Decentralized finance (DeFi) is exploding. The quantity of capital locked in DeFi, an imperfect but helpful measure of traction, just lately hit an all-time excessive of $35 billion.
At present, Ethereum is the dominant community for DeFi in all essential metrics, together with capital flows, locked capital, variety of tasks and builders.
Alex is a co-founder at Zabo, a platform enabling fintechs and monetary providers corporations to simply join cryptocurrency accounts to their purposes.
The exploding development in DeFi has stoked an already fierce battle amongst sensible contract platforms, aka “Ethereum-killers,” to win share of the rising class.
Tushar Jain, accomplice on the crypto enterprise agency Multicoin Capital, just lately made feedback on Twitter calling into query Ethereum’s DeFi dominance:
Jain’s view is held by many sensible buyers and will be summarized as: finally increased efficiency, higher designed, inexpensive networks will begin to eat into Ethereum’s DeFi market share.
Certainly, buyers have poured billions into competing sensible contract platforms in assist of this actual thesis.
But, regardless of many competing platforms launching and deploying huge quantities of capital of their efforts, Ethereum’s community results and moat are inexplicably as sturdy as ever. How is that this doable?
It’s doable as a result of Ethereum has highly effective intangible belongings which are extremely troublesome to breed and compete towards.
This isn’t a brand new dynamic – intangible dominance has lengthy been noticed and impacted conventional markets and corporations, too.
Coca-Cola, Google and … Ethereum?
You possibly can typically break up belongings into two classes: tangible and intangible.
Tangible belongings are bodily in nature – issues like cash, gear and servers. For pc networks, a tangible asset may embody how a lot computational energy will be delivered or how briskly a question will be run – issues primarily based on underlying bodily properties of the community. Given tangible belongings’ bodily nature, they’re fairly straightforward to quantify and measure.
Against this, intangible belongings don’t exist in bodily kind – resembling mental property, model recognition and belief. Intangible belongings will be very troublesome to quantify, making it tougher to identify their affect on closing outputs like earnings or variety of connections in a community. Intangible belongings will also be extremely troublesome to copy, as a result of their creation typically depends on one thing much more advanced, just like the ideas of a human mind.
Traders have lengthy recognized that profitable corporations have sturdy intangible qualities giving them the flexibility to accrue outsized worth and keep extremely aggressive for lengthy durations.
Take into account an organization like Coca-Cola. Think about you created a cola that tasted even higher than Coke (“increased efficiency”) and provided sufficient capital to construct a greater world-wide distribution community to rival Coca-Cola’s (“extra scalable” and “inexpensive”).
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:
- A vast, rapidly expanding interconnectedness, of developer energy (proof of work), capital, assets and projects (akin to Google’s existing search volume moat)
- A cryptocurrency brand second only to Bitcoin (the category leader) and the dominant brand in DeFi where Ethereum is far and away the category leader
- A fanatically loyal community that includes the most dominant network of developers and projects in the entire crypto industry.
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 rivals later, Bitcoin continues to transform an outsized portion of the incremental crypto consumer.
See additionally: Money Reimagined: Bitcoin and Ethereum Are a DeFi Double Act
The one community with a brand-loyal following and community results just like Bitcoin is Ethereum. It obtained them by creating utterly new classes – sensible contracts and DeFi – that didn’t compete with Bitcoin immediately. If Bitcoin and web companies with highly effective, intangible community results are any indication, we’re headed in direction of extra dominance for Ethereum, not much less, pushed by an ever increasing intangible moat.
So what’s a competing technologist to do? Cease constructing? Cease investing?
Technologists ought to maintain constructing and investing in new classes the place the authenticity of their product and imaginative and prescient will entice not simply customers, however loyal followers.