<ul>
 <li>Zilliqa is abandoning its standalone Layer 1 strategy after nine years, citing insufficient adoption, declining liquidity and rising security costs.</li>
 <li>Its proposed institutional network introduces pre-settlement identity verification through vLEIs, with a mediation architecture designed to separate compliance from settlement.</li>
 <li>The transition leaves unresolved questions about ZIL token economics, legacy-chain continuity and the security guarantees of the replacement infrastructure.</li>
</ul>
Zilliqa is abandoning its standalone blockchain strategy to pursue institutional financial infrastructure, acknowledging that nine years of development failed to generate sufficient network activity to sustain its original business model.
<a href="https://www.zilliqa.com/why.html" rel="noopener noreferrer nofollow">The project announced plans</a> on November 4 to establish the Zilliqa Institutional Layer (ZIL), initially presented as an Ethereum Layer 2 targeting regulated institutions.
Its proposed architecture also introduces a settlement-agnostic mediation layer, intended to verify institutional identities and apply transaction controls before settlement. That distinction broadens the project’s ambitions beyond simply migrating an existing blockchain onto Ethereum.
<blockquote class="twitter-tweet">
 We know it’s not great. For nine years we built and ran our own Layer 1. It hasn’t worked.
 We’re not giving up. Here’s the first of many next steps in a new direction:
 Zilliqa is becoming the Zilliqa Institutional Layer (ZIL): an Ethereum Layer 2 for regulated institutions.
 Usage never reached what a standalone chain needs. Funding and liquidity for standalone L1s dried up. The recent hacks showed how much it takes to secure a chain alone. The data is onchain for everyone to see.
 We keep what was great: our partnerships, our community and one token, ZIL.
 We cut what isn’t working. We stop fighting alone.
 We start with a new identity, a new goal and a new path.
 What we are building:
 – Settlement secured by Ethereum. – Identity and compliance built into the network, through vLEIs. – A permissioned market where verified institutions trade with each other. Institutions first, later individuals and agents.
 Our partners are even more committed to this future. @ltin_li, the state-backed trust network in Liechtenstein, will operate the sequencer and is becoming a qualified vLEI issuer.
 ZIL holders: this move needs no action from you today. We will publish the technical details before anything changes. Any claim, swap or migration is announced on https://t.co/382XLEBa8M first. If it’s not there, it’s not real.
 Zilliqa isn’t going away. We fight another day.
 — Zilliqa (@zilliqa) <a href="https://x.com/zilliqa/status/2118288870060032070?ref_src=twsrc%5Etfw" rel="noopener noreferrer nofollow">November 5, 2026</a>
</blockquote>
For a network once recognized as an early pioneer of blockchain sharding, the decision represents a substantial change in direction.
<h2 id="why-zilliqa-s-layer-1-strategy-failed">Why Zilliqa’s Layer 1 Strategy Failed</h2>
Founded in 2017 by researchers associated with the National University of Singapore, Zilliqa emerged during a period when blockchain scalability was widely viewed as a major obstacle to adoption.
Its original architecture used sharding to distribute transaction processing across network segments, seeking higher throughput without relying on a single execution environment.
The mainnet launched in January 2019, establishing Zilliqa among the earlier public blockchains built around sharded transaction processing.
However, technical capacity did not translate into sufficient economic activity.
In its official explanation, Zilliqa acknowledged that usage remained below the level required to sustain an independent network.
The project also cited declining liquidity and funding for smaller Layer 1 ecosystems, alongside the increasing cost of maintaining security infrastructure.
These pressures are particularly significant for networks operating their own consensus systems.
Independent blockchains must sustain validator participation, maintain infrastructure, support developers and attract enough applications to generate recurring economic activity.
When transaction demand remains limited, the network can face substantial operating obligations without a corresponding source of sustainable revenue.
Zilliqa’s subsequent development efforts, including its Zilliqa 2.0 infrastructure overhaul, did not eliminate that underlying challenge.
The proposed transition changes the project’s operating model. Instead of competing primarily on transaction throughput, Zilliqa intends to provide identity, compliance and transaction infrastructure for institutional markets.
Whether that strategy improves its economics will depend on actual customer adoption and the cost of operating the new architecture.
The project has not disclosed a comprehensive financial comparison demonstrating how much the transition could reduce operating expenses.
<h2 id="zilliqa-s-mediation-layer-moves-compliance-before-settlement">Zilliqa’s Mediation Layer Moves Compliance Before Settlement</h2>
The proposed institutional architecture introduces a distinction between transaction authorization and blockchain settlement.
Rather than relying exclusively on conventional wallet addresses, Zilliqa intends to use verifiable Legal Entity Identifiers, or vLEIs, to establish the identities of participating organizations.
A vLEI is a digitally verifiable credential associated with a legal entity. It can also establish whether an individual has authority to act on that organization’s behalf.
This creates a mechanism for verifying institutional counterparties before transactions proceed.
Zilliqa’s proposed mediation layer is designed to perform identity and eligibility checks ahead of settlement, separating those controls from the underlying transaction infrastructure.
The project has described this framework as settlement-agnostic, suggesting an architecture in which institutional verification is not inherently tied to one blockchain’s settlement process.
That does not establish that every proposed settlement integration is operational. The project’s initial transition announcement identifies Ethereum as the intended Layer 2 settlement foundation, while the scope of additional settlement-network support requires further technical confirmation.
Zilliqa has also identified the Liechtenstein Trust Integrity Network (LTIN) as a participant in its institutional identity infrastructure.
The model could offer financial institutions a more consistent way to establish counterparty eligibility before executing transactions involving tokenized assets.
However, pre-settlement verification does not automatically eliminate post-trade reconciliation. Institutions must still reconcile asset balances, settlement finality and transaction records across their internal systems.
The potential advantage is narrower but commercially relevant: certain identity and authorization failures could be detected before transactions reach settlement.
<h2 id="why-vlei-does-not-automatically-establish-regulatory-compliance">Why vLEI Does Not Automatically Establish Regulatory Compliance</h2>
Zilliqa’s institutional positioning intersects with several European financial regulatory frameworks.
Under the <a href="https://ethnews.com/mica-review-esma-moves-to-close-stablecoin-and-defi-loopholes/" rel="noopener noreferrer nofollow">EU’s Markets in Crypto-Assets Regulation (MiCA)</a>, firms providing covered crypto-asset services generally require appropriate authorization and must satisfy applicable operational and conduct requirements.
Identity verification can support those obligations, but it does not replace them.
A vLEI credential does not independently establish compliance with anti-money-laundering rules, sanctions screening, custody safeguards or transaction-monitoring requirements.
There is also an important distinction between crypto-assets covered by MiCA and tokenized financial instruments.
Where a token qualifies as a financial instrument, existing securities legislation, including MiFID II, may apply instead.
The EU’s DLT Pilot Regime provides a separate regulatory framework for certain market infrastructures handling eligible tokenized financial instruments. It does not grant automatic approval to blockchain networks that implement institutional identity credentials.
For Zilliqa, the regulatory challenge is therefore not simply verifying who controls a wallet.
Its infrastructure must allow regulated participants to meet the specific obligations associated with the assets, transactions and services they provide.
<h2 id="celo-and-lisk-offer-two-different-migration-lessons">Celo and Lisk Offer Two Different Migration Lessons</h2>
Zilliqa’s decision follows other established blockchain projects that have reconsidered independent Layer 1 operations.
<a href="https://newsletter.celo.org/p/celo-l2-is-now-live-a-note-from-our-founders" rel="noopener noreferrer nofollow">Celo completed its migration</a> to an Ethereum Layer 2 in March 2025, adopting infrastructure based on Optimism’s OP Stack.
The transition preserved its existing blockchain state and historical records, allowing applications and users to continue operating within a new settlement architecture.
Celo entered that transition with an established payments ecosystem, making the migration partly an infrastructure decision rather than an attempt to create an entirely new market.
Lisk provides a contrasting example.
After repositioning itself around Ethereum Layer 2 infrastructure, Lisk announced the closure of its Layer 2 chain in November 2026 as it redirected its business toward financial services.
The comparison illustrates an important limitation of blockchain migration strategies.
Moving onto Ethereum may reduce certain technical and ecosystem barriers, but it does not independently establish sustainable demand.
Zilliqa’s proposed strategy differs from both projects because its primary commercial target is regulated institutional activity.
Its success will depend less on attracting general-purpose decentralized applications and more on convincing financial institutions to integrate its identity and transaction infrastructure into production systems.
That is a potentially valuable market, but one characterized by lengthy procurement processes, regulatory scrutiny and established infrastructure providers.
<h2 id="what-happens-to-zil-token-holders">What Happens to ZIL Token Holders?</h2>
Zilliqa has confirmed that ZIL will remain part of its ecosystem and that existing holders do not currently need to take action.
Nevertheless, preserving the token does not necessarily preserve its previous economic function.
Under the standalone blockchain model, ZIL has supported transaction fees and network staking.
A transition involving Ethereum settlement and institutional mediation could change how transaction costs are paid, how network operators receive compensation and whether institutional activity generates direct demand for ZIL.
The announcement does not yet establish a complete post-transition tokenomics framework.
<h3 id="several-questions-remain-particularly-important">Several questions remain particularly important:</h3>
<ul>
 <li>Will ZIL continue to support staking, and what mechanism will determine future rewards?</li>
 <li>Will institutional transactions require ZIL, or can fees be paid through other assets?</li>
 <li>How will settlement costs incurred on Ethereum be allocated?</li>
 <li>Will the existing blockchain’s transaction history and state remain accessible after migration?</li>
 <li>What mechanisms will allow users to withdraw assets if a sequencer or intermediary becomes unavailable?</li>
</ul>
The security architecture also requires further disclosure.
Zilliqa has not published a complete specification establishing the verification mechanism, data-availability arrangements and failure-recovery protections of the proposed system.
Those details determine whether users can independently verify transactions and recover assets during operational disruptions.
Ethereum settlement can provide important security guarantees, but those guarantees depend on how the surrounding infrastructure is implemented.
For investors, the distinction is material. A successful institutional network does not automatically translate into higher token demand unless ZIL has a necessary and clearly defined role within its economics.
<h2 id="institutional-adoption-will-determine-the-outcome">Institutional Adoption Will Determine the Outcome</h2>
Zilliqa’s announcement establishes a new strategic direction, not evidence that institutional adoption has already been secured.
The project has identified regulated financial institutions and tokenized-asset markets as its target customers, but it has not disclosed sufficient information to assess committed transaction volumes or recurring revenue.
The next meaningful milestones will be the publication of technical specifications, confirmation of institutional integrations and a detailed explanation of the token’s future economic role.
Its identity architecture could provide a useful bridge between regulated financial operations and blockchain settlement. Yet the commercial case remains dependent on whether institutions adopt that infrastructure at scale.
Zilliqa’s original blockchain demonstrated that technical innovation alone does not guarantee a sustainable network.
Its institutional strategy will be judged by a different measure: whether verified counterparties, compliant transaction processing and settlement infrastructure can generate the economic activity that its standalone Layer 1 never achieved.
The post <a href="https://ethnews.com/zilliqa-abandons-layer-1-to-build-institutional-ethereum-l2/" rel="noopener noreferrer nofollow">Zilliqa Abandons Layer 1 to Build Institutional Ethereum L2</a> appeared first on <a href="https://ethnews.com" rel="noopener noreferrer nofollow">ETHNews</a>.

Zilliqa Abandons Layer 1 to Build Institutional Ethereum L2

Table of Contents

ETHNews

Other articles published on Nov 5, 2026

Join our free newsletter for daily crypto updates!