Distribution and Liquidity Win in DeFi
As I have been diving deeper into yield farming, particularly on the Harvest Finance as well as https://defikarma.xyz, I am amazed that these strategies all live online in the open.
How long with this last?
It seems like most traditional finance depends upon opacity as a virtue and a moat.
VC investments and returns are largely hidden.
Hedge funds strategies are secrets.
Fees for transactions and payments are "hidden" through legal jargon and obfuscation.
But when all these become transparent and in the open, who wins?
The competitive field goes back to my adage that distribution wins. In this case, those protocols that have all the liquidity and keep it ultimately win.
New protocols need to attract liquidity, and it seems like whoever owns that part of the funnel will capture the value of all the underlying primitives.
The primitives compete against each other for providing the best returns to the end-user.
It seems like wallets are the browsers to web3.
Browsers didn't capture value directly; but they were strategic, enough so that even competitors were paid off by Google (estimate but need definitive sources: $400M per year).
Wallets are literally keys to the kingdom. While L1 and L2s fight the battle to be the settlement and operating system, the equivalent of browser wars or phone wars is taking place.
On the one hand, I would have thought that the exchanges, like Uniswap, that is the biggest can just keep attracting liquidity because it drives down costs of all the things due to greater liquidity. Swaps with larger liquidity can lower their costs, which attracts more transactions, which attracts liquidity providers.
But what happens when a wallet, like MetaMask, has a competitive exchange?
Wallets could end up being highly personal and the best UX wins, as we saw with Apple vs the rest of the world.
Till it came against Android, which provided even more distribution and lower costs.
Hopefully wallets will continue to flourish, though, to decentralize the experience.
But whoever has the distribution (wallets) can attract the liquidity.