Decentralized finance (DeFi) is exploding. The quantity of capital locked in DeFi, a less than excellent but helpful measure of traction, lately hit all time highs of $35 billion.
Today, Ethereum is the dominant community for DeFi in all necessary metrics, together with capital flows, locked capital, selection of initiatives and builders.
Alex is a co-founder at Zabo, a platform enabling fintechs and monetary services and products firms to simply attach cryptocurrency accounts to their packages.
The exploding expansion in DeFi has stoked an already fierce struggle amongst good contract platforms, aka “Ethereum-killers,” to win proportion of the rising class.
Tushar Jain, spouse on the crypto undertaking company Multicoin Capital lately made feedback on Twitter calling into query Ethereum’s DeFi dominance:
Jain’s view is held by means of many good traders and will also be summarized as: sooner or later upper efficiency, higher designed, more cost effective networks will begin to consume into Ethereum’s DeFi marketplace proportion.
Indeed, traders have poured billions into competing good contract platforms in enhance of this actual thesis.
Yet, in spite of many competing platforms launching and deploying huge quantities of capital of their efforts, Ethereum’s community results and moat are inexplicably as robust as ever. How is that this conceivable?
It’s conceivable as a result of Ethereum has robust intangible property which can be extremely tricky to breed and compete with.
This isn’t a brand new dynamic – intangible dominance has lengthy been seen and impacted conventional markets and firms too.
Coca-Cola, Google and… Ethereum?
You can normally cut up up property into two classes: tangible and intangible.
Tangible property are bodily in nature – such things as cash, apparatus and servers. For laptop networks, a tangible asset would possibly come with how a lot computational energy will also be delivered or how briskly a question will also be run – issues according to underlying bodily houses of the community. Given tangible property’ bodily nature, they’re moderately simple to quantify and measure.
By distinction, intangible property don’t exist in bodily shape – comparable to highbrow assets, emblem reputation and agree with. Intangible property will also be very tricky to quantify, making it tougher to identify their affect on ultimate outputs like income or selection of connections in a community. Intangible property will also be extremely tricky to copy, as a result of their introduction steadily is determined by one thing way more complicated, just like the ideas of a human mind.
Investors have lengthy identified that a hit firms have robust intangible qualities giving them the facility to accrue oversized worth and keep extremely aggressive for lengthy sessions.
Consider an organization like Coca-Cola. Imagine you created a cola that tasted even higher than Coke (“higher performance”) and equipped sufficient capital to construct a greater world-wide distribution community to rival Coca-Cola’s (“more scalable” and “less expensive”).
Would that enable you to convince most existing and new cola drinkers to make the switch off Coke?
Coca-Cola’s tangible assets – the raw ingredients that make up Coke’s taste, packaging and distribution – are not what secure the company’s dominant market position alone. Coke is dominant today because of intangible assets: its universal brand awareness, customer loyalty and the way it makes people feel. Those are incredibly hard to reproduce.
Yet, Coke is a consumer brand. What about technology? We find the same trend there, too.
Google is a clear example of intangible dominance in a technology market. While Google is widely viewed as having the best technology (part of its brand and thus intangible), like Coke, its brand is so strong that it became a generic term (“google it”).
Today, more than 20 years after Google was founded, competing search engines still languish behind Google’s 85%+ market share. Why? Unassailable intangible assets, including brand, trust and existing search volume, which together form part of the moat that enables Google to continually maintain superior tangible assets over long periods.
Ethereum the intangible
What about open source networks? Do the same rules apply?
In open source networks, there are far fewer intangible assets to work with. There are no patents or intellectual property that make one network better than the other. All networks compete on a vast, completely open plane, viewable and copyable by all.
Initially it may seem that this makes tangible assets, such as network speed, computational power or capital availability more valuable.
But it’s quite the opposite. Tangible assets are more easily reproduced in open-source software than just about anywhere else. Just as in traditional businesses, intangibles are king in open source.
Competing networks are quick to point out tangible weaknesses in Ethereum’s network: high transaction fees (not cheap), lack of scalability (not fast) and even easily fudgable smart contracts (not secure).
But they fail to fully appreciate that Ethereum’s immense intangible assets are the real moat behind its dominance:
Attacking primarily on a tangible basis – “better technology” and more resources – will not knock Ethereum from its dominant position anymore than “better cola” or “better search results” will unseat Coke or Google. The intangible moat at this stage is simply too wide, giving Ethereum free range to continue building compounding tangible infrastructure.
Many well-capitalized, super talented and well-meaning teams have built and launched networks that have struggled (so far) to put a dent in Ethereum’s DeFi dominance. What most of these attempts have in common is they assume that producing superior tangible outcomes in the same categories Ethereum owns will be the strategy to win.
What about new users?
Jain’s comment importantly makes the distinction of “new DeFi users,” implying that Ethereum’s dominance won’t last as DeFi grows and there are many new participants.
Yet, we don’t have to look farther than Bitcoin to see the opposite precedent.
Similar to Ethereum, and for twice as long, Bitcoin has confronted and ultimately out-competed every contender to the throne of the dominant, decentralized, store-of-value network. Similar to Ethereum, Bitcoin has constantly been attacked over the perceived limitations of its network, including that it’s too slow and not scalable.
Yet despite a seemingly infinite number of tangible iterations, every Bitcoin competitor has failed to generate an intangible moat of significance in brand, awareness, trust or adoption. Instead of faltering, Bitcoin has dominated the market with a more than 60% share by market cap. Bitcoin’s brand of “digital gold” has become so powerful that not even gold itself can escape Bitcoin’s intangible gravity.
Twelve years and 1000’s of competition later, Bitcoin continues to transform an oversized portion of the incremental crypto consumer.
See additionally: Money Reimagined: Bitcoin and Ethereum Are a DeFi Double Act
The handiest community with a emblem, dependable following and community results very similar to Bitcoin is Ethereum. It acquired them by means of developing totally new classes – good contracts and DeFi – that didn’t compete with Bitcoin immediately. If Bitcoin and web companies with robust, intangible community results are any indication, we’re headed in opposition to extra dominance for Ethereum, now not much less, pushed by means of an ever increasing intangible moat.
So what’s a competing technologist to do? Stop construction? Stop making an investment?
Technologists will have to stay construction and making an investment in new classes the place the authenticity in their product and imaginative and prescient will draw in now not simply customers, however dependable fans.