Disclaimer: This article is intended to convey more market information and does not constitute any investment advice. The article only represents the author's views and does not represent the official position of MarsBit.
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Source: Bankless
Original title: The Best DeFi Business Models
During the period of the surge in liquidity brought about by the bull market, TVL is the first choice indicator for investors to measure the success of the agreement and its use.
Nowadays, liquidity is drying up and people's attention has shifted to basic income and profitability indicators.
fundamentals have always been important. The bull market just obscures them, but does not exclude them.
It is important to remember that the DeFi protocol is a founding enterprise. Even the oldest is only a few years old, and many agreements are even a few months old. It is unrealistic to ask them to make profits immediately now.
However, the auditability and transparency of blockchain give us unique capabilities to better understand these protocols and evaluate profit paths.
People like to think of DeFi as a single whole, but each type of DeFi protocol runs different businesses, with different competitive advantages, revenue quality and pricing power.
In a mature market, such as TradFi or Web2, you will expect projects with higher revenue quality and stronger pricing power to trade at richer valuations than those with lower quality and weaker revenue.
So, which DeFi protocols have the best business model?
To find out, we delve into the business models of four different types of protocols: decentralized exchanges (spot and perpetual), lending markets (excess and low mortgages), asset management agreements, and liquidity pledge agreements.
1. Decentralized exchange
- Description: Refers to the exchange agreement that operates spot or perpetual futures trading.
- Examples: Uniswap, Curve, Balancer, GMX, dYdX, Perpetual Protocol
- How to make money: Spot and perpetual futures exchanges both come from trading fees. Although the distributions vary among exchanges, these fees are distributed between the protocol and the liquidity providers of the DEX, which usually chooses to allocate a portion (or all) of its share to token holders.
🧐 Income quality: Medium
DEX Income quality is medium.
DEX revenue is difficult to predict because trading volume is related to market activity. While exchanges will have considerable trading volumes during any period of volatility, whether rising or falling, over a longer period of time, trading activity tends to increase in bull markets and decline in bear markets. The revenue of
DEX can be high or low, depending on the exchange.
This is because different DEXs choose to incentivize liquidity in order to gain market share.
For example, dYdX has given $539.1 million in incentives over the past year, with an operating loss of $226.8 million and a profit margin of -73%.
However, other exchanges like Perpetual Protocol have managed to stay profitable, which issued only $5.9 million in tokens, making $10.9 million in profits at a 64.6% margin.
It remains to be seen whether frugal or positive growth will pay off in the long run.
💪 Pricing power: Low/medium
Spot and derivatives DEXs are different in terms of pricing power.
Spot DEXs are susceptible to fee compression in the long run because they do not manage risks, are easily forked, and forked, and for traders seeking the best swap execution, the conversion cost is low.
While some liquidity and trading volume may be loyal to individual exchanges because of their brand awareness and trust in their user base, spot DEXs are still susceptible to the price wars we see in centralized exchanges. Initial signs in this regard have begun to appear, as Uniswap has added a 1 bps fee level to certain token pairs (mainly stablecoins).
, compared with spot exchange , DEXs that provide leverage trading (such as perpetual currency) are not easily affected by these pricing pressures.One reason is that these exchanges require their DAOs and core teams to actively manage and maintain exchanges to manage risks, as these stakeholders are responsible for accessing new markets and setting parameters such as margin ratio .
In addition, it provides synthetic leverage DEX, which only requires a safe price feedback to enter the new market, and can be easily distinguished from other competitors by supporting novel assets. The two factors of
mean that, as a whole, DEX, borrowing from TradFi, should be able to maintain the fee HFL (higher and last longer).
2. Lending
- Description: refers to a loan agreement with excessive mortgage or low mortgage.
- Examples: Aave, Compound, Euler Finance, Maple Finance, TrueFi
- How to make money: The over-mortgage lending market generates income by taking commissions from interest paid to lenders. Low-collateralized lending markets generate income by charging initiation fees, and some also take commissions from interest paid to lenders.
🧐 Revenue quality: The income quality of the low
lending platform is not high.
Over-collateralized and low-collateralized lending market interest income is unpredictable. This is because, like transaction fees, it depends on market conditions.
borrowing demand is positively correlated with price behavior because the demand for leverage increases when the price rises and the demand for leverage decreases when the price falls.
The initiation fees of low mortgage lenders are also unpredictable, because the demand for low mortgage loans is based on the same factors.
Source: Token Terminal
In addition, compared with other DeFi protocols, lenders have very low profit margins because they have to actively release tokens to attract liquidity and gain market share, the average TTM (tracking twelve months) profit margins in the loan market are -829%.
💪 Pricing ability: Medium/strong
Over-mortgage and low-mortgage lending platforms have varying degrees of pricing ability.
over-mortgage lending market should be able to maintain a certain level of pricing power, as these protocols benefit from strong brand awareness and user trust, and the DAOs it manages require extensive risk management to ensure they operate properly.
This creates barriers to entry for challengers, and although it turns out that a large number of incentive forks can attract billions of TVLs, this liquidity is not sticky in the long run for the above reasons.
However, low mortgage lending markets have stronger pricing power because they focus on compliance and institutional clients ( hedge funds , venture capital firms and market makers), thus benefiting from higher barriers to entry for competitors. Furthermore, as they provide very valuable differentiated services to these entities, these agreements should be able to continue to charge initiation fees while remaining unaffected by fee compression for the foreseeable future.
3. Asset Management Agreement
Description: refers to the protocol for operating the yield generation library, as well as the protocol for creating and maintaining structural products.
Examples: Yearn Finance, Badger DAO, Index Coop, Galleon DAO
How they make money: Asset Management Agreements earn revenue from AUM-based management fees, performance fees and/or coining and redemption fees for structured products.
🧐 Revenue quality: High
Asset management company 's revenue is high-quality.
This is because the revenue from the asset management protocol is more predictable than many other protocols, and the revenue generated in AUM-based management fees or revenue generated over a predetermined time period is recurring.
Due to its stability, this form of income is considered the gold standard for traditional investors . It should be noted, however, that performance and coin/redemption fees are less predictable, as these revenue streams depend to a large extent on market conditions, like transactions and interest income.
Asset Management Agreement benefits from very high profit margins.
These protocols usually do not require issuing large amounts of token rewards, because both yield vaults and structured products inherently generate their own rate of return.
For example, two asset management protocols, Yearn and Index Coop, have earned $49.0 and $3.8 million in revenues in the past year, and spent $0 and $355,000 on token releases, respectively.
💪 Pricing ability: Strong
asset management protocol has strong pricing ability.
Asset management protocols are likely not affected by compression because of considerable risks. Although the strategies that generate income can be copied, users have shown a tendency to place funds in asset management protocols that have strong commitment to security, even if the returns are provided are lower and the charging structure is higher than their competitors.
In addition, given the large differences between many individual structured products from each other, it may take some time for the industry to converge on a single, standardized charging structure, which helps further protect the pricing power of the asset management agreement.
4. Liquid staking
- Description: Refers to the agreement to issue liquid staking derivatives (LSD).
- Example: Lido, Rocket Pool, StakeWise
- How to make money: Liquid staking protocols earn income by drawing commissions from the total staking rewards earned by validators. The pledge reward consists of issuance fees, transaction fees and MEVs.
🧐 Income quality: Medium
The income quality of liquidity staking agreement is medium.
LSD The revenue of the issuer is predictable to a certain extent because block issuance is linked to the staking participation rate, which changes slowly over time. On the other hand, revenue from transaction fees and MEVs is less predictable because it is highly correlated with market conditions and volatility.
LSD publishers also benefit from earning fees entirely on ETH (or other native assets of L1). This means that as these assets (hopefully) appreciate in the long term, their earnings value can increase significantly in US dollars.
Although liquidity staking protocols like Lido have to spend a lot of money to incentivize liquidity so far, as their network effects develop, they may have strong profit margins in the long run (more on this below).
💪 Pricing ability: Strong
liquidity staking agreement has strong pricing ability.
These protocols benefit from strong network effects, stemming from the deep liquidity and integration of their LSDs. This network effect increases the cost of switching between users, as large stakers will be less inclined to hold and use LSD suppliers with less liquidity and practicality.
liquidity staking protocols also benefit from high barriers to entry for competitors, as these protocols are not easily forked, as the correct management of these protocols requires complex technology, as well as pledge queues and withdrawal delays due to the illiquidity of underlying deposits. These competitive advantages of
means that liquidity staking agreements should be able to maintain their current market position for the foreseeable future.
Conclusion
As we can see, not all DeFi protocols are equal.
Each type of protocol has its own unique business model, with varying degrees of revenue quality and pricing power.
An interesting gain in this evaluation is the advantages of the asset management business model, which has both high-quality revenue and strong pricing capabilities.
Although the yield generation library operated by Yearn has already become quite attractive, protocols that adopt this business model have not seen the same level of success as exchanges, loan agreements or LSD issuers. It is important to know that YFI is the only asset management token that ranks in the top 15 by market value.
Editor in charge: MK
