Fast Follower Forks in DeFi
How can DeFi protocols design for defensibility if $SUSHI is just the beginning of many more fast follower forks?
|Ian Lee||Sep 1, 2020||11||2|
Last Friday, Sushiswap forked Uniswap, added a governance token ($SUSHI), and fair launched (no pre-mine, no VC funding) with a liquidity mining program—distributing 100% of the network’s ownership to Sushiswap liquidity providers (LPs).
It’s the biggest news in DeFi right now.
찌 G 跻 じ ⚡️ 🔑 @DegenSpartanupdate @SushiSwap now has 68% of uniswap's liquidity just facts bro https://t.co/QL6TR0Qn2w https://t.co/mk0KgWFxc5
In only five days, Sushiswap’s total value locked (TVL) has gone from zero to $1 billion, and $SUSHI’s market cap has grown to $200 million. By comparison, Uniswap has been around for two years (since 2018), grown to $1.25 billion TVL, but has not yet created or issued a token. In June, Uniswap raised a $11 million Series A from a16z, USV, Paradigm and several other VCs.
Because Sushiswap fair launched while Uniswap raised substantial venture capital, Sushiswap stands to be significantly more community-owned than Uniswap. That’s a big deal, especially since $YFI has showed us that fair launches and 100% community-owned networks hold incredible promise, are highly aligned with the ethos of the decentralization movement, and fit with the current zeitgeist against “VC coins.”
(See my post on Monday on why fair launches will disrupt crypto VCs.)
The Rise of ‘Fast Follower Forks’
Whether we like it or not, ‘fast follower forks’—where a team cheaply forks another team’s expensive R&D—are going to become more and more common in DeFi.
A ‘fast follower’ strategy (versus being the ‘first mover’) is not specific to crypto as it’s widely used by businesses like Apple (e.g., Zune -> iPod), Samsung (e.g., iPhone -> Galaxy), Facebook (e.g., Whatsapp -> Messenger, Snapchat -> Stories, TikTok -> Reels), and many others. It’s proven to be a very effective strategy—so we should expect it to be the same (if not more effective) in crypto because of crypto’s open source nature.
A fast follower fork is when a VC-backed crypto team will do months or years of R&D, test and refine the value proposition, develop and audit the contracts, market to attract users and grow the market—only to have another (often anonymous) team fast follow, fork the audited code, and deploy to Mainnet in days with a fair launch model and better economics for users and its community.
Is DeFi Defensible?
Rather than complain about the situation, we need to quickly accept that fast follower forks are an inevitability. It comes with the territory of open source—so what we need to do is learn and continue to grow from events like Sushiswap. (Frankly, I’m surprised it didn’t happen earlier.)
So let’s assume fast follower forks with fair launches will happen even more often in the future—perhaps all of the time. In that world, what can DeFi founders do if they want to make their protocol more defensible and resilient to fast follower forks?
Hello from January 1, 2021
One of the ways we at IDEO help teams know what to do now is to first envision what the future looks like—then work backwards from there. This methodology is called ‘Design Fiction,’ and it’s used in everything from venture building, to product design, to Hollywood movies like ‘Minority Report.’
Let’s see what design fiction could help us learn about fast follower forks and where they might be headed.
It’s January 1, 2021.
You just raised a $10M Series A for your DeFi protocol, so now in total, you’ve sold 20% of the network via a SAFT to VCs at a $50M post-money private market valuation. You’re feeling really good about things—you’ve got plenty of runway to grow the team and last 18 months before raising your last private round. Then you’ll publicly launch your token after some more legal design. That’s more than enough time.
It took you 12 months from your seed round to design, test, iterate, and build the core contracts, which you’ve deployed to Mainnet and have been testing for the last 2 months. You spent $100K on 3 security audits from top firms—as well as over $100K in legal work on the token design and distribution. You don’t plan to launch the token for another 12 months or more—right now your focus is on marketing, integrations, and growing TVL, which currently sits at $5M but with the Series A funding, you’re confident you can get it to $100M before the public launch of your token. Things are n track and going to work out great.
The next morning, you wake up and check crypto Twitter on your mobile phone (as you always do), and you see your company’s handle trending. Hmmm. Maybe a crypto influencer tweeted about how much they love your project? That would be great.
But you’re shocked to learn an anonymous team has forked your audited code, come up with a dank meme, and fair launched the fork with a governance token, better liquidity mining program, and no VC funding. 100% of the network will be given to its users. Their TVL has already surged past $150M in 3 hours, and they’re all over crypto Twitter, the Defiant, and Bankless.
You just got Sushiswapped. This is horrible. It can’t get any worse than this.
But the next day, another fork of your project launches in Europe.
A few days after that, another fork launches in Asia—this time in multiple languages with a visual style and messaging that resonates well with those users.
A week or so after that, another major DeFi protocol with $800 million TVL and thousands of users launches a fork of your project integrated with their system—making their core protocol better and their fork more useful than yours due to the integration and network effects.
You try to compete and pivot, but ultimately things don’t work out, and you decide to shut down the project and return money to your investors.
You were wrong. It definitely got worse. And the worst thing is, you thought you were doing everything right.
Hello from January 1, 2025
Let’s now envision what it’s like five years from now—in 2025—to see what’s the same, and what’s different, in a world with infinite forks. Let’s also take an optimistic view.
You just received a $500K no-strings-attached grant from ‘fair launch capital,’ which comes along with it public support from the founders of top crypto protocols as well as commitments to integrate your new project into their networks. In return, you commit to a fair launch and get support from several teams on the token design and go-to-market to ensure that your fair launch attracts the highest quality, most valuable, long-term users to your protocol. You also get help from the engineering and integrations teams at Aave, yearn finance, and Synthetix to get your contracts in top shape for Mainnet.
You use the grant to hire another engineer and front-end programmer for 3 months to finalize the minimum viable network and interface to launch with. You spend $50K on security audits and $20K for counsel from a few lawyers—not to draft any documents but just to make sure you’re taking all the right steps for the fair launch.
You launch your protocol, and it skyrockets to $1 billion TVL with the support from the crypto community, liquidity providers, integration partners, and users. The market cap of the token also surpasses $1 billion in 10 days. It’s going way better than you imagined.
The next morning, you wake up and check crypto Twitter on your mobile phone (as you always do), and you see your project’s handle trending. Hmmm. Maybe the project just got forked by a fast follower. You wonder which type of fork it is. “This will be interesting.” You take a quick shower, grab some coffee, check the news, then calmly sit down at your computer.
It looks like an anonymous team has forked your project for Latin America and homologated the interface and messaging for Spanish speakers.
Ten minutes later, another team forked it in Asia. And another in Eastern Europe.
That’s awesome. Because with your token economic and governance design, the protocol encourages and becomes more valuable with more forks. You can’t wait for them to fork it in the U.S. too.
Within 3 days of the forks, the combined TVL climbs to $10 billion. The recursive token design increases the market cap of your token to $5 billion because of the forks. The forks are also worth a lot too. That’s amazing! Keep them coming! Your tokens (as well as the forks) are all on Uniswap, Synthetix, Aave, yearn, Nexus Mutual, and two dozen protocols. And you haven’t even launched your liquidity migration and burning incentive programs yet.
The next day, you wake up and find that another anonymous team forked your protocol—but this time, not in support but in direct competition with your entire system. They’ve called it “The New New Protocol” and claim they’ve got a better design, better distribution mechanism, and that they’ll attract better users.
You think it’s pretty hilarious.
They launch, a few early liquidity miners get rich, but ultimately a week later the protocol pumps to $100M TVL and a $100M market cap before free-falling and bottoming out at $20M TVL and a $30M market cap. It still lives on, but all of the users either got REKT or moved on to another fork to ride the next wave. That’s just the way it goes—and ultimately a lot of the value created by the fork just went back to the highest quality Schelling Point: your project. Your TVL and market cap is now higher than it was before the amateur fork. “Thank you amateur fork” (but sorry to those who got REKT) you think to yourself.
Since your protocol’s community voted in the creation of a long-term treasury, to fund the ongoing development and growth of the protocol, you were hired shortly after the network’s launch along with a small team of passionate and talented engineers, designers, marketers, and business managers to continue innovating and evolving the system. Little did the amateur forker know that you are launching v2 of the protocol tomorrow, which introduces a number of incredible capabilities that could only be conceived and developed by your team because you’re working and collaborating with the best DeFi builders and founders in the world. It’ll take amateur forkers at least 2-3 months to understand v2 and how to fork it. By then you’ll already be ready to launch v3.
But such is the nature of the game. To you it keeps things interesting and fun.
What We Just Learned About the Future
As you can see, through these design fiction exercises, we learned a lot about what the future might look like. Surely, there are alternative versions (I encourage you to try your own), but from them we can draw a number of meaningful and potentially useful insights that crypto founders can utilize now to make their protocols more resilient to forks going forward:
About the Future of Forks:
Fast follower forks will become a common thing—they’ll happen more often and faster than before.
Projects without or that have not yet launched a token have higher risks of being forked, tokenized, and fair launched.
Time is not on your side—the longer you wait the greater risk your protocol has in being forked.
Raising too much venture capital is likely a real thing—be very careful about how much you raise, how much they own, and who you’re raising from.
There will be different types of forks—with different strategies and focuses.
About the Types of Fast Follower Forks:
Pump and Dump Forks: Forks whose primary purpose is to make a few people a lot of money, get a lot of people REKT, then move on to the next one.
Fast Follower Forks: Forks genuinely trying to unseat the original protocol or do something a little bit better—whether token distribution, incentive design, or a key functionality.
Homologated Forks: Forks that homologate the protocol, interface, brand, and messaging to a particular geography, region, customer, or segment. These forks try to take advantage of better customer understanding and intimacy.
Big Protocol Forks: Forks from existing, well established protocols to increase their capabilities and/or offerings to existing or new users.
About the Strategies for Protocols Against Forks:
Fork Integration Incentives: We haven’t seen this yet, but as shown in the design fiction above, it’s likely that we’ll see protocols with incentives that design in rewards for forks that then integrate into the original protocol. I’m excited by what embracing forks could do and mean.
High LTV Users: Focus on acquiring and locking-in the highest quality and lifetime value (LTV) users into your protocol.
Key Opinion Leaders: Acquire and lock-in key opinion leaders in crypto (e.g., crypto founders, crypto investors) into your protocol early.
Community Experience: Design a holistic experience for the members of your community—from the token design and economics, to the communications, forums, to the governance tools and experiences.
Trusted Brand: Design and build a brand that will be globally recognized, respected, and trusted.
Secure Contracts: Get your contracts audited, but also communicate on your website/interface more than just “Audited by XYZ.” Detail what has been audited and the tests that have been run. Publish parts of the audit report publicly.
Trusted Institutional Users: Onboard trusted institutions (e.g., Chicago DeFi Alliance) with strong reputations as users of your protocol—they will in turn confer their brands and reputations onto your protocol. This will become particularly important as institutional players move into DeFi.
DeFi Partnerships and Integrations: Get your protocol adopted and integrated with other top DeFi protocols. Ensure that your assets are composable and used as collateral for other top DeFi projects.
‘Real World’ Partnerships and Integrations: Get your protocol adopted and integrated non-crypto businesses and systems. Do the hard work that a team who forks won’t because it’s too much effort.
UX: Design and deliver the best user experience out there—both for your protocol as well as its integrations and flows with other protocols it is integrated with. If you create the best experience, you will win the users.
Minimize VC: Minimize the amount of VC ownership and overhang on your token cap table to maximize distributions to users, as well as create flexibility.
Resources for Ongoing Innovation/Development: Ensure that your protocol has access to enough capital (e.g., treasury, voting in a foundation, venture capital) to continue to innovate your protocol faster than potential forks.
Liquidity migration and burning incentives: This is more aggressive, but hostile-takeover like strategies are possible if tokens are reserved for these kinds of programs to prevent and/or attack future forks. Simon de la Rouviere outlined some early designs for that in 2018 here.
(Notice that liquidity and TVL is not listed as a defensible strategy.)
As wild as Sushiswap’s fork of Uniswap is, it’s just the beginning. It’s also not something we should be afraid of—but it should be embraced, especially if anticipated and designed for well.
Remember, the best things in crypto are yet to come. Fast follower forks are going to be a part of it.
If you’re working on a crypto project and want to discuss how to design for defenses or even embrace forks (e.g., “fork integration incentives” above), DM me on Twitter here. I’d love to chat.