Opinion: Capital Efficiency of Web3 and DeFi Becomes the Biggest Threat to Traditional Enterprises

DeFi vs TradFi and what it means for the next generation of founders and funders.

Bear markets create great companies.

The combination of scarce capital and pent-up market demand has forced founders and teams to become financially frugal and focus on high-value activities.

Companies like Uber, Dropbox, Facebook, and Airbnb are often cited as bear market success stories, and they all made strides during the global financial crisis of 2008 and 2009.

While the bear market may have played a role, these companies also benefited from the convergence and proliferation of internet connectivity, mobile and cloud computing.

This radically lowers the barriers to entry and customer distribution, making it easy for just about anyone to start a tech company.

In fact, as the market recovers, we are not only seeing a rapid recovery in business creation, but also a long-term shift towards smaller companies with less than 250 employees (see below). Businesses can basically do more with less.

Opinion: Capital Efficiency of Web3 and DeFi Becomes the Biggest Threat to Traditional Enterprises

Businesses create a quick recovery, in line with the mobile boom.

Small businesses do more with less.

Bear market in 2022

Fast forward to today and we are in yet another bear market. Inflation is soaring, we are heading for a recession, public markets are devastated, and the valuations of private startups are falling faster than the Italian footballers in the penalty area.

Once again, as inflation soars, customer demand is stimulated, the cost of capital increases, and investors become stingy, founders are forced to tighten their wallets — especially when it comes to giving founders favorable valuations.

But as in 2008, we may again see the emergence of a new capital-efficient high-growth startup.

The last time we saw this, direct-to-consumer apps and e-commerce players emerged as winners.

This time, it might be crypto and web3 startups.

Capital efficiency reaches new heights thanks to the power of blockchain infrastructure and its culture of open source development and decentralization.

Market Cap – DeFi and TradFi

Decentralized finance (DeFi) has numerous protocols (think of these as companies) that are more capital efficient than their traditional finance (TradFi) counterparts, at least in terms of market cap.

The following numbers are indicative.

Opinion: Capital Efficiency of Web3 and DeFi Becomes the Biggest Threat to Traditional Enterprises

Opinion: Capital Efficiency of Web3 and DeFi Becomes the Biggest Threat to Traditional Enterprises

MakerDAO , considered by many to be the “OG of the DAO”, has around 90 core team members and has developed the $6.8 billion DAI stablecoin. MakerDAO’s MKR token has a market cap of $1.1 billion (~$12 million per team member).

UniSwap is the leading decentralized exchange and trading protocol with around 80 core team members and today’s fully diluted market cap of $5.1 billion, or $63 million per team member.

All of them outperform their TradFi counterparts. JPMorgan Chase and Goldman Sachs both barely made $1 million per employee, at $1.1 million and $1.4 million, respectively.

Value Creation and UAM — DeFi v TradFi

Looking at market capitalization in isolation can overlook the actual value created by an organization because — and this is especially true in the cryptocurrency world — it can be largely driven by market sentiment and Elon Musk’s unhinged tweets — — Just look at the meme token Dogecoin.

Even in today’s bear market, Dogecoin has a market cap of $10.8 billion, on par with commercial real estate trust Scentre Group (owner and operator of Westfield Mall) and American Airlines…you know, those really A company that does things and serves millions of customers every year.

For now, TradFi organizations are much more demanding in terms of transaction volume, managing assets, and ultimately creating more value for society.

The global TradFi capital market is worth about $100 trillion, 500 times the over $20 billion currently locked in DeFi protocols.

Opinion: Capital Efficiency of Web3 and DeFi Becomes the Biggest Threat to Traditional Enterprises

Having said that, the global consumer finance market is worth $2.3 trillion, only an order of magnitude larger than DeFi today. Unlike the TradFi market, whose origins can be traced back nearly 500 years to the Dutch East India Company in the 1600s – the first public company, DeFi is only a few years old and growing rapidly – ​​the term itself was coined in 2018 was created for the first time.

Opinion: Capital Efficiency of Web3 and DeFi Becomes the Biggest Threat to Traditional Enterprises

DeFi is growing rapidly.

Assets under management, or “total value locked” (TVL) in the DeFi world, are a more convincing indicator of value creation and capture.

Here we see a slightly different but still fascinating DeFi story.

Opinion: Capital Efficiency of Web3 and DeFi Becomes the Biggest Threat to Traditional Enterprises

Opinion: Capital Efficiency of Web3 and DeFi Becomes the Biggest Threat to Traditional Enterprises

DeFi protocols are still more efficient when it comes to AUM/TVL.

Of course, doing one thing well is one thing. But offering multiple services at Goldman’s scale is another story.

Still, this capital efficiency is quite telling and creates opportunities for founders and funders.

Founder’s Opportunity

It’s easy for founders to become obsessed with stories of founders raising millions on the back of napkins. For example, FlowCarbon, co-founded by WeWork’s Adam Neumann, recently raised more than $70 million to build its tokenized carbon credit project, FlowCarbon, although the project is still in its early stages.

But the reality is that most web3 projects with teams of a few contributors dedicated to the task can achieve a lot without outside funding.

The capital efficiency of web3 startups described earlier is caused by a number of factors, but is mainly due to (a) open source development and the ease with which blockchains can fork, and (b) the ease with which teams can crowdsource from all over the world. People’s contributions, paying talents with stablecoins such as ETH and DAI or USDC, and incentivizing them with native tokens, effectively allowing talents to share the benefits of protocol growth.

A team of three to five people with a compelling vision and sufficient skills in blockchain development, community building, marketing and design to go far and get higher when funding is needed Valuation, giving away a smaller portion of the business.

Now is the time for founders and teams to shine, adept at eliminating distractions, wasted expenses, and distinguishing signal from noise.

Fund and Investor Opportunities

When startups require less capital, they dominate and investors ultimately have less power and control.

This could ultimately lead to smaller investments and ownership stakes – also due to the community-oriented nature of web3 startups (a startup with more than 20% of its tokens owned by private investors is likely to be objected and may be discarded).

On the plus side, this means investors can put more bets and earn excess capital-efficiency returns from winners.

In such a world, venture funds and investors can provide not only funding, but also the insight and connections needed to help web3 startups thrive, and in areas such as government regulation, security, token economics, AMM, and scale Navigating through the minefields – will have an advantage over their capital-only counterparts.

Lower barriers to entry accelerate the rate at which startups fail, succeed and disrupt incumbents.

If I can end this article with a convincing statement, it’s that incumbents will be disrupted within the next five years. Exactly which incumbents reinvent themselves and stick around remains to be seen.

Posted by:CoinYuppie,Reprinted with attribution to:https://coinyuppie.com/opinion-capital-efficiency-of-web3-and-defi-becomes-the-biggest-threat-to-traditional-enterprises/
Coinyuppie is an open information publishing platform, all information provided is not related to the views and positions of coinyuppie, and does not constitute any investment and financial advice. Users are expected to carefully screen and prevent risks.

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