DeFi protocols now store billions of dollars in assets and facilitate billions of dollars in financial activity daily.

But how do they actually create and capture value?

1/
This summer it was easy to ignore longer-term questions of sustainability and competitive advantage when all DeFi asset prices were rising.

But now that the market has cooled down, more level heads may now prevail and position for the next stage of DeFi.

messari.io/article/defi-c…
Value creation in DeFi all starts with a balance sheet.

DeFi protocols are coordination mechanisms that define rules and provide incentives in order to facilitate financial activity.
Most DeFi protocols do this by crowdsourcing assets from their communities and putting those assets to productive use in activities such as market making and lending.
Users provide their capital to protocols in exchange for value flows that may be intrinsic (like native token rewards) or extrinsic (like stablecoins).

How much value protocols create for stakeholders is determined by how effectively protocols can monetize their balance sheets.
Balance sheet monetization as a business model is not new.

It’s how financial institutions such as banks have generated cash flow for millennia.
But when code is open source and capital can move freely on the internet, traditional sources of competitive advantage lose their relevance.

Even liquidity can be forked in this world.

This is why building a moat in DeFi is hard.
How then can DeFi protocols capture value if it appears as if nothing is defensible?

I believe there are five primary sources of sustainable competitive advantage:

- Community
- Integrations
- Protocol Resources
- Security
- Brand / UX
But the above is just scratching the surface.

In my latest Pro piece I detail:

1. Competitive Moats in DeFi

2. The Future of Balance Sheet Monetization as a Business Model

3. The Rise of Protocol to Protocol Cooperation

messari.io/article/defi-c…
What’s matters for the long-term DeFi investor is not flash-in-the-pan food coins, valueless forks, and ponzinomics.

Rather its legitimate sources of sustainable competitive advantage that will allow DeFi protocols to create and capture value now and into the future.

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More from @RyanWatkins_

28 Oct
Proposal to rethink @iearnfinance's capital allocation strategy.

Rather than distributing income to YFI stakers now, Yearn should use income to buy back YFI to reinvest in growth.

The goal is to maximize long-term value creation for YFI stakeholders.

1/
gov.yearn.finance/t/proposal-ret…
Yearn is DeFi’s leading yield aggregator and one of its most exciting community-run projects.

But it's still in its infancy with much work to be done.

This YIP could meaningfully improve the attractiveness of contributing to Yearn, by providing contributors with upside to YFI.
There are many community members that create enormous value for Yearn, yet did not participate in the initial YFI distribution or buy YFI early.

It would be beneficial to all stakeholders in the long-run if these contributors may also participate in the financial upside of YFI.
Read 6 tweets
22 Oct
yUSD is an incredible product, but it’s also one of the riskiest stablecoins available on Ethereum.

In addition to compounded smart contract risk, yUSD’s risk of peg loss is the sum risk of all its underlying stablecoins losing their peg, combined.

1/
If even a single one of the underlying stablecoins in the yPool (USDT, TUSD, USDC, DAI) underlying yUSD loses its peg, yUSD will also lose its “peg”.

There is nothing insuring against this risk and Curve is clear about this on the risk section of their website.
This peg risk may be addressed in the future by allocating the underlying stablecoins elsewhere to protocols that backstop against this risk, or don’t introduce it altogether, but for now it’s there.

Other ideas for how to insure against this would also be welcomed.
Read 8 tweets
21 Oct
🤯 Ethereum now transacts two times more value than Bitcoin daily.

This is what a cryptoeconomy looks like when it starts to find product-market fit.

1/
There are two key developments over the past year that made this all possible: stablecoins and DeFi.

The two provided a strong foundation for real financial activity to take place on Ethereum.

messari.io/article/ethere…
Ethereum’s progress has been so incredible that it will likely becomes the first public blockchain ever to settle $1 trillion in a year.
Read 6 tweets
22 Sep
The last couple weeks in DeFi have been an absolute bloodbath.

But keep in mind bull markets never go up in a straight line.

In the 2017 ICO boom ETH pulled back 20%+ seven times before it peaked in January 2018.

So far in this bull market we’ve only experienced one.

1/
What's clear right now is that there are more sellers than buyers and DeFi’s summer casino could be coming to an end (it’s the start of Fall anyways?).

But let’s zoom out and look at DeFi’s summer in numbers.

messari.io/article/a-data…
The median DeFi asset is down more than 40% in the past 30 days.

Take some time to digest this table.

Below are a couple takeaways from the data.
Read 7 tweets
17 Sep
DeFi moves fast. Yearn moves faster.

As if launching a $1bn asset management platform in 8 weeks wasn’t enough, Yearn is now entering new markets rapidly.

The latest being AMMs, lending, and stablecoins through a potentially disruptive new protocol called StableCredit.

1/ Image
In a nutshell StableCredit is MakerDAO + Aave + Bancor combined, but with minimal governance and no token ($YFI is not involved).

The latter two points hint at StableCredit’s ambition to be truly decentralized infrastructure that requires minimal human interaction to run. Image
StableCredit allows users to deposit an asset and then receive a credit line that allows them to borrow up to 75% of the collateral they provided.
Read 11 tweets
16 Sep
There's now more than $1 billion in #Bitcoin on Ethereum (0.5% of total supply).

$500 million in the past 30 days 📈

This is the gravity of triple digit yields.

1/ Image
While I personally think the biggest cross-chain opportunity is exchange rather than pegged assets, pegged assets will definitely be huge as yield farming opportunities continue to pop up.

messari.io/article/bridgi…
Also interesting here is how the trend demonstrates how powerful yield farming incentives are.

There's a lot of assets that have been left out the DeFi mania because they're unproductive and sit idly in wallets.
Read 4 tweets

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