Author: Multicoin Capital, Compilation: 0xjs@Golden Finance
Jeff Bezos has a famous saying:
What changes will happen over the next decade? That's a very interesting question and a common one. But very few people ask me, 'What won't change in the next decade?' And I want to tell you, the second question is actually more important — because you can build business strategies around those things that remain constant over the long term. ... In our retail business, we know customers want low-priced products, and I know that will still be the case ten years from now. They want fast delivery, they want a rich selection. It's hard to imagine a decade from now that a customer will come to me and say, 'Jeff, I love Amazon, I just wish the prices could be a bit higher,' or 'I love Amazon, I just wish the delivery could be a bit slower.' That's impossible. So the efforts we put into these areas, continuously pushing these aspects forward, we know the energy invested today will yield returns for our customers a decade from now. When you determine that certain things are long-term truths, you can confidently invest significant energy in them.
Earlier this week, we published a typical VC article outlining the new areas the Multicoin investment team expects to focus on in 2025. In the spirit of Jeff Bezos's famous saying, we believe it is equally important to highlight some trends we often take for granted but are quietly accumulating and providing a stable foundation for our investments.
The relentless pursuit of capital efficiency
Author: Kyle Samani, Co-founder of Multicoin Capital
At the beginning, DeFi had extremely low capital efficiency. Uniswap's xyk curve is notorious for its inefficiency.
Over the past five years, capital efficiency in DeFi has improved in various aspects. Limit order books (CLOBs), cyclical/multi-product, concentrated liquidity, using pegged USD stablecoins (USDe) as collateral in derivatives exchanges, utilizing derivative collateral to facilitate lending, using liquidity provider (LP) positions as collateral for derivatives, and so on. The market will always relentlessly pursue capital efficiency.
This is the beauty of DeFi. Permissionless innovation has driven all these improvements in capital efficiency.
We believe that Drift, the leading decentralized trading exchange (DEX) on Solana, represents a form of the endpoint of DeFi capital efficiency logic. Spencer and David discussed these issues in their talks at the 2024 Multicoin Summit.
The endless desire for new financial games
Author: Tushar Jain; Co-founder of Multicoin Capital
Humans will always want to gamble; it's just the forms of games that change.
Memecoins are a new generation of gambling. The volatility of memecoins is much greater, making them more interesting than traditional casino gambling or sports betting. The maximum return offered by memecoins surpasses that of other forms of gambling, and their extreme volatility brings a level of thrill and risk that goes beyond traditional casino games or sports betting. The potential for huge returns far exceeds that of traditional gambling forms, making it a huge attraction for those willing to take risks. This potential for massive gains, combined with the inherent unpredictability of memecoins, creates an experience unmatched by traditional gambling.
Memecoins also have a unique social dimension. Tokenizing internet culture into memecoins provides a social element that is lacking in other forms of gambling. They are often associated with internet culture and online communities, creating a sense of shared experience among gamblers. This social aspect transforms memecoins trading into a collective activity, allowing people to interact based on shared interests and experiences. It fosters a sense of belonging and collective identity that is absent in other forms of gambling.
Memecoins represent a fusion of gambling, internet culture, and social interaction. They provide a high-risk, high-reward experience that caters to the human desire for thrill while also leveraging the social and collective characteristics of online communities. As internet culture continues to evolve, memecoins are likely to maintain a significant presence in the gambling space, offering unique and engaging experiences for those willing to take risks.
The human impulse to gamble remains constant, but the games we play are changing. Memecoins are the next step in this evolution, but they will not be the last step.
The pursuit of transparency in financial markets
Author: Spencer Applebaum, Partner at Multicoin Capital
In traditional finance (TradFi) trading markets, brokers can offer retail clients zero-commission trades because high-frequency trading firms like Citadel Securities, Susquehanna International, and Wolverine Trading compete to execute these order flows. This is known as 'payment for order flow (PFOF)'.
These companies are willing to take on large amounts of this order flow at prices close to the midpoint because, by definition, this order flow lacks insider information. There is a lot of literature discussing why order flow payment is beneficial to the world and is not a bad thing (even though it often carries negative connotations).
The issue with order flow payment models like Robinhood and E-Trade is the lack of transparency, and auctions are limited to market makers partnered with brokers. Additionally, there are layers of intermediaries like clearinghouses, exchanges, and brokers, all of which extract fees that are hidden from the end user and are often included in the bid-ask spread.
Regarding the opacity of order flow payment, this research report points out: 'Robinhood's agreement with wholesalers sacrifices price improvement (PI) for more order flow payment — this is precisely the conflict of interest that SEC Chairman Gensler is concerned about... If consumers could easily discern the execution quality differences among different brokers, it wouldn't be a problem. However, these differences cannot be inferred from the current disclosure mechanisms.'
The beauty of DeFi lies in its ability to compress settlement, trading, custody, and execution into a single application programming interface (API), with all processes being transparent. This brings a natural advantage to DeFi as the market always values transparency.
DFlow, a portfolio company of Multicoin, is pioneering a concept called 'conditional liquidity', which stipulates that liquidity can only be obtained if the frontend application recognizes the recipient as a non-harmful trading party (or the recipient receives better prices from market makers through algorithms). Market makers can provide liquidity on on-chain limit order books like Phoenix or on-chain automated market makers (AMMs) like Orca, providing significant price improvements for retail order flow lacking insider information while avoiding exploitation by harmful recipients.
The entire stack is open and transparent, and using conditional liquidity, an order flow payment model can be built on top of this. This model is clever because it merges the advantages of traditional finance and decentralized finance: it can segment order flow, providing better prices for retail traders while maintaining the openness, transparency, and auditability provided by DeFi.
Value capture will always be continuously split and restructured throughout the system
Author: Shayon Sengupta, Partner at Multicoin Capital
Last year, I published an article on the 'Value Attention Theory' in which I described the core breakthrough of cryptocurrency in consumer applications as permissionless asset issuance and trading in any interface and environment (issuance-trading platform).
In 2024, asset issuance will be concentrated on a few platforms — most notably pump.fun. These platforms have become the dominant asset issuance platforms, but crucially, asset trading occurs elsewhere — through bots in Telegram group chats, aggregators like DexScreener and Birdeye, and sometimes directly in Phantom wallets. Asset issuance and asset trading are not coupled within a single issuance-trading platform but are split across a series of decentralized platforms. Since the inception of the crypto capital market, asset issuance and trading have always been separate. Bitcoin was launched on a cryptographic mailing list called metzdowd.com, and today (through ETFs) it trades on Nasdaq. Tokens launched on ICOBench in 2017 are still being traded on major centralized exchanges (CEX).
So, while pump.fun dominated asset issuance last year, the trading aspect was taken up by Telegram bots and retail aggregator products — these are new sources of order flow. In the long run, I expect that being able to control trading or order flow will be a more profitable business.
For issuance-trading platforms, this is just the beginning. The locations for asset issuance and trading will be split and restructured thousands of times across thousands of platforms because attention on the internet is not limited to a single set of applications — it exists across forums, live video platforms, instant messaging tools, and various other interfaces we interact with.
More importantly, I expect these applications will more clearly recognize that controlling attention provides the opportunity to control order flow, which is a highly profitable business. Get ready for more consumer applications embedding wallet and trading features by 2025.
Capital is always in search of returns
Author: Eli Qian, Partner at Multicoin Capital
Everyone with capital is looking for a simple and straightforward way to earn returns.
Until recently, most sources of yield were reserved for experienced market participants and investors. For example, if you deposit money into a savings account at Bank of America, you can only earn a 0.01% annual yield (while Bank of America lends your money out at a 10% rate!). You can only achieve a more reasonable yield when you purchase a money market fund. However, the demand for yield has always existed, and products like exchange-traded funds (ETFs) that eliminate the hassle of picking individual stocks, along with robo-advisors that can manage your entire portfolio, have made it easier for non-professional market participants to access previously restricted yields.
Similar situations exist in the cryptocurrency space, where earning yields through staking or lending is not easy and requires users to have relevant knowledge. Products that simplify the yield acquisition process will continue to evolve, ending this knowledge arbitrage phenomenon that disadvantages retail users. Nowadays, you can simply arrive at a wallet or application with cryptocurrency and earn staking or lending yields with a few simple clicks — knowledge of staking, lending, etc., is not required. Products like Fuse Wallet and StakeKit can do this. In the future, wallets and DeFi applications will automatically allocate and rebalance assets among validation nodes, lending protocols, and liquidity pools, providing users with optimal yields 24/7.
Innovation reduces the cost of banking
Author: Vishal Kankani, Partner at Multicoin Capital
In the 15th century, the Medici family led the development of modern banking. Banking at that time was slow, reliant on physical operations, costly, and required a high degree of trust. Over time, the cost of accessing financial services has significantly decreased. With blockchain technology, we can clearly see the prospect of achieving 24/7, global, zero-cost banking.
No matter how advanced financial infrastructure becomes, the demand for banking will always exist. The emergence of Banking-as-a-Service (BaaS) arises because, within the framework of traditional financial systems, it is difficult to build basic financial components, regardless of how innovative the application layer is; naturally, this modularizes the software layer, leading to a separation of the frontend and backend. Nowadays, the backend is referred to as BaaS.
BaaS providers license their infrastructure to fintech companies, enabling businesses to launch digital banks, corporate credit cards, and lending products with minimal time and cost. By providing these services through application programming interfaces (APIs), BaaS providers allow tech companies to focus on customer experience and unique products while handling the 'boring but critical' backend tasks: compliance, risk management, and cash flow.
Assuming the BaaS system before the emergence of blockchain included banking infrastructure, KYC/AML compliance, payment processing, card issuance, and data aggregation. This system, while feasible, is complex and inefficient as it is still based on traditional banking infrastructure established in the 1970s (SWIFT/ACH), charging high fees, unable to provide 24-hour service, low capital efficiency, and lacking global universality.
Blockchain will disrupt modern BaaS as it represents a fundamental innovation. By using blockchain-based assets and protocols, we can build a new type of BaaS model that is simpler, cheaper, faster, global, and more transparent.
A blockchain-based BaaS system could look like this: self-custodial wallets like Squads, on-chain KYC and compliance protocols that enhance programmability (like zkMe), stablecoin payment infrastructure (like Bridge), and DeFi protocols for lending (Kamino) and trading (Drift).
The evolution of BaaS to a blockchain-based model is inevitable. As the infrastructure matures, we will see blockchain protocols replace every component in today's BaaS system, creating a more streamlined, efficient, and transparent model for financial services.
Multicoin's portfolio company, Squads, essentially provides a banking-as-a-service protocol on Solana that allows businesses, individuals, and developers to create a secure account for storing value and conducting programmable transactions. Squads is the first formally verified protocol on Solana, having processed over $1 billion in stablecoin trading volume, with assets protected by the Squads protocol growing exponentially. We expect Squads to firmly lead the development of BaaS by 2025.
Eliminating friction will increase usage
Author: Matt Shapiro, Partner at Multicoin Capital
When you make things easier to do by eliminating costs and friction, people will naturally do more of it. Email changed the way we communicate. The iPhone made taking pictures and recording life easier. Amazon simplified our online shopping process. Social media made sharing content seamless.
Clearly, simplifying transactions and transfers will yield similar results. Stablecoins are likely to trigger one of the most significant financial transformations of our time. The ability to transfer with near-instant settlement around the clock will have profound impacts. This will enable the dollar to penetrate new markets in a way that government bond auctions cannot achieve, bringing it into the hands of real users. This will allow business activities to be conducted more efficiently at night, on weekends, or during holidays. It will reduce working capital needs and significantly lower the costs and time of cross-border transactions. The supply of stablecoins has reached new highs, and so has the trading volume of stablecoins. With regulatory clarity opening doors for the acceptance of stablecoins, both should accelerate growth.
The growth of stablecoins will further promote the concept of open finance. When transactions become easier, more transactions will occur. Holders of stablecoins will seek returns on these assets and will lean towards platforms like Kamino and Drift, which automatically match lenders and borrowers by reducing friction. Once on-chain, stablecoin holders can easily access currency market funds like BlackRock's BUIDL, as well as decentralized exchanges like Drift, Jupiter, Raydium, and Uniswap with just a click. With the continued growth of on-chain assets, stablecoin holders will undoubtedly have more assets to choose from and participate in. Stablecoins are the 'Trojan horse' into the on-chain economy, which is expected to develop into a more inclusive and open global financial system.
