Reading 2022-03-28

Metadata

• Ref:: Finimize
• Title:: How To Make Sure Your Crypto Investments Don’t Get Forked Over
• Author:: Reda Farran
• Year of publication:: 2022
• Category:: Blog
• Topic:: #topic.cryptoasset
• Related::

Notes from reading

Parker McKee at successful venture capital firm Pillar looks at a combination of two key things to assess a project’s long-term value: its popularity and defensibility.

Most crypto projects are open source, meaning they’re quite susceptible to competitors copying (or “forking”) their code to build a competing project. Hence Parker McKee calls the defensibility of a project as unforkable utility - the hard-to-replicate value to a crypto project’s user.

Five common forms of unforkable utility

1. Project capital
   • Decentralized finance (DeFi) projects have capital – think deposits, collateral, and liquidity – that they rely on to operate their markets efficiently, and this capital is hard to fork.
     • Take DeFi lending/borrowing project Anchor, which has over $15 billion worth of capital in the form of deposits (supplied by lenders) and collateral (supplied by borrowers). So while Anchor’s code can be copied, its $15 billion-plus worth of capital is unforkable utility to its users that serves as the project’s economic moat.
   • DeFi exchanges (also called decentralized exchanges, or “DEXs”) have liquidity pools of token pairs that allow them to act as market makers. Without these, DEXs can’t function. And once again, while you can copy a DEX’s code, its capital – in the form of liquidity pools – is unforkable utility to its users that serves as the project’s economic moat.
     • Popular DEX Uniswap, for example, has over $7 billion worth of capital that’s impossible to fork.
   • You can look at how much capital a project has – also called total value locked or “TVL” – using DefiLlama and DeFi Pulse
2. Project users
   • It’s said that the value of a network is proportional to the square of the number of its users. So the more participants on a network, the more valuable it is to each user. This is the network effect
   • A real example of this is the NFT marketplace OpenSea. Because it has (by far) the most users compared to other platforms, it’s the go-to marketplace for NFT creators, buyers, and sellers
3. Project security
   • specific to blockchains like Ethereum, Solana, and Avalanche
   • Whether through mining or staking, network participants (also called blockchain validators) help keep the blockchains secure in exchange for some financial incentive (earning crypto). And the more users there are, the more secure the network becomes since it’s harder for hackers to execute a 51% attack
   • The more secure a blockchain is, the easier it becomes for the next marginal user to justify storing some of their wealth in that chain or projects built on top of it
4. Token acceptance
   • Similar to currencies, a project’s token can have unforkable utility if it’s generally accepted at face value as a method of payment
5. Project community and brand
   • community is really important in the crypto world since many projects are built and operated by the community itself
   • The whole idea of these decentralized projects is that they’re by the people, for the people – and not run by some centralized party