Editor’s Note: This post was originally published by Laura Shin on the Unchained Podcast. The introduction has been adapted for reference.
Introduction
With the rise of new Layer 1 blockchains, the discussion around Ethereum’s network effects and the defensibility of its DeFi protocols has intensified.
Years ago, I analyzed the network effects of non-sovereign Layer 1 currencies like Bitcoin and Ethereum. Since then, Ethereum’s DeFi ecosystem has flourished—enabling users to access billions in liquidity through decentralized protocols.
Given this scale, assessing the defensibility of these protocols becomes critical. One approach is quantifying network effects, though this is challenging due to each protocol’s unique dynamics.
This article evaluates the effort and capital required to fork major DeFi protocols, ranks their relative strengths, and explores Ethereum’s ecosystem-level defensibility.
(Note: Familiarity with each protocol is assumed.)
Protocol Breakdowns and Defensibility
1. Synthetic Stablecoins – Maker (DAI)
Key Defensibility: Liquidity and usability of DAI.
- DAI’s value hinges on its integration into third-party apps (e.g., Augur, Compound) and merchant adoption.
- An alt-Maker fork would need to replicate both collateral and DAI’s external utility—a high barrier.
Verdict: Strong defensibility due to network effects beyond collateral.
2. Fiat-Collateralized Stablecoins – USDT
Key Defensibility: Dominant liquidity in crypto markets.
- Despite competition (USDC, PAX), USDT holds ~80% of the stablecoin market.
- Threat: Stablecoin swap protocols (e.g., Shell) could erode USDT’s liquidity advantage.
Verdict: Highly defensible but vulnerable to frictionless swaps.
3. Lending Markets – Compound / Lendf.me
Key Defensibility: Size of collateral pools.
- Forking is feasible via subsidies (e.g., alt-Compound offering lower rates).
- dForce’s Lendf.me successfully forked Compound by adding unsupported assets (e.g., USDT).
Verdict: Moderate defensibility—liquidity is easily replicable.
4. Synthetic Assets – Synthetix
Key Defensibility: Real-asset-to-Synth bridges (e.g., sETH/ETH on Uniswap).
- Requires bootstrapping liquidity bridges—a temporary moat.
Verdict: Slightly stronger than lending markets due to bridge dependency.
5. AMMs – Uniswap, Bancor
Key Defensibility: Liquidity pool size.
- All AMMs converge toward perfect substitutability (e.g., 0x v3 pools).
- Winners: Traders (best execution), not protocols.
Verdict: Weak defensibility; competition is fierce.
6. DEXs – dYdX, 0x
Key Defensibility: Margin features and low latency.
- Hindered by blockchain limitations (e.g., miner front-running).
- Centralized exchanges (e.g., Binance) outperform in capital efficiency.
Verdict: Least defensible in current form.
7. Mixers – Tornado Cash
Key Defensibility: Privacy pool size.
- Future versions (private payments) could increase capital stickiness.
Verdict: Potentially strong for high-net-worth users.
Ranking: Most to Least Defensible
- USDT – Liquidity dominance.
- Maker (DAI) – Integration-dependent utility.
- Tornado Cash – Privacy pools for wealthy users.
- Synthetix – Requires liquidity bridges.
- Compound – Subsidy-vulnerable liquidity.
- AMMs – Commoditized.
- DEXs – Outpaced by centralized alternatives.
Ethereum’s Ecosystem-Level Defensibility
Ethereum’s composability is its ultimate moat. Protocols like Maker, Compound, and Synthetix interoperate seamlessly—enabling complex transactions (e.g., the bZx attack) that would take years to replicate elsewhere.
New Layer 1 chains should focus on non-DeFi use cases until their ecosystems mature.
FAQs
Q1: Why is DAI more defensible than USDT?
A: DAI’s utility depends on external integrations (e.g., lending protocols), while USDT relies on liquidity alone—which is easier to disrupt.
Q2: Can subsidized rates fork Compound?
A: Yes. Alt-Compound forks can attract liquidity by offering lower rates (e.g., Lendf.me’s strategy).
Q3: What’s Synthetix’s key vulnerability?
A: Dependence on third-party bridges (e.g., Uniswap for sETH/ETH trading).
👉 Explore DeFi’s top protocols
👉 Why Ethereum’s composability wins
Credits: Feedback by Haseeb Qureshi, Alex Pruden, Ali Yahya, and Michael Anderson.
### SEO & Key Features:
- **Keywords:** DeFi protocols, Ethereum, forkability, Maker, USDT, Compound, Synthetix, AMMs, Tornado Cash.