Competition in Defi & among CEXs and DEXs
This week’s blockchain insights include an outlook on middleware protocols and their influence on the adoption of layer 1 protocols. We also discuss how centralized exchanges adapt to the growing competition of DEXs and start to join the Defi space.
If you come across great insights or an interesting crypto tweet in the future, please reach out or tag us on Twitter: @BCComparison. Don’t forget to join our Telegram group where we collect insights from all blockchain ecosystems: @BCinsights.
Blockchain Insights
Many blockchain project builders created protocols, tools, communities and foundations without a clear business model or a model to sustainability. Projects without revenues, without a token, or with a token but a huge dev share, might not be able to compete in the long-run.
crypto people are too business model-phobic which will be the ultimate downfall of most crypto projects. Most “tokeneconomics” is engineers dancing around traditional business models because they don’t want to be corporate. Even the rich foundations will dry up.
— Dean Eigenmann (@DeanEigenmann) September 4, 2020
Onboarding of core developers, dapp developers & businesses is a big challenge for blockchain projects. Developer guides and get-started guides are important and quality documentation is a must-have. Below, there is a good thread with info on technical writing, developer experience & Docs-as-Code including insights to API documentation, igration of docs to a new tool, managing SDK releases and Github’s OpenAPI description.
📚 API documentation #01
– @tomjohnson Managing SDK releases
– @nataliekjohnson Designing delightful CLIs
– @github OpenAPI description
– @APIHandyman INTERFACE by apidays recap
– and more!https://t.co/uH5cHV2Ifa— David Garcia (@dgarcia360) August 30, 2020
Chris Burniske shared an interesting thread about middleware protocols, their defensibility and future. The biggest middleware protocols are currently in Defi (e.g. Aave, Compound & Uniswap). Best known are layer 2 protocols focusing on scalability & privacy improvements (e.g. Lightning network or Optimism). Over the coming year, more middleware protocols will also target usability and support multiple layer 1 protocols. These multi-chain middleware protocols with a focus on usability can play a major role in the success of underlying layer 1 protocols.
Having written about…
The Defensibility Of Middleware Protocols: https://t.co/xYVxBqQqd3
Fire Before Growth: The Likely Fate Of Ethereum Killers: https://t.co/dyfTh9kZ92
…I have to say the next 12+ months are going to be tense.
Middleware protocols may be the deciders 🧵
— Chris Burniske (@cburniske) September 8, 2020
Alex Bosworth shared that Bitcoiners chase outside trends and want to integrate them into Bitcoin to benefit from the hype. The same rationale is present in all blockchain ecosystems and many chase the trends much more than Bitcoin – and often too late to actually benefit. Building a project on an (specific purpose) infrastructure that is specifically fit for that use case should ultimately lead to better results and provide a nice defensibility mechanism.
One thing I notice in BTC is a chase of outside trends, "let's bring this hype cycle to BTC"
By the time you notice the hype cycle, it's too late to quickly enter it, so make a big entrance or don't try at all
The most interesting projects are ones that could only happen on BTC
— Alex Bosworth (@alexbosworth) September 10, 2020
The continued rise of DEXs and DEXs trading volumes are no surprise to crypto insiders since DEXs offer a number of advantages compared to CEXs such as the easy usage without KYC, aggregators to find the best prices, liquidity mining incentives, listing of the newest tokens and opportunities for traders. One thing that’s also been missing on CEXs for some time is the direct exchange of 2 assets with the CEX finding the optimal trading route – so far users have to make multiple trades themselves.
It's kinda shocking if you think about it, but the ability to trade from any pair into any other pair where the DEX finds the optimal route in between is great UX and beloved by users.
And not only has it not been invented by CEXs, it hasn't even been copied yet
— Hasu (@hasufl) September 10, 2020
Binance and other CEXs already offer staking for some assets on their platform and they are expanding their services and get faster with listing new Defi assets. Some of the central exchanges and wallet providers such as OKEx, Binance or Crypto.com build their own blockchains, DEXs and start moving more and more into DeFi. CZ from Binance just coined the new term CeDeFi and announced Binance Smart chain as well as the first Defi protocols and collaborations (more info here).
#DeFi is great. I love it. But #CeFi is about to give it a run for its money.
2 advantages CeDeFi offers:
(short thread)
— CZ Binance (@cz_binance) September 10, 2020
Sam Bankman-Fried from Alameda Research (a trading firm) is building the derivatives exchange FTX while also being heavily involved with Solana and currently with the new DEX Sushiswap. They earn a percentage of trades on their exchanges and they can exploit AMM/DEX inefficiencies with their sophisticated trading arm. The following piece explains “Toxic Flow: Its Sources and Counter-Strategies” and shows how sharp traders will end up making more money than Liquidity Providers in AMMs. Right now, the majority of LPs provide liquidity for farming incentives and many LPs are unaware that they may be providing liquidity at a loss (without the farming incentive or compared to simply holding both coins).
This week @tt_0x from @ambergroup_io and I have written an article for @DeribitInsights on toxic order flow, AMMs, and counter-strategies.https://t.co/OA5Lzqj8oE
— Su Zhu (@zhusu) September 11, 2020
Token Terminal provides up-to-date data on digital assets. One of the important Defi KPIs for investors is Market Cap / Revenue which is especially relevant for Defi assets. Balancer is leading in this area with a multiple of 18.
📈Top projects based on price to sales-ratio (market cap/ revenue):
🥇 Balancer – 18.7x
🥈 Ethereum – 19.9x
🥉 Kyber – 23.2x
—
4. Terra – 26.6x
5. Compound – 39.8x
6. IDEX – 46.3x
7. Ren – 57.4x
8. Aave – 76.1x
9. Kava – 97.1xhttps://t.co/udeIF1HanH pic.twitter.com/HObYUhPSRf— Token Terminal (@tokenterminal) September 9, 2020
Many layer 2 protocols are either focused on scalability or part of Defi on Ethereum (Aave, Compound & Co.). Multi-chain middleware protocols with a focus on usability can play a major role for the success of integrated underlying layer 1 protocols. Chris Burniske shared a collection of great articles and an interesting thread around this thesis.
Having written about…
The Defensibility Of Middleware Protocols: https://t.co/xYVxBqQqd3
Fire Before Growth: The Likely Fate Of Ethereum Killers: https://t.co/dyfTh9kZ92
…I have to say the next 12+ months are going to be tense.
Middleware protocols may be the deciders 🧵
— Chris Burniske (@cburniske) September 8, 2020
Defi investors are currently focusing more and more on the derivatives market. Projects such as Hegic, Opyn, Hedget, Synthetix are offering synthetics and options. A comparison of Defi options platforms can be found here and a nice insight into synthetics was given by Multicoin Capital below.
0/ Synthetic assets are going to be dominate crypto trading
There's tons of experimentation in synthetic asset constructions with the Cambrian explosion of DeFi@TusharJain_ and @SpencerApplebau explore the trade offs of the various designshttps://t.co/m3q7yu8tcF
— Kyle Samani (@KyleSamani) September 8, 2020
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