DeFi Business Models: The Convergence

Key Insights

• Crypto’s shared settlement and open-source software accentuate liquidity as the key competitive dimension within DeFi since these tech properties negate key traditional dimensions like regulatory positioning and high switching costs.
• Majority of DeFi protocols earn revenue by charging a transaction-level fee to LPs thus curtailing liquidity. This is counterproductive since liquidity is the key feature by which protocols compete.
• DeFi business models which issue liquidity, such as a stablecoin, are significantly more profitable and defensible if there is sufficient demand for the issued token.
• Combining both the liquidity issuance business model which earns revenue via interest with a typical financial service like a DEX or money market is a more optimized model as it shifts the revenue burden away from LPs.
• Some of the top DeFi protocols like Aave and Curve are starting to converge to this model which could potentially increase bottom-line revenues by roughly 40-100% depending on the amount of stables issued.

When any industry adopts a new technological paradigm, the initial business models closely resemble the models of old. The Internet, inheriting from preceding print publications, initially monetized via static ads before giving way to dynamic auctions and direct subscriptions.