The New Business Model for DeFi Wallets
|By Chris Coney|
Last week, I discussed the difficulty open-source projects have in generating revenue if the recipe for their secret sauce is published online for all to see.
So, you might be wondering: How do these companies make money if it’s so easy to copy them?
Well, let’s use Uniswap (UNI, “B”) as an example.
Like many other DeFi apps, it can fund its operations by gradually selling the stock of UNI tokens it allocated to itself when the token was launched.
So, if Uniswap can innovate in such a way that grows the value of the UNI token ecosystem, then the token price should appreciate.
In turn, this should continually increase the value of its treasury.
To get a better idea of these mechanics, I will use some specific numbers. Please keep in mind these numbers are purely for demonstration purposes and are completely made up.
Let’s say I launch a token today and allocate 1 million tokens to myself out of a total supply of 100 million.
On day one, the token trades at only $0.01, making my allocation worth a measly $10,000. That’s not a whole lot if I spent two years developing an amazing app like Uniswap.
At this rate, I’m going to run out of cash to pay my developers within a week and go out of business.
Fast forward a year, and let’s say the token is now trading at $1.
If I still hold 1 million tokens in my treasury, then it is now worth $1 million. But if I sold 50,000 during the year and only have 950,000 tokens left, then my treasury would be worth $950,000.
So, as long as I continue to innovate and my ecosystem continues to grow, my token could be worth $5 by the end of the second year.
At that time, I might have 900,000 tokens remaining in my treasury, which would then be worth $4.5 million.
This kind of mirrors the logic behind an initial public offering.
Although I might have to give up 50% of the ownership of my business to take my company public, I can use the influx of cash I get from the IPO to grow my business more rapidly.
So, if I grow my business value 3x after the IPO, then my remaining equity is worth 3x more than when I started.
The base value of most crypto tokens comes from the fact that you can usually use them to vote on the direction in which a certain project should develop.
To use Uniswap as an example again, if you are a UNI token holder, then you have a stake in the success of the ecosystem.
So, you should be interested in using your tokens to vote on new features that you believe will help attract more users and ultimately increase the value of the token.
Wallet developers can — and have — used this exact same model in an attempt to create a business for themselves.
However, I would say the biggest problem here is that it is extremely difficult to ensure that the tokens you retain for yourself go up in value.
Once most of your token supply is released into the wild, it is in the hands of the market. So, whatever happens to your tokens is out of your control.
The New Business Model for Wallets
In an earlier article, I wrote about the innovation of account abstraction and DeFi smart wallets.
But I casually breezed past how big of a breakthrough this is in terms of creating an entirely new, much more sustainable business model for wallet developers.
In order to make money in the past, a wallet developer might have to rely on the cut of fees they receive by integrating a third-party swap feature into their wallet.
So, I could integrate Uniswap into my wallet and give myself a cut by offering a slightly inferior exchange rate than what is available by going to Uniswap directly.
But hey, that is the price of one-click convenience.
In my DeFi smart wallet article, I highlighted the incredibly welcomed feature of being able to pay network transaction fees in a stablecoin such as USD Coin (USDC).
Recently, I have been studying one such DeFi smart wallet in depth, since I am integrating it into my Crypto Yield Hunter service.
What I have discovered is that the transaction fee quoted by the wallet is 20% higher than the real transaction cost quoted by the network itself.
This additional 20% becomes revenue for the wallet developers, and I personally believe this transforms the wallet business completely.
The ability to earn a sustainable revenue stream based on usage is the ideal alignment of incentives.
If your wallet is not great, users will go elsewhere … and your revenues will suffer.
From a user perspective, not only do they have the simplicity of a 100% dollar-based experience on DeFi, but they also only have to pay for what they use.
There are no subscriptions or monthly bills. You can just pay for the transactions you complete, plus 20% for the wallet developers.
Now the race is on for developers to create the best wallet experience possible.
At the time of writing, the Ethereum (ETH, “B”) mainnet generated over $7 million in transaction fees in the past 24 hours.
If you take 20% of that, that is an astounding $1.4 million.
Based on these current numbers, a whopping $1.4 million is how much potential revenue is available for DeFi smart wallet developers per day!
And that’s on top of the $7 million that goes to Ethereum validators. So, they are no worse off.
Now, it is the users who would be paying the $1.4 million for additional convenience and to ensure their wallet provider has the money to continually maintain and upgrade their product.
Of course, all of this is to the user’s benefit.
This is what we need for DeFi to go mainstream: We need to transition out of the volunteer and donation-based system.
Although that system did a great job of bootstrapping the industry at the beginning, now crypto needs to move to a more sustainable model that creates an upward spiral.
With this new model, crypto should eventually be able to truly compete against the legacy financial system.
But that’s all I’ve got for you today. Let me know what you think about this new business model for DeFi wallets by tweeting @WeissCrypto.
I’ll catch you here next week with another update.
But until then, it’s me Chris Coney saying, bye for now.