Messari Daily Brief Feb. 2, 2021 - DeFi Will Eat JPMorgan

(TBI is out this morning. Watkins has things covered above-the-fold.)

DeFi asset prices are soaring. The average DeFi asset is up 3x this past month, and we now have six DeFi unicorns: Uniswap and Sushiswap (decentralized exchange), Aave, Compound, and MakerDAO (lending), and Synthetix (synthetic assets). The current DeFi king, Uniswap, is worth $5.5 billion today, and nearly $20 billion on a fully-diluted basis, having processed $30 billion of trading volume in January.

Insane.

There’s real value flowing through these markets, and we’ve argued before that many DeFi asset valuations are supported by fundamentals (i.e. network earnings power) despite their sky-high sticker prices. This is especially true when considering long-term growth potential. Still, just how high are the ceilings for DeFi assets? Can they one day rival today’s largest global financial institutions, or are their ceilings structurally lower?

That depends on three variables:

1) Global Reach
2) Market Structure
3) Value Capture

Global Reach - DeFi protocols should scale more efficiently across jurisdictions than legacy financial institutions. Like the internet protocols we take for granted today (TCP/IP, HTTP), DeFi protocols are open standards for transferring value worldwide. They are not beholden to any specific jurisdiction; they are available everywhere (easy to access), yet have no physical “home” (hard to kill). That’s a deadly combination for a disruptive technology.

Market Structure - Will DeFi be a “winner-take-all” market? This is the trillion-dollar question, and maybe the hardest to answer. It’s unclear how many winning protocols there will be per vertical, or whether “everything protocols” emerge that completely absorb their rivals. There are already some early signs that the latter is one potential outcome.

Value Capture - Even if we assume DeFi scales globally and exhibits winner-take-most dynamics, it won’t matter for investors if protocols lack viable long-term value capture mechanisms. Open source development leads to low switching costs, so it's likely protocols will extract only minimal value from the services they provide, as competition will prove fierce. There’s a delicate balance in managing stakeholder incentives in DeFi, and it's unclear how much extractable value there will be (or should be) for token holders today or in the future.

My take?

I’m bullish that in 15-20 years, DeFi protocols will be far larger than our current financial institutions. Their ignorance of borders and democratized economics will help them scale globally much more quickly than incumbents would like. We’ll see at least some value capture from each new financial utility as protocol maintainers reap rewards for their contributions. And it won’t matter whether verticals become "winner-take-most" or “everything protocols”: investors could simply invest in vertical winners early on, and ride them as they eat the competition.

The “everything stores” of finance will be much larger than JPMorgan.

Headlines that matter:

• INTEL: Kadena, Keep, Compound, 1inch, Tezos, Sushi, Chainlink, Zcash (+ 20 updates)
• Coinbase taps Nasdaq for direct listing at $50 billion valuation (CoinDesk)
• Robinhood raises $3.4 billion in capital from Ribbit, a16z, Sequoia (Robinhood)
• Nic Carter on how obvious fake trade volumes are today
• IBM Blockchain team has been eviscerated by 90% (CoinDesk)
• SEC’s Hester Peirce says DeFi will be "challenging for us” (Forkast)
• The evolving landscape of Digital Governance (Mario Paul)
• MicroStrategy buys another $10mm BTC; now holding $2.5bn (Decrypt)
• Daily Shade: Scott Galloway says Bitcoin is the reason you're not getting laid.

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