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Unlike in traditional markets, in DeFi almost everything is forkable 
, making it difficult to establish a moat
In today's @Delphi_Digital daily, I discuss the attributes that *can't* be forked and how to combine and compound them to create unassailable moats
Thread
, making it difficult to establish a moatIn today's @Delphi_Digital daily, I discuss the attributes that *can't* be forked and how to combine and compound them to create unassailable moats
Thread
1/17 While DeFi fulfils most of the conditions of a perfectly competitive market, unlike in perfect competition projects in DeFi are not price-takers because they benefit from network effects, meaning as they grow they are able to price out competitors
2/17 I argue there are four distinct network effects present in DeFi: liquidity (weak), security, community and integrations
In order to be defensible, a project must leverage a combination of these attributes, with the whole being greater than the sum of its parts...
In order to be defensible, a project must leverage a combination of these attributes, with the whole being greater than the sum of its parts...
3/17 Liquidity 
Most DeFi products are two-sided market places with supply of capital on one side and demand on the other. As such, they benefit from marketplace liquidity network effects.
Most DeFi products are two-sided market places with supply of capital on one side and demand on the other. As such, they benefit from marketplace liquidity network effects.
4/17 Specifically, greater supply-side liquidity (e.g. depositors in Aave/COMP, LPs in Uniswap/Balancer, stakers in SNX) leads to higher capacity/better prices which begets more demand-side usage, fees and greater supply-side liquidity
5/17 However, as we’ve seen with recent vampire attacks by Sushi and others, liquidity is a fickle mistress, flowing to wherever the highest incentives are
As such, it cannot be used in isolation but must be combined with another unforkable attribute to provide a sustained moat
As such, it cannot be used in isolation but must be combined with another unforkable attribute to provide a sustained moat
6/17 Security
Security can be seen as the cost of undermining a protocol’s consensus: the higher the cost, the more secure the protocol is
Higher security attracts more demand, generating better yield for supply-siders and contributing to the network effect flywheel effect
Security can be seen as the cost of undermining a protocol’s consensus: the higher the cost, the more secure the protocol is
Higher security attracts more demand, generating better yield for supply-siders and contributing to the network effect flywheel effect
7/17 In well-designed token economic systems such as @thorchain_org , security is proportional to the market cap of the network and thus intrinsically linked to supply-side liquidity
8/17 Value of RUNE bonded by nodes must always be > 3:1 ratio to value of external TVL
As the value of bonded RUNE increases, the capacity of the network (amount of external TVL it can facilitate) increases which means more liquidity, security and value accrual for RUNE
As the value of bonded RUNE increases, the capacity of the network (amount of external TVL it can facilitate) increases which means more liquidity, security and value accrual for RUNE
9/17 The protocol also utilises an incentive pendulum to ensure this remains the case, increasing the portion of liquidity fees that nodes receive when the ratio drops below 3:1, providing strong incentives for more nodes to come online
This provides built-in fork resistance...
This provides built-in fork resistance...
10/17 Forks cannot simply redeploy the smart contracts, they must also deploy a new token and bootstrap enough liquidity and security to compete
Also, as liq flows out of RUNE, the competitor must contend with RUNE’s automated incentives, increasing the costs of forking
Also, as liq flows out of RUNE, the competitor must contend with RUNE’s automated incentives, increasing the costs of forking
11/17 Community
Most DeFi protocols either are or aim to one day become user-owned public goods. As such, their progress and success is in a large part dependent on the size and quality of the user bases that govern them
Most DeFi protocols either are or aim to one day become user-owned public goods. As such, their progress and success is in a large part dependent on the size and quality of the user bases that govern them
12/17 While liquidity mining has shown that at least some community members will defect given sufficiently high incentives, it has also shown that many will not.
One example here is @AaveAave which despite no liquidity mining incentives has attracted higher TVL and MC than COMP
One example here is @AaveAave which despite no liquidity mining incentives has attracted higher TVL and MC than COMP
13/17 While there are no shortcuts to building strong communities, a well-designed token economic model can be a useful tool
An example of this is @synthetix_io which, which used locked incentives to nurture one of the most active, long-term oriented communities in the space
An example of this is @synthetix_io which, which used locked incentives to nurture one of the most active, long-term oriented communities in the space
14/17 Integrations
If liquidity is unforkable supply, integrations are unforkable demand
Unlike the other unforkable attributes, integrations can also be proprietary in that they often rely on proprietary relationships (e.g. exchange listings)
If liquidity is unforkable supply, integrations are unforkable demand
Unlike the other unforkable attributes, integrations can also be proprietary in that they often rely on proprietary relationships (e.g. exchange listings)
15/17 A protocol with a significant amount of integrations becomes very difficult to fork since these integrations must be built one by one and require time and trust
A good example here is @MakerDAO 's DAI which, despite its flaws, is integrated everywhere and hard to displace
A good example here is @MakerDAO 's DAI which, despite its flaws, is integrated everywhere and hard to displace
16/17 As mentioned earlier, truly defensible moats come from combining multiple unforkable attributes
We've already discussed @thorchain_org earlier which combines liquidity and security, but another example here is @iearnfinance which combines liquidity and community
We've already discussed @thorchain_org earlier which combines liquidity and security, but another example here is @iearnfinance which combines liquidity and community
17/17 YFI's community meant it generated the best strategies, attracting most liquidity. The best strategists are attracted to the highest liquidity which maximises the amount of fees they can earn. This creates a reflexive, compounding, positive flywheel effect
You can read the full article here: https://www.delphidigital.io/reports/unforkable-moats-in-defi/
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Disclaimer: Delphi Ventures holds both $RUNE and $YFI
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Disclaimer: Delphi Ventures holds both $RUNE and $YFI
