The success of every company – from tech giants to century-old conglomerates – can be reduced to its moat. Whether in the form of network effects, switching costs, or economies of scale, moats are what ultimately enable companies to evade the natural laws of competition and sustainably capture value.

While defensibility is often an afterthought for crypto investors, I would argue the concept of a moat is even more important in the context of crypto markets. This is due to three structural differences uniquely underpinning crypto apps:

1. Forkability: The ability to fork apps and protocols implies that barriers to entry are implicitly lower in crypto markets
2. Composability: Users have inherently lower switching costs given the interoperable nature of apps and protocols
3. Token-Based Acquisition: The ability to use token incentives as an effective user acquisition tool means that cost of acquisition (CAC) is also structurally lower for crypto projects

Lower barriers to entry, lower switching costs, and structurally lower CAC have the net effect of naturally accelerating the laws of competition in crypto markets. Consequently, not only do moats manifest differently, but at a minimum, they are 10x more difficult to build out.

While we have numerous precedents and heuristics for understanding moats in traditional markets, we lack equivalent frameworks that account for these structural differences. This piece aims to bridge this gap by establishing a new framework for understanding defensibility in crypto markets. The goal is to get to the root of what constitutes a sustainable moat, and downstream of this, identify the handful of applications positioned to ultimately capture value.

A Novel Framework For Assessing Application Defensibility

Warren Buffet, the king of defensibility, has one of the most simple, yet effective, heuristics for identifying defensible companies. He asks himself, If I had a billion dollars, and I built a competitor to this company, could I steal significant market share? 

By tweaking this framework slightly, we can apply this same logic to crypto markets while taking into account the aforementioned structural differences:

If I fork this app, with $50M in token subsidies, can I steal and maintain market share?

By entertaining this question, you naturally simulate the laws of competition. If the answer is yes, it is likely a matter of time before an emerging fork or undifferentiated competitor erodes that applications market share. Conversely, if the answer is no, the app by default possesses what I believe is downstream of every defensible crypto app — “un-forkable” and “un-subsidizable” properties.

To better understand what I mean by this, take Aave for example. If I forked Aave today, no one would use my fork given it wouldn’t have the liquidity for users to borrow nor the users to borrow said liquidity. TVL and the two-sided network effects underpinning money markets such as Aave is therefore an “un-forkable” property.

However, while TVL certainly provides money markets with some degree of defensibility, the nuance lies in asking if these properties are also immune to subsidization. Imagine a well capitalized team came along and not only forked Aave, but additionally engineered a well-designed $50M incentives campaign to acquire Aave’s users. Assuming the competitor is able to reach a competitive liquidity threshold scale, there may not be much of an incentive to switch back to Aave given money markets are inherently undifferentiated. 

To be clear, I don’t see anyone successfully vampiring Aave anytime soon. Subsidizing $12B in TVL is certainly non-trivial. However, I would argue that for the rest of money markets that have yet to reach this scale, their TVL may in fact be subsidizable.

Kamino’s recent successful vampire attack on MarginFi underscores this logic. On the back of a well-executed incentives campaign, Kamino was able to not only acquire, but importantly retain users given there wasn’t much of an incentive to go back to using MarginFi.

It is also worth noting that while larger money markets such as Aave may be insulated from emerging competitors, they may not be entirely defensible from adjacent apps looking to horizontally integrate. Spark, the lending arm of MakerDAO, has now stolen over 18% market share from Aave after spinning up their own Aave fork back in August of 2023. Given Maker’s market positioning, they were able to both siphon and retain users as a logical extension to the Maker protocol.

Consequently, in the absence of some other properties that cannot be easily subsidized, lend/borrow protocols may not be as structurally defensible as one may think. By once again asking ourselves — If I fork this app, with $50M in token subsidies, can I steal and maintain market share? – I would argue that for the majority of money markets, the answer is in fact, yes.

Taken to its logical conclusion, not only could we envision a world where margins increasingly compress to zero, but furthermore, in an attempt to remain competitive the majority of money markets may be forced to retain market share with unsustainable incentives. This would imply that in the absence of alternative “un-forkable” and “un-subsidizable” properties, irrespective of a couple apps, the natural resting state of the money market vertical may paradoxically be a state of negative value capture.

DEXs

The popularity of aggregators and alternative front-ends makes the question of defensibility slightly more nuanced in the DEX market. Historically, if you asked me which model is more defensible — DEXs or aggregators — my answer would be undoubtably DEXs. At the end of the day, given front-ends are simply different lenses through which a back-end is viewed, switching costs are inherently lower across aggregators. Aside from some DeFi integrations and an off-chain algorithm that handles routing, aggregators do not own any meaningful properties that cannot simply be forked and subsidized.

Conversely, given DEXs own the liquidity layer, there are much higher switching costs associated with using an alternative DEX with less liquidity. Doing so would assume more slippage and worse net execution. Consequently, given liquidity is un-fokrable and much more difficult to subsidize at scale, I would have argued that DEXs are meaningfully more defensible. 

However, while I expect this to remain true for the time being, I believe the pendulum may be swinging in favor of front-ends increasingly capturing value. My thinking can be distilled to four reasons. 

First, front-ends have evolved meaningfully over the past few years. Today, the most popular “aggregators” are now intent-based front-ends. These