Yes—I am comparing the TVL yield of Hyperliquid (a trading platform protocol) with Aave (a lending avenue). However, in a market where consumer preferences are not predetermined and investor loyalty is shallow, capital will flow to where the best outcomes can be generated. Considering the risks of hacks, investors will demand a premium for the risks involved.

Vertical Integration in the Crypto Space

Protocols have slowly begun to execute the same logic.

For Maple, such integration involves years of experience collaborating with hedge funds and market makers. For @centrifuge, its integration involves receiving nearly $1 billion from @grovedotfinance for its JAAA bond issuance from Janus Henderson. They do not capture loose, abstract parts of the economy but rather vertically integrate to provide better products to end users. By doing so, they create moats that are difficult to replicate overnight.

Maple’s years of underwriting experience or Centrifuge’s moat as a trusted capital coordinator are all features of a world where capital and relationships have become the only things that are difficult to replicate.

However, when companies scale up, having the entire stack is necessary to establish a competitive advantage. This is partly why the industry is undergoing mergers and acquisitions.

When a company implements vertical integration, you are not competing on single products but rather on the overall experience users have within it. On Hyperliquid, once HIP-4 goes live, users will be able to deposit for free (through @nativemarkets), participate in predictive market positions, and trade that position as collateral on their perpetual contract product. Its risk engine supports this experience. It’s worth noting that, even in today’s traditional finance, this would not be possible without the assistance of investment bankers.

The tweet below is an example of what happens when products undergo vertical integration within an ecosystem:

Hyperliquid has users, deposit channels, risk engines, trading interfaces, liquidity, and issues Tokens. Competing with it as a new business means fighting on six different fronts at the same time.

For newly launched applications, being able to capture a small slice of that holds far greater significance than building on new protocols like Monad—the total derivatives trading volume of all five perpetual contract protocols on Monad is around $2.6 billion.

Trading platforms have also seen this shift. Coinbase acquired Deribit, which has custody operations, jointly issues currency (USDC) with Circle, gains revenue from reserves, has a substantial wallet infrastructure, and deposit channels in over 100 countries. It has also launched its own blockchain to pursue a vertically integrated user experience. Admittedly, Coinbase may be pursuing retail users who clearly do not want to "publish content" on a blockchain or use Farcaster too early.

Coinbase's integration exists in a loose form but is hidden beneath layers of bureaucracy, regulatory hurdles, and internal priorities. This may be a major distinction between an open-access integrated system and a walled garden. With a market cap of about $60 billion, Coinbase has little incentive to pursue edge developers.

In contrast, Hyperliquid benefits from developing its core pathway into the best marketplace while creating an ecosystem that drives value for the underlying Token.

In this context, Token is part of the integration, as it is what keeps these integrations active and valuable as a shared underpinning. This is where you see the industry getting confused between tokenized protocols and tokenized businesses. The premise of tokenized protocols is that it is easy for third-party developers to build on them. It incentivizes people to drive value (down) towards the Token—often in the form of repurchases from the market.

Companies like Robinhood and Coinbase are powerful economic players, but they cannot replicate Hyperliquid’s core owner-operator network.

The protocol's airdrop ensures that those who hold it are individuals contributing to its economy. They own enough Tokens and are willing to drive value for it. Hyperliquid practices this goal by foregoing 99% of revenue to repurchase Tokens from the market. Imagine a public company repurchasing ESOP from employees with 100% of their income. We might see people more accepting of capitalism.

This is what you see in the evolution of the industry, whether we like it culturally or not. Solana focuses on immutability. Ethereum focuses on censorship resistance and open-source. But if you closely observe where the traffic goes, you will see the industry adjusting its ideology based on commercial realities.

Compromise with Chaos

This is not a new story on the internet. In the late 1990s, there was great hope for an open internet that allowed free speech without the concerns of repercussions. Nazi memorabilia was auctioned on Yahoo until a French court intervened in 2000. Tim Wu explored this topic deeply in his book "Who Controls the Internet?". The story of the internet, or perhaps the story of all human business networks, is that complete decentralization gives way to a diluted version that sacrifices control for economic interaction.

This tremendous expansion of energy is reflected in the way we describe those epochs. “The Wild” West. The internet “bubble”. Perhaps crypto is also experiencing a similar expansion of energy and dilution.

What does this mean for founders? Look at the data for Metamask and Phantom. These businesses are earning more than most L2s because they are downstream of ecosystems that produce enormous economic output. Building bridges to nowhere and for underserved trading platforms is no longer a business model—especially when the associated pain includes hacks. You should build where liquidity and users are today.

Imitating a vertically integrated product overnight is impossible. But you can build on top of it.

Do you remember I mentioned Cubbon Park? I often think about why it has remained so clean and well-maintained during my decade in Bangalore. Part of the reason is that there are rules. For instance, being in the park after 6 PM is not allowed. Or holding events in the park may be met with scorn. Sometimes the rules can be strict. But the rules keep the place functioning properly.

In an era of vertical integrators, we may find ourselves agreeing more and more with the rules so that our funds stay with us, and the economies of the people spending time in them can continue to scale. The trends point in this direction. Stablecoins, RWA (Real World Assets), perpetual contract trading platforms with closed-access risk engines, lending platforms with unknown risk underwriters, and off-chain RFQ products like @DeriveXYZ all point to the same trend.

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Source: https://x.com/Decentralisedco/status/2046961963385925865