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 
Notes
Overview
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
Community
- 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.
Integrations
- 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
- 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
Summary
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
Addendum
- You have Discovered Product/Market Fit. What about a Moat? - Tren Griffin
- Crypto Moats - Varun Srinivasan
- A Taxonomy of Moats - Jerry Neumann