ZAMA hits a new high: FHE privacy narrative returns

Written by: Little Cake

ZAMA has risen about 42% in the past 24 hours, priced at $0.085, setting a new historical high. The market capitalization has surpassed $210 million, with a 24-hour trading volume of $112 million.

The catalyst is the combination of two product actions: On September 15, Zama expanded Morpho's Confidential Vaults from 5 to 21 on Ethereum. On September 17, Zama partnered with Merkl to launch "Confidential Incentives," allowing cTokens (confidential tokens) to seamlessly access Merkl's DeFi incentive infrastructure. On the same day, the Zama Swap Protocol went live, supporting exchanges between crypto assets.

According to the project team, the Shielded TVL has exceeded $75 million. DefiLlama currently estimates it at about $78.28 million.

From the TGE issuance price of $0.05 in February, dropping to a low of $0.017, and now reaching a new high of $0.085, ZAMA has completed a full V-shaped reversal in seven and a half months.

The question is: how much of the right side of this V is supported by real demand?

What Zama Did: Turning DeFi into a "Sealed Envelope"?

First, understand what problem Zama is solving.

All data on public blockchains is transparent. Your balance, your transactions, your DeFi positions can be seen by anyone on Etherscan. This is irrelevant for most retail investors but is fatal for institutions; no asset management company wants competitors to see their holdings and trading strategies in real-time.

Zama addresses this issue with Fully Homomorphic Encryption (FHE). FHE allows smart contracts to perform computations while the data is fully encrypted; the inputs are encrypted, the computation process is encrypted, and the outputs are also encrypted. No one can see the underlying data at any stage.

To put it simply: traditional DeFi is like counting money in an open square, while Zama's FHE completes all calculations inside a sealed envelope, where you can only see the results when the envelope is opened, not the process.

Zama is a cross-chain confidential layer that sits on top of Ethereum and other L1/L2s via the fhEVM co-processor. Developers can deploy confidential applications without permission or fees; Zama's charging point is the encryption and decryption operations themselves, with each on-chain encryption operation costing about $0.13.

Token Economics: The Tug-of-War Between Burn and Mint

ZAMA's token design revolves around a "burn-and-mint model":

Fee Side: All protocol fees (encryption fees, decryption fees) are 100% burned. Each time someone uses Zama's FHE functionality, ZAMA is permanently removed from circulation.

Minting Side: Staking rewards are paid through the minting of new tokens, with an annualized rate of about 5%. These minting rewards are distributed to operators running FHE co-processor nodes and staking ZAMA.

The core question becomes a simple arithmetic problem: Can the amount of ZAMA burned each year exceed the amount minted each year?

If it can, ZAMA is deflationary; as usage grows, the circulating supply continues to decrease, leading to supply tightening for the token. If it cannot, ZAMA is inflationary; the minting speed of staking rewards exceeds the burning speed of usage fees, diluting the value for token holders.

Current data does not support an optimistic conclusion. With a total supply of 11 billion tokens and a current circulation of about 2.56 billion tokens, a 5% annual minting means about 550 million new tokens are minted each year. To cover the minting with burning, based on the $0.13 per encryption operation fee, approximately 4.2 billion encryption operations are needed annually.

Based on the current Shielded TVL (about $78.28 million) and usage frequency, this number is still far from being reached. ZAMA is currently still in the "minting far exceeds burning" phase.

The Quality of $78.28 Million TVL

The growth rate of Shielded TVL is indeed astonishing; the first vault went live in June and reached $40 million within 7 weeks. After expanding to 21 vaults on September 15, the TVL surpassed $75 million and reached $78.28 million two days later.

However, this growth needs to be broken down into three layers:

First Layer: Subsidy-Driven Deposits. The "Confidential Incentives" mechanism launched by Zama in collaboration with Merkl allows protocol parties to provide liquidity incentives for confidential vaults. This means part of the TVL is attracted by subsidized rates, similar to the "mining subsidies" logic in traditional DeFi. When the subsidies stop, this part of the TVL will leave.

Second Layer: Repeated Calculation of Wrapped Assets. Among the 21 vaults, 12 are "hybrid vaults," meaning they are wrapped in a layer of confidentiality on top of existing Morpho strategies. Users deposit USDC, which is first wrapped as cUSDC (confidential USDC) before being deposited into the vault. If DefiLlama counts both the underlying Morpho vault's TVL and the outer confidential vault's TVL simultaneously, there may be double counting.

Third Layer: Real Paid Privacy Demand. Only 4 vaults are "standalone vaults," with no publicly available counterparts. The TVL corresponding to these vaults is more likely to reflect real privacy demand; users choose these vaults instead of ordinary Morpho because they genuinely need privacy.

Currently, there is no public data to accurately break down the proportions of these three layers. However, one judgment criterion is: how much TVL can be maintained after the subsidy activities end. If it stays above 50%, it indicates that real demand exists; if it significantly drops, it suggests that the current TVL is mainly incentive-driven.

Competitive Landscape: How Significant is Zama's First-Mover Advantage?

The FHE track is not solely occupied by Zama; there are several major competitors:

Fhenix: Supported by Offchain Labs (the developer of Arbitrum), focusing on CoFHE co-processors and privacy layers for L2 rollups. It has launched on Base and Arbitrum Sepolia. The difference from Zama is that Fhenix is more L2-specific, while Zama is a cross-chain general solution.

Inco Network: A modular confidential L1, showing a 25% monthly active growth as of March 2026. It raised $4.5 million in seed funding. It secured about $4.7 billion in re-staked ETH for security through Ethos.

Mind Network: Another FHE infrastructure project focusing on the intersection of AI and data privacy.

Zama's advantages include: over $150 million in funding, a $1 billion valuation from Series B, the largest FHE deployment on Ethereum mainnet (21 vaults, $78 million TVL), and its authority on the FHE token standard as the proposer of ERC-7984.

However, the FHE track is still in its very early stages; $78 million in TVL is almost invisible in the broader DeFi market (Aave around $12 billion, Morpho around $2 billion). Zama's first-mover advantage is more reflected in its tech stack and ecosystem partnerships rather than market scale.

Valuation Anchors

Current data: ZAMA price $0.085, circulation of 2.56 billion tokens, circulating market cap of about $21.7 million. Total supply of 11 billion tokens, FDV of about $935 million.

Based on $78.28 million TVL, FDV/TVL is about 12 times. In comparison, Morpho's FDV/TVL is about 3 to 4 times, and Aave is about 2 times. This multiple reflects the market's expectations for the "FHE privacy premium," but it also means that if TVL growth stagnates, the current valuation lacks support.

A more core valuation variable is fee income. Based on $0.13 per encryption operation, even assuming that the Shielded TVL is fully active (producing 0.01 encryption operations per dollar of TVL daily), the annual fee income would be about $285,000. FDV/annual fees would be about 3280 times.

This is a typical asset priced on "narrative rather than cash flow," buying ZAMA equals buying a hypothesis: FHE privacy will become the infrastructure layer of DeFi, and hundreds of billions of dollars in on-chain assets will need encryption protection, with Zama being the main capture of this demand.