The DeFi Wars Are Here - The Daily Gwei #31
Who wins in the DeFi wars?
The Ethereum DeFi space has been heating up considerably over the last few months and is now at a point where similar protocols are starting to eat into the incumbents. As Vance alludes to in his tweet, Synthetix is taking a bite out of Maker’s market-share with Aave beginning to give Compound a run for it’s money.
We’re going to be seeing much more of this fierce competition play out over the coming months and years as DeFi projects migrate from being viewed as “toys” to being worth tens of billions of dollars. What everyone is building is not meant to just be for the insular Ethereum and crypto communities but rather for the billions of people who need and want a better financial system. To get there, the ecosystem needs projects to be rapidly building, innovating and growing.
One thing you’ll notice from many of the leading DeFi projects (at least, leading by value locked) is that they have a protocol token. I’ve long viewed protocol tokens as a great way to build a community and I believe that they act as a powerful way for a protocol to “growth hack” itself. The clearest recent example of this growth hack in practice is the launch of COMP - Compound’s native token. I went into detail here about how that works to drive liquidity to the platform through an incentive program. Now, whether that liquidity is lasting or not is an open question but there’s no doubt that a token is an extremely powerful way to get people excited about a project. We may see projects that do not have a native protocol token be leapfrogged or lose market-share to those that do.
Speaking of liquidity, that is literally what all of these projects are fighting each-other for. When Compound launched their COMP token, capital started fleeing other DeFi protocols and going into Compound because that’s where the maximum amount of profit was. Following this launch, many DeFi projects have now rushed to spin up their own “liquidity mining” programs because they realised that the game has now changed and without a carrot to bait people, they aren’t going to put their money into a protocol. The jury is still out on whether this is long-term sustainable but there’s no denying that it is an incredible way to growth hack.
I do think that as protocols and projects mature, they won’t just be competing on liquidity but also competing fiercely on usability. Not everyone is going to be an advanced “yield farmer” who always chases the highest gains with no care in the world for the risk involved. Most people will probably just enter this ecosystem through simple apps such as earning a yield on their USD or swapping tokens on a beautiful interface like 0x’s Matcha.
The projects that we know and love today may not be around in a few years at all because they either failed to find broad product/market fit or were taken out by a team that was able to move and innovative faster. I believe that this trend is healthy because it is a clear sign that the industry is starting to mature.
Have a great weekend everyone,
Anthony Sassano
All information presented above is for educational purposes only and should not be taken as investment advice.
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