Crypto Vertical Integration

Crypto Vertical Integration

The Macalinao brothers had the right idea but the wrong approach.

Apple Vertical Integration
  • Centralized players in the crypto space are already doing this.
  • Execution matters more than innovations in an open-sourced and fork-able industry.
  • Products that are closest to the end users have the most valuable currency and the highest potential to vertically integrate.
  • Vertically integrating removes the need for external composability that can introduce additional risks.
  • The underlying technology might be decentralized, but in near future, the killer products will be centralized.

New Technologies, Same Old Playbook

All of the big crypto centralized players have been doing vertical integration for years. Think acquisitions, a new product launch that copies existing companies, and many more. We’re lucky that despite the size and influence of the likes of Binance, FTX, and Coinbase, the on-chain ecosystem is still ripe for builders and innovators. Relatively new players such as Lido and Frax were able to enter the scene and found product-market fit without getting trampled by these crypto giants.

Imagine a World

There are two crucial factors that can make or break on-chain products’ efforts in vertically integrating and competing against the incumbent CEXs.

  • The on-chain players with the most valuable currency are those who are closest to the end-users. It is much easier to move from Uniswap to Sushiswap than from MetaMask to Rainbow. Non-custodial wallets are arguably the most poised to capitalize on the vertical integration trend and create products that will lock users in its ecosystem, similar to how the CEXs have been doing it.
  • MetaMask made more than $350M in revenue from its in-app “swap” feature, basically Laziness as a Service. Users can easily go to Uniswap to trade, but a lot of them chose to do so within the MetaMask app. Imagine if MetaMask launches its own AMM with concentrated liquidity, becomes its own LP Lfinity-style, and charges cheaper fees for the most popular pairs (ETH/USDC). What if they also decide to launch on-chain earn products or even a stablecoin?
  • The Macalinao brothers’ action in Solana DeFi was the largest elephant in the room for the longest time. Almost all other Solana founders were aware of it, but somewhat helpless to act given the speed of execution that the brothers deployed. It’s actually commendable.
  • In an open-sourced world where protocols are fork-able, having great executions matters more than finding new innovations. It’s not that we should disregard founders that want to try novel ideas, but we should also take into consideration how fast can those founders execute, and whether the ideas are defensible.
  • Daniele Sesta tried to create such an ecosystem (although without the wallet component) by combining SUSHI-TIME-POPSICLE-ABRACADABRA, which in retrospect could have been successful if it’s not for the downfall of TIME. Fast execution matters. For a second, it felt like his DeFi ecosystem could’ve overtaken or competed on the same level with the OG DeFi protocols. His mistake was going too fast and underestimating the risks associated with TIME.

If You Want to Go Fast, Go Alone. If You Want to Go Far, Go Together.

The counterargument to this is the African proverb you just read above. A team that is focused on one product will most likely generate a higher quality outcome in the long run. They will pay attention to every little detail and be more careful with security risks.

But Then It’s All Centralized!

Well, that depends, but first and foremost, I welcome you back to reality. Every successful product and company for the past few centuries has been centralized powers. They were eventually broken up by the governments for the benefits of the free market and to instigate innovations, but everything from chicken producers to big tech and finance is centralized power. By combining everything under one roof, they offer an experience that is unmatched by their competitors.

Ludicrous

Adam Neumann raised $350M from a16z for his new real-estate venture, Flow. Not the Flowcarbon tokenized carbon credit project he’s involved with, nor the Flow blockchain. A spin-up of the old WeWork’s communal living initiatives from a founder that became a billionaire after destroying tens of billions in value for his investors and employees, received the largest ever check that a16z has ever written. While from a return perspective this investment can actually work (I won’t bother with the calculation here), a16z shows that you can destroy decades-long of reputation building within a few years by being a money-driven NIMBY.

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Marco Manoppo

Marco Manoppo

38 Followers

Research Director @DAR_crypto. Writing crypto, investing, venture building, strategy, and life musings. A pragmatic dreamer.