[Notes] "DeFi Citadels" by Ryan Watkins

This post contains my notes from reading DeFi Citadels by Ryan Watkins of Messari. “DeFi Citadels” has come up on multiple community calls, and these moats are often referenced by @setoshi.

You will learn about 5 moats (a.k.a. sustainable competitive advantages) Mr. Watkins believes DeFi protocols can develop:

  • Community
  • Integrations
  • Brand and user experience
  • Protocol resources
  • Security

As you read, consider:

  • How can we build these competitive advantages at the Index Coop?
  • What are we doing well today?
  • What should we do in the future?

Community-wide understanding of these moats will help guide us to further success. We’re already on track :rocket:



Protocols as Coordinators of Financial Activity

  • DeFi protocols are coordination mechanisms that define rules and provide incentives in order to facilitate financial activity
  • How much value a protocol creates for its stakeholders depends on how effectively a protocol can monetize its balance sheet **
  • DeFi Protocols accumulate capital through selling tokens, retaining protocol earnings, and crowdsourcing liquidity.
  • Protocols only maintain the privilege of managing users’ capital to the extent they continue to provide compelling reasons to park capital with them. **
  • Users keep capital in a protocol for a variety of reasons primarily economic in nature. The leading reasons are fee capture, token rewards, and security.

The core of the DeFi protocol business model is a protocol’s balance sheet, which can be defined as the total amount of assets under management.

Defense in a world of free-flowing internet capital

Protocol defensibly [sic] is derived from a combination of 5 things

  • Community
  • Integrations
  • Brand and user experience
  • Protocol resources
  • Security


  • Communities are one of the strongest drivers of value for DeFi protocols
  • Protocols need a wide and distributed group of committed stakeholders who believe in the vision and are willing to do whatever it takes to make the protocol successful
  • For financial protocols much of what builds trust…is effective risk management
  • Protocols need world class developers committed to perfecting the protocol, and thoughtful and diverse token holders governing the protocol for longevity
  • the only way protocols will have the privilege to store and manage significant portions of the world’s wealth will be if they’re managed carefully.


  • Protocols benefit significantly from integrations both with real world institutions and other protocols
  • Real world integrations: exchanges, custodians, wallets, aggregators, payment gateways, and various financial service providers provide demand that can’t easily be forked
  • Protocol: privileged integrations with other protocols can create unforkable utility

Brand and User experience

  • Brand and user experience can be a powerful source of competitive advantage that keeps users captive
  • This is especially true when a protocol is the first to build a successful protocol in its market, which allows it to set expectations around user experience and build brand equity with users
  • Blockchains are adversarial environments and one wrong move can cost users everything. Having confidence that [a product] works and that you know how to use it safely can lock-in user mindshare and prevent fast switching between protocols

Protocol Resources

  • Whether it be through having raised money or retained earnings from the protocol’s operation, some protocols have significant financial resources that may be an unforkable source of competitive advantage.
  • …large treasuries which grow both endogenously (through activities like staking) and exogenously (through retained earnings or capital raises), provide significant amount of value that ultimately can flow back to stakeholders.
  • Beyond treasuries simply allowing protocols to return value to token holders (dividends and token buybacks), treasuries also allow protocols to engage in various institution building activities (ecosystem spending)
  • The idea is that treasuries provide the opportunity to reward a wide and diverse base of stakeholders for their contributions


  • Security is an important unforkable source of competitive advantage that attracts capital to a protocol
  • Protocols that are secure provide users more confidence and thus are more attractive for high value transactions


The more of the above five defenses the better.

These five features amplify things like liquidity to where it can actually begin to provide network effects



This stands out . The hard work that @reganbozman and @romario have done working with Dentons in Singapore, the work that @verto0912 has done with wallet integrations, and our enduring partnership with DeFi Pulse (@snasps). Each of these relationships further separate us from our competitors.

Relationships like the DeFi Partnerships being led by @Mringz and the institutional sales being led by @Metfanmike and @fallow8 will truly begin to solidify our place. The actions we are taking now will have long-term implications for our survival. We are on the right course here.

At the FLI launch party yesterday, we started to see true community synchronicity between our engineering core and community contributors. Watching @puniaviision and @LemonadeAlpha coordinate the launch of a highly sophisticated product was both exciting and humbling. We are lucky to have some truly talented individuals in our community, and we are at our best when these individuals are allowed to do what they do best.

@Mringz this is something we need to explore more. We really pushed to maximize partnerships over the last three months - the next step is to start thinking critically about how we are building privileged integration and not just partnerships.

We need to be aggressive here. Our website is widely recognized to need an update- we have debated this and discussed options endlessly with not a whole lot of movement. This isn’t anyone’s fault - but we need to fix this. Some problems need to be debated and discussed, and some problems just need to be fixed. The website is starting to fall into the latter category.

As of March 18, 2021, our community is broadly aligned on essentially every major initiative and project. Why is our website the one major outlier? We all know that we need a new one, we all want a new one, we have been talking about building a new one for months, and yet we haven’t moved forward at all.

Everyday we see DeFi project with 1/1000 of our TVL and Market Cap launch with great websites. Why can’t we keep up?

As a community member I take full ownership for this lack of movement. We spoke a lot about a new website in Feb and I should have leveraged that momentum more aggressively. We need to welcome discussion on how to solve this problem - but ultimately this is a problem that will be solved by a community member or members with the relevant skillset and knowledge taking ownership of this problem and solving it.

We have the skill and knowledge base within our community, do we have the will to make it happen? I think we do. In fact, if we really wanted to we could have a website that would be the ENVY of every other DeFi project by the end of April.

(Note: Hard work went into building and designing our current website and we are very thankful that that work happened. But we have drastically scaled our capabilities in EVERY aspect of our community, the website should reflect our new size and strength)

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