tl;dr: DeFi is exploding. Barriers to entry are low. What is the differentiator? Good governance.

The pace of innovation within the DeFi space is too fast for me to keep up.

A few weeks ago, a project called Sushi Swap came on the scene and within 6 days, had over $1bn of liquidity locked in.

I saw a lot of people talking about it on Twitter and dutifully bookmarked the whitepaper for later reading. By the time I got to it, the project had imploded.

But then, just as fast, it came back.

It seems like every day there is a new project that is forking an existing project, making some modifications, launching, and then attracting attention.

In some respects, this is the beauty of open-source innovation at its best. The whole point is that the time to innovation is reduced significantly because the software is already out there.

No one needs to re-invent the code for Google or Facebook in a crypto world because it’s sitting out there on GitHub.

(Ironically, a centralized repository owned by Microsoft, but that will change at some point- probably when MSFT launched a GitHub token.)

The upside is the oft-mentioned “Cambrian explosion” of tech innovation and it’s dizzying.

The downside is that it makes the Wild West look like Singapore.

Which brings me to the major point (I hope).

Crypto Differentiation

SushiSwap was able to garner so much in deposits in such a short time because it was a fork of Uniswap.

Uniswap is one of the “crypto-Unicorns” and in the past year has grown to become the dominant Decentralized Exchange (Dex), with its volumes surpassing centralized Coinbase Pro.

What the SushiSwap experience highlighted is the lack of defensible moats in many of the crypto projects. Not that this was news, because it was obvious from the beginning of the innovation cycle that the same type of “lock-in” that banks and other traditional liquidity providers or, even beyond finance, other centralized institutions is absent in crypto.

So, the question becomes: if all the code is open-source, how does a crypto-based entity differentiate?

It feels like the industry is slowly waking up to something that the teams at DAOstack and Aragon have known for a long time. Joel Monegro and the Placeholder team has been talking about this for a while now as well.

Good governance.

Uniswap Responds

I suffer from bouts of insomnia. I should probably not read the Deficit Myth before going to sleep.

During one of those recent spells, I was doomscrolling through Twitter and picked up the news that Uniswap had launched its own governance token, UNI, to those who had provided liquidity in the past.

It was a strong move and, whether it was originally intended or a rapid response to the SushiSwap situation is above my pay grade, but it brought me back to the question:

Why would someone stay with one protocol versus another?

Good Governance

And, ironically, it was the Deficit Myth that helped me think about it.

The reason why MMT even has any legs is because it is based upon the assumption (among others) that the US Dollar will remain the global reserve currency for the foreseeable future.

It’s plausible, but the question is: why is the USD so revered?

One reason is that, despite the many shortcomings of the country, the US is perceived as the country with the best governance when it comes to laws and contract enforcement/protection.

That gives people the “TRUST” that their assets, value, and wealth will be safe, compared to say Venezuela.

Hence, yield below 1% and a Fed that is committed to keeping rates at zero for the next few years while trying to increase inflation above 2%.

Leaving aside the fact that the US is basically being an abusive monetary spouse to the rest of the world, it’s a strong endorsement of the power of good governance.

And it’s a reminder that the game in crypto is not about the swift, fast, or sexy (SushiSwap had the best branding in crypto history, imho), it’s going to the ones that, like the US in its best form, can prove that it’s the best managed, best governed entity.

This is where DAOs-Decentralized Autonomous Organizations-come in. Though 2019 was supposed to be the “Year of the DAO”, it’s looking like 2020 is that year.

We’ve seen a huge number of DAOs launched and the UNI token is only the latest. Deep DAO is the leading entity tracking this development and, as they add more crypto-native metrics regarding good governance, we’ll start to get a better sense of the correlation/causation between governance and long-term tokenholder value.

My sense is that it will be high, even if not apparent for a few years.

The governance tokens like MKR, COMP, UNI, GEN, and many others are the equivalent of citizenship.

Will you want a US, Swiss, Japanese, or German passport? Or one from Myanmar, Congo, or North Korea?

Good governance has always mattered when it comes to value.

Now, it’s just crypto-governance.