

08:59 And the other thing that is also important to note

09:03 is that when there is short interest against crypto,

09:06 it's easier to do it with stocks

09:07 like Coinbase and MicroStrategy,

09:09 which are just easier to borrow shares of

09:14 as opposed to trying to go into defy

09:16 or various crypto exchanges and borrow these tokens.

09:18 So absent some sort of big legal action by the SEC

09:23 or someone else, I would expect these blockchains

09:26 to continue in perpetuity.

09:27 - So are there any legal ways for token holders

09:31 to access these treasuries?

09:33 - It's hard to tell.

09:34 And that's a question that we tried to explore

09:36 at the end of the article.

09:38 So I'm glad you brought that up.

09:40 I mean, theoretically,

09:43 or I guess not more than theoretically,

09:44 the SEC likely views most of the tokens

09:48 on this listed in this report as securities.

09:53 At least four of them were mentioned in lawsuits

09:55 that they filed against Binance, Kraken and Coinbase,

09:58 alleging that those platforms are operating

10:00 as unregistered national securities exchanges.

10:02 But here's the important part.

10:04 The SEC has gone against the exchanges,

10:09 not the token issuers themselves.

10:10 So any thoughts on this or whatever,

10:14 those just simply don't apply to these types of cases.

10:16 I did speak with a couple of lawyers to figure out

10:19 like if token holders say, hey, look, this project,

10:22 this foundation has a massive treasury.

10:25 Maybe we have rights to it.

10:27 Even that could be difficult because in the words

10:30 of one lawyer that I quoted in the story,

10:32 you have to be able to prove that there has been actual harm,

10:35 fraud and something like that in these cases.

10:37 And if these foundations,

10:39 which are usually the founding teams of the blockchains

10:41 before turning it over ostensibly to the community,

10:44 if they are doing at least what they said

10:47 they were going to do,

10:47 which is use the funds to develop the community,

10:49 it's hard to suggest that they were being dishonest

10:52 in that way.

10:54 So I would be interested to see if anyone tries

10:57 this type of legal approach.

10:59 There have been a couple of historical precedents

11:01 that sort of provide,

11:03 that haven't provided a clear picture

11:05 as to what could happen,

11:06 but I would be interested if a plaintiff

11:10 or someone tried to file a class action

11:12 against one of these blockchains

11:13 and then what would happen.

11:16 - Well, thank you so much for joining me today, Steve.

11:18 - Great, thanks Rosemary.

11:20 (silence)

11:22 (silence)

11:24 (silence)

11:26 [BLANK_AUDIO]

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