2026 and the Protocol Graveyard

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We’re about half way through 2026 and the bodies have been piling up. An estimated 40+ crypto projects, protocols, wallets, NFT marketplaces, games, and infrastructure companies have shut down or entered maintenance mode in 2026.

The last crypto collapse in 2022 was largely a function of fraud and hidden leverage. The likes of Terra, FTX and Celsius were cataclysmic events for crypto.

In 2026 we’re seeing failures happen in slow motion instead of dramatic explosions. In fact, this year’s most dramatic explosions have actually resulted in surviving protocols.

Over $770 million has been drained YTD with with just two exploits (Kelp DAO at $293 million and Drift at $285 million) in April making up most of this number. Both of these projects are still standing.

It’s not fraud and it’s not hacks killing crypto projects this time around. We’re seeing legitimate teams who raised venture money and shipped real products trying to capture real users simply run out of runway.

Today we’ll talk about what’s happening and provide our take on how to fix it permanently.

For most of 2021 through 2024, small to midcap crypto projects survived on the appreciating value of their own treasury tokens. They paid developers in tokens and subsidized their costs and liquidity in tokens. In bull markets there are more people willing to take tokens for services because of the perceived upside. Protocols don’t mind because their treasures are full of tokens that they aren’t going to run out of. 42% of DAOs still hold more than half of their treasury in their own native token.

When secondary market liquidity dries up for these small and midcap tokens, things like profitability and cash runway start to become meaningful again.

This slow moving death explains most of the protocol graveyard. Revenues for these protocols rarely if ever covered costs, the token-funded runway shrank and since there’s no easy way to restructure financially these protocols are forced to wind down.

Ways to Die

Tally was a governance service behind over 500 DAOs and processed over a billion dollars in payments. Major protocols like Uniswap and Arbitrum were users but no one really cared to pay for it. Parsec was an onchain analytics app (one our team was quite fond of) that had to shut down due to being unable to monetize. Leap Wallet served 100s of thousands of users and couldn’t work the economics.

Hacks and exploits did take out some protocols but they were more like the nail in the coffin. Step Finance lost close to $40 million in a phishing compromise and was unable to raise rescue funding to continue operating. In a bull market a VC or perhaps even the community could have rounded up capital to plug the hole.

Protocols without a meaningful cash/stablecoin treasury and fee revenue lack optionality and are unlikely to make it to the other side of this bear market. Token-funded treasuries in a falling market are essentially worthless since no one wants your token.

No Turnarounds

In traditional financial markets, businesses in trouble that have some scale are typically not wound down (startups notwithstanding). You generally have some buyer or capital provider who recognizes the value of the business, and through a process that involves a legal framework as well as negotiations with other stakeholders they are able to take over the business and install new management.

In crypto this doesn’t happen for a few reasons.

• The main reason is that there’s no real “control” you can acquire. In a business turnaround you’re fundamentally executing a transfer of control. You buy the equity or the assets, install new management and change the strategy. In a protocol, what do you even buy? The contracts are often immutable and ownerless and the team/front-end is usually a separate offshore shell from the protocol. You can accumulate governance tokens, but that doesn’t confer operational control. There’s no boardroom to walk into and no lever you can pull that gets rid of an existing team and says “new management starts Monday.”

• Ownership is scattered across thousands of anon token holders, it’s hard to achieve consensus

• Often easier to copy/paste the code instead of inherit the baggage of an old protocol

• Customers likely weren’t sticky/loyal in the first place and the protocol died because incentives died

• Simply a lack of capable teams interested in jumping into a known dumpster fire, dealing with angry community, hack history, unknown legal risks etc.

Rare Turnaround Success Story: Pendle Finance

We first covered Pendle in January 2022, when the rest of the market had written it off as dead. Pendle’s v1 peaked at ~$35 million in TVL. We saw the potential its yield-tokenization idea had. The team stuck it out and in 2024 it grew its TVL by 20x on the demand for liquid staking/restaking. It now runs a multi-billion dollar TVL and is a core DeFi protocol.

Practical Action Steps

If you’ve been a paid DeFi Ed reader for any amount of time you would have picked up on our analytical framework (broken down in detail in our course). The last protocol that followed our core ideas around generating value for real users, solving problems better than existing solutions, and creating sustainable tokens that are deeply linked to the underlying value generated by the protocol was the biggest wealth generating event for retail since Ethereum. Yes we’re talking about Hyperliquid.

The winning philosophy remains the same but it is difficult to execute. The crypto industry is reminded every few years that you shouldn’t be able to get rich from businesses that were meant to fail from the start, but survived purely due to a pool of market participants who didn’t understand they were exit liquidity. Every time this reminder occurs the industry loses years of time and millions of long-term users who fell prey to scam projects.

So what do you actually do with this framework right now?

Only build or reward protocols with your capital if they are genuinely user-first. Protocols must have post-incentive sustainability in mind from the beginning. The incentives should be for initial runway and a tool for user acquisition, not the product. We’ve written a lot on tokenomics over the years. Our most recent Deep Dive Report on the topic is here and remains relevant in today’s market.

Is this the last bear market?

It’s a nice thought, but no it’s not the last bear market.

Markets (crypto and otherwise) move in cycles. However, they also learn and develop instead of just repeat the same story. In the case of crypto, what we have seen in recent years (and continue to anticipate) is a change in the opportunity set pursued by founders. From DeFi to the Ethereum Foundation we have seen talent migrate to projects that are more values aligned. As industry participants progress through crypto they learn what works and what doesn’t work.

Each bear market there is a wash out of the excesses of the bull market. The new success stories spur a new generation of founders. In this past cycle we had Hyperliquid as the blowout success story. A fast growing revenue generating protocol with genuine product market fit, not driven by incentives. The market rewarded this protocol, its founders and the early buyers. This case study will stand out to any future founders. When they look around at the protocol graveyard they will have a better sense for what protocols can survive, and what are doomed to fail.

While this will not be the last bear market, we are cautiously optimistic it will be the last bear market where protocols are built on the delusions of what the market shouldwant and instead built on what the market actually desires and will pay to use. User-first protocols that solve problems.

Until then, we will continue to see the bodies pile up and funding dry up.

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Until next time..

Disclaimer: None of this is to be deemed legal or financial advice of any kind. These are opinions from an anonymous group of cartoon animals with Wall Street and Software backgrounds.

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