DeFi Weekly #53

Zerion Raises $2m Seed Round, Uniswap Black-Lists Sanctioned Countries

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  • First up this week, Zerion raises $2m seed round! I find this worth taking note of as it's the second DeFi interface startup to raise within that range (after InstaDapp). Both teams executed their raises by having a couple of thousand users actively using their products. What isn't clear though for both teams is the business model as they continue to execute. I touched upon this last week about how Compound faces issues with being regulated if they decide to charge a fee. DeFi interfaces will also face a similar trajectory, if not harder one, as they don't have the added benefit of having network effects of liquidity. Most plays in this category fall into the "entry portal to crypto" thesis where if you capture the relationship with the user you own a much larger stack. However I actually don't think there's enough validation for this hypothesis at this stage. DeFi users in their current form look for lowest prices with acceptable convenience. Key word being acceptable. Case in point: Dharma has launched for a few months and still only has $1m locked up via their proxy contracts. InstaDapp has 30x the amount but by virtue of 1 large whale 10 smaller ones (there's a post that breaks down this data). Owning the relationship with the user is key in all technology products but one to provide commodity services isn't lucrative in itself. DeFi in its current form doesn't actually value UX, liquidity is the key MOAT and driver of success. Liquidity is driven by usage but the difference between web 2 users is the fact that each app needs to be trusted by consumers to a much higher degree since the literal item on the line is money. Trust is paramount and likewise brands carry more weight than they usually would. For an industry which prides itself on being trustless, users actually want someone/something to trust that can reduce cognitive overload and take care/put their money to work. Front-ends aren't actually valuable by themselves, the brand that they build around them is key. However, should a brand with enough trust and lower rates springs up it should be enough to prompt users to go elsewhere as seen in the past. The winning combo in my opinion seems to be a great front-end, solid protocol engineering and most importantly - a token that captures this value. This is probably a good segue to the next piece of new for this week.

  • Uniswap low-key bans a bunch of countries that the US has shaky relations with. However, there wasn't an official announcement - just a silent code push with no comments from Hayden or anyone else on the project. What is interesting is the fact that someone happened to re-host the front-end on IPFS without the restrictions. It's great to see the permisionless nature of these technologies take place although I think it's a key event to take note of. Many venture funded companies such as Dharma, dYdX or Set only release the bare minimum as open-source to create defensibility around their business model. However as we see more regulatory action crack down, without the front-ends many of these protocols would lose liquidity unless they have strong developer network effects at the protocol layer. The only two in my opinion that can survive are Compound and MakerDAO. The rest still have catching up to do. Dharma wouldn't have much choice as their entire value capture model is owning the end-to-end user experience, although that being said they probably could become regulated since they're aiming more for the US centric high-interest account play (evident through emphasis on Coinbase above other sign up options). Thinking about this a bit more deeply it becomes clear to teams that they have two choices, either bootstrap initial liquidity from existing protocols then capture value at lower levels of the stack with their user's liquidity OR build the protocol and a front-end and hope that other teams eventually build on you through your organically bootstrapped liquidity. The former option appeals to venture funded companies while the latter appeals to token-based companies. In most cases I'd say that it's hard to say which approach is better but it seems that the token based plays have a clear path to value capture and organically growing with increasing network effects due to the shared upside. No venture funded DeFi company has a remotely good chance of profitability due to their ties with the existing legal and financial system while we have MakerDAO and Synthetix becoming $100m+ protocols and a much wider group of people who are interested in their success. A project to keep an eye out for is UMA, they started off venture funded but releasing their governance token soon. My biggest question with them is how they'll continue to raise capital with a small initial raise and the tokenomics that would heavily incentivise VCs. This doesn't just go for UMA but any protocol that takes a longer term path to liquidity, if your token's market cap is $5m at $0.05, in order to raise $2m in additional capital will you need to sell 40%+ (assuming no spot discount) of your total token supply. An obvious answer might be that just set the price higher so the MC trades higher, although that becomes hard if there's enough liquidity on the market to begin with. Teams would instead need to over-charge compared to spot price by magnitudes in order to have healthy financing (which they can if liquidity is super limited which it most likely will). I don't think this is completely out-of-reach but I haven't heard much of this playing out in practice. If anyone has more ideas/thoughts on this I'd love to chat with you. To finish off the point I was making earlier, a good front-end + solid engineering + token = winning combo in crypto. Other methods rely on the VC machine to keep pouring money at higher valuations with unknown paths to profitability (which does have its benefits).