The industry is pruning unsustainable startups, leaving only those with real user bases and cash flow.
By Oliver Knight, Margaux Nijkerk|Edited by Cheyenne Ligon1 hr ago7 min readMake preferred on ShareShare this articleCopy linkX (Twitter)LinkedInFacebookEmailMake preferred on Vultures eating carrion (Getty Images/Dan Kitwood)SummaryShow- Projects across the crypto landscape, particularly in layer-2 networks and protocol tooling, are being eliminated as altcoin values plummet between 70% and 90%, severely impacting startup finances.
- In the first half of 2026, over $1.1 billion was lost due to exploits, and as venture capital funds diminish, single incidents are leading to immediate bankruptcies, leaving behind "zombie contracts" on-chain.
- Only those projects that charge real fees in stablecoins or cash, such as Aave, Hyperliquid, and Ether.fi, are surviving, indicating a shift towards sustainable business models.
According to RootData, more than 100 crypto projects have either shut down, declared bankruptcy, or gone dark in 2026, and the trend is accelerating. Notably, four significant firms — BitMEX, BitMart, Movement Labs, and Storj Labs — announced closures in the last week of July alone.
The closures affect various sectors, including exchanges, wallets, DeFi lending protocols, NFT marketplaces, and layer-1 blockchains. A notable example is the complete shutdown of a Polkadot parachain, Moonbeam, which ceased operations on July 31, leaving users stranded who failed to transfer their assets in time.
The Ethereum layer-2 ecosystem has been contracting after its rapid growth, which began in 2023 with technological advancements that lowered transaction fees and simplified the launch of new chains. These layer-2 networks handle transactions off the Ethereum mainnet, bundling them before posting back, thus offering enhanced speed and cost-effectiveness while relying on Ethereum for security.
However, with the ease of launching chains, the market for general-purpose layer-2s became oversaturated, leading to a lack of differentiation among products. This crowded market has made it difficult for many projects to sustain themselves.
Ben Fisch, CEO of Espresso Systems, stated to CoinDesk, "There were way too many general-purpose layer twos, which frankly don't make sense as a product because there's no reason to have many versions of the same thing. We are in a consolidation phase for general-purpose layer twos, not layer twos broadly."
Industry experts suggest that the ongoing shakeout is indicative of a wider transformation within the crypto sector, not limited to Ethereum scaling networks.
Marek Olszewski, co-founder of the Celo layer-2, remarked, "Consolidation is happening across all of crypto right now, not just layer two, from DeFi protocols to DEXs and infrastructure providers. It's a sign that the industry is maturing. The networks that are enduring this period are the ones that people actually use and rely on."
Nick Puckrin, founder of Coin Bureau, noted on X, "For every crypto project you hear about shutting down, there could be another 10 quietly doing the same. This is creative destruction for the next cycle, perhaps."
Orkun Mahir Kılıç, co-founder and CEO of Chainway Labs, which is working on the Bitcoin layer-2 Citrea, explained that the trend of closures reflects a maturing market where attracting capital is becoming more challenging and investors are increasingly selective.
He stated, "Different businesses have different reasons and underlying issues for shutting down. The emerging pattern is not an inherent problem within the layer-2 ecosystem. The market and technology are maturing, investment is much slower and more cautious now, and only projects with solid business models and clear problem statements will survive."
Kılıç believes this trend is common in technology sectors. "This pattern of closure and consolidation isn't unique to layer-2s or crypto; it’s quite typical in tech. We witnessed a similar scenario during the internet bubble burst, and we will likely see the same with AI soon."
He added that the ongoing shakeout ultimately benefits the ecosystem. "So is consolidation good? It’s painful in the short term but healthy in the long run. It resets the baseline back to retention and real usage. Chains that expected users to migrate simply because the technology was superior are the ones now shutting down or merging. The ones that remain will be those that meet users where they already are."
Lorenzo Valente, director of research at Ark Invest, echoed this sentiment regarding crypto's consolidation. “I believe crypto is undergoing the largest consolidation phase in its history, far more significant than in previous bear markets,” he stated on X. “The market structure has changed. Capital is much more selective, and teams and exchanges lacking genuine product-market fit are closing down. Revenue concentration is now at all-time highs across nearly all layers — apps, middleware, L1s, etc.: Hyperliquid and Pump.fun account for 67% of total app revenue.”
The current wave of closures in 2026 is fundamentally different from the previous major crypto collapse in 2022, which was driven by fraud and interconnected leverage that led to the rapid downfall of companies like Terra, Celsius, and FTX. This time, there is no singular point of failure; instead, a broad industry reckoning is dismantling the overly optimistic sentiment that emerged after Donald Trump became a crypto-friendly U.S. president in early 2025.
The token-as-revenue model is failing
Many of the projects now shutting down were not generating revenue in the conventional sense. They compensated engineers with tokens, subsidized liquidity with tokens, and funded security audits with tokens. As long as those tokens retained their dollar value, the model functioned. However, most altcoins have recently lost between 70% and 90% of their value, rendering financial forecasts drastically inaccurate.
Tally, a DAO tooling platform supporting governance for over 500 protocols including Uniswap, Arbitrum, and ENS, processed over $1 billion in payments and secured up to $80 billion in on-chain value but still could not survive. Co-founder Dennison Bertram stated, "There isn't a venture-backed business in governance tooling for decentralized protocols, at least not yet," when announcing the shutdown.
Step Finance, a Solana portfolio tracker and analytics platform, had raised sufficient funds to create a viable product. However, in January, a phishing attack drained 261,854 SOL, approximately $35 million, from the protocol's multisig wallet. Rescue funds never materialized, and despite exploring "every possible path forward, including financing and acquisition opportunities," the platform ultimately shut down in February.
Everclear, a cross-chain settlement protocol, reached $500 million in monthly transaction volume but still faced financial difficulties. The team explained, "Despite reaching $500M in monthly volume, the cross-chain solvers segment never developed the commercial depth we needed." They had pivoted to a B2B2C model and partnered with several major industry players but "underestimated the time it would take for those partners to launch — and our runway ran out before they did."
The common thread among these cases is usage without revenue and a treasury entirely composed of tokens undergoing a severe decline.
Hacks are now fatal
Accompanying the wave of shutdowns is the worst series of DeFi exploits on record. A Blockaid report estimates that $1.1 billion was lost to on-chain exploits in the first half of 2026, surpassing the total losses of 2025.
April 2026 marked the most-hacked month in crypto history by the number of incidents. Two attacks accounted for the majority of losses: a $293 million exploit of Kelp DAO on April 18 and a $285 million theft from Drift Protocol on April 1, where North Korean-affiliated hackers spent six months socially engineering their way into the Solana-based exchange without exploiting any smart contract code.
TRM Labs estimates that North Korean-linked actors accounted for 66% of all crypto hack losses in the first half of 2026, up from 64% in 2025 and under 10% earlier this decade. The sophistication of these operations has raised security costs beyond what many mid-tier protocols can afford.
What has changed this time is the aftermath of hacks. Previously, affected communities would rally, and treasuries would cover losses, leading to recovery. In 2026, token-denominated treasuries have already been depleted by the bear market, and venture capital firms are not providing rescue funds at the same frequency as before. The liquidity issue also persists, as it has not recovered since the $19 billion leverage wipeout last October, leaving altcoin tokens vulnerable to volatile price movements and rapid sell-offs triggered by any minor news.
The 'zombie' issue
Not all failed protocols disappear cleanly. When teams dissolve and companies declare bankruptcy, the smart contracts they deployed continue to operate, and the code does not vanish.
A $6 million exploit at Lazy Summer Protocol in July was traced back to Stream Finance, a protocol that collapsed in November 2025. Eight months after Stream Finance went dark, unresolved code from the defunct protocol became the entry point for a live attack.
Moonbeam's shutdown highlights a more visible aspect of this problem. The chain stopped producing blocks on July 31. Any assets still locked in DeFi protocols deployed on Moonbeam — including positions in the lending protocol Moonwell — are now inaccessible. The contracts remain, but no one is left to manage them.
The risk extends beyond users with stranded assets. Security researchers have warned that orphaned contracts often contain unpatched vulnerabilities that were deprioritized prior to a team's shutdown, and the audit reports relied upon by users were created for specific code versions at particular times. As more protocols accumulate on the dead list, the number of live-but-headless contracts on major chains continues to grow.
Who remains standing
The common denominator among the protocols that have not only survived but also thrived during the bear market is simple: they generate revenue in dollars instead of their own tokens.
Hyperliquid, a decentralized perpetuals exchange, surpassed $1 billion in cumulative fees by June 30 — less than two years post-launch, even amidst a crypto bear market. Its trading volume actually increased as the market declined, and the protocol now commands 70% of the decentralized perpetuals market.
Aave, the leader in DeFi lending, reported over $12 billion in deposits as of July 2026 and generated more than $100 million in annualized borrow fees. It weathered a significant period of stress in April when the Kelp DAO hack caused $8.4 billion in deposit outflows and continued to function.
Ether.fi, a liquid restaking protocol, diversified its revenue streams before the onset of the bear market. Its crypto-linked debit card product now accounts for about 50% of the protocol's revenue, with transaction fees hitting a record $2.72 million in Q2 2026. The protocol holds $7.8 billion in total value locked.
The surviving protocols are not necessarily the most technically advanced, best-funded, or have the largest user bases; they simply created products that people are willing to pay for.