Multicoin: Some trends will never change, even in 2025

Earlier this week, we published a typical VC article about new areas that the Multicoin investment team is looking forward to focusing on in 2025. In the spirit of Jeff Bezos’ famous quote, we thought it was also necessary to highlight some trends that we usually take for granted, but are quietly accumulating and providing a stable foundation for our investments.

The relentless pursuit of capital efficiency

By Kyle Samani, Co-founder of Multicoin Capital

DeFi started out with extremely low capital efficiency. Uniswap’s xyk curve is notorious for its capital inefficiency.

Over the past five years, capital efficiency in DeFi has improved in all aspects. Limit order books (CLOBs), revolving/multi-products, pooled liquidity, using USDe-pegged stablecoins (USDe) as collateral on derivatives exchanges, using derivatives collateral to facilitate lending, using liquidity provider (LP) positions as derivatives collateral, etc. The market will always be relentless in its pursuit of capital efficiency.

That’s the beauty of DeFi. Permissionless innovation drives all of these improvements in capital efficiency.

We believe that Drift, the leading derivatives decentralized exchange (DEX) on Solana, represents a form of the logical endpoint of DeFi capital efficiency. Spencer and David spoke about these issues in their presentation at the 2024 Multicoin Summit.

Endless thirst for new financial games

By Tushar Jain, Co-founder of Multicoin Capital

Humans will always want to gamble, it’s just that the form of the game changes.

Memecoins are the next generation of gambling. Memecoins are far more volatile and therefore more fun than traditional casino gambling or sports betting. Memecoins offer higher maximum returns than other forms of gambling, and their extreme volatility creates a level of excitement and risk that goes beyond traditional casino games or sports betting. The potential for huge returns far exceeds that of traditional forms of gambling, which is a huge attraction for those who dare to take risks. This potential for huge gains, combined with the inherent unpredictability of memecoins, creates an experience that traditional gambling cannot match.

Memecoins also have a unique social dimension. Tokenizing internet culture into memecoins provides a social element that other forms of gambling lack. They are often associated with internet culture and online communities, creating a sense of shared experience among gamblers. This social aspect turns memecoin trading into a group activity, allowing people to interact with each other based on common interests and experiences. This creates a sense of belonging and shared identity that other forms of gambling do not have.

Memecoins represent a fusion of gambling, internet culture, and social interaction. They offer a high-risk, high-reward experience that appeals to the human thrill-seeking nature while also tapping into the social and group nature of online communities. As internet culture continues to grow, memecoins will likely continue to play an important role in the gambling space, providing a unique and engaging experience for those willing to take the risk.

The human urge to gamble is constant, but the games we play are changing. Memecoins are the next step in this evolution, but they won’t be the last.

The pursuit of transparency in financial markets

By Spencer Applebaum, Venture Partner at Multicoin Capital

In the traditional financial (TradFi) trading market, brokers are able to offer zero-commission trading to retail clients because high-frequency trading firms such as Citadel Securities, Susquehanna International, and Wolverine Trading compete to execute these order flows. This is called "Payment for Order Flow (PFOF)."

These firms are willing to take large amounts of this order flow at prices close to the mid-price because, by definition, this order flow lacks inside information. There is a lot of literature on why payment for order flow is good for the world and not a bad thing (despite the negative connotations it often carries).

The problem with payment for order flow models like Robinhood and E-Trade is the lack of transparency and the auctions are limited to the market makers that the broker works with. In addition, there are layers of intermediaries such as clearing houses, exchanges, and brokers, all of which extract fees that are hidden from the end user and are usually included in the bid-ask spread.

Regarding the opacity of payment for order flow, the research paper states: “Robinhood’s agreements with wholesalers sacrifice price improvement (PI) in exchange for more payment for order flow—exactly the conflict of interest that SEC Chairman Gensler is concerned about… This would not be a problem in itself if consumers could easily discern differences in execution quality across brokers. However, these differences cannot be inferred from the current disclosure mechanism.”

The beauty of DeFi is that it compresses settlement, trading, custody, and execution into a single application programming interface (API), and all links are transparent. This brings a natural advantage to DeFi because the market always values ​​transparency.

Multicoin portfolio company DFlow is pioneering a concept called “conditional liquidity”, which stipulates that liquidity can only be obtained if the front-end application recognizes the receiver as a non-harmful party (or the receiver obtains a better price from the market maker through the algorithm). Market makers can provide liquidity on chain limit order books like Phoenix, or on-chain automated market makers (AMMs) like Orca, providing significant price improvements for retail order flow that lacks insider information, while avoiding being taken advantage of by harmful receivers.

The entire stack is open and transparent, and conditional liquidity can be used to build a payment model for order flow on top of it. This model is ingenious because it combines the advantages of traditional finance and decentralized finance: it can segment order flow and provide better prices for retail traders, while also having the openness, transparency and auditability provided by DeFi.

Value capture will always be split and reorganized throughout the system

By Shayon Sengupta, Venture 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 the permissionless issuance and exchange of assets (issuance-trading platforms) in arbitrary interfaces and environments.

In 2024, asset issuance is concentrated on a handful of platforms — most prominently pump.fun. These platforms became the dominant platforms for asset issuance, but crucially, trading of assets is conducted elsewhere — via bots in Telegram group chats, aggregators like DexScreener and Birdeye, and sometimes directly in Phantom Wallet. Rather than being coupled in a single issuance-trading platform, asset issuance and asset trading are split across a range of decentralized platforms. The issuance and trading of assets have been separated since the birth of crypto capital markets. Bitcoin was launched on a cryptography mailing list called metzdowd.com and is now traded on Nasdaq (via an ETF). Tokens launched on ICOBench in 2017 are still traded on major centralized exchanges (CEXs).

So while pump.fun dominated the asset issuance side last year, the trading side was dominated by Telegram bots and retail aggregator products - these are new sources of order flow. In the long run, I expect being able to control trading or order flow to be a more profitable business.

For the issuance-trading platform, this is just the beginning. The venues where assets are issued and traded will be split and reassembled thousands of times across thousands of platforms, because attention on the internet is not limited to one set of applications — it exists on forums, live video platforms, instant messengers, and every other interface we interact with.

More importantly, I expect these apps to realize more clearly that controlling attention provides an opportunity to control order flow, which is a very lucrative business. Get ready for wallets and trading capabilities to be embedded in more consumer apps in 2025.

Funds are always looking for returns

Author: Eli Qian, Investment Partner at Multicoin Capital

Everyone who has money is looking for an easy and straightforward way to earn income.

Until recently, most sources of yield were reserved for sophisticated market participants and investors. For example, if you put your money in a savings account at Bank of America, you’d earn only 0.01% annualized (and Bank of America would lend your money out at 10%!). Only when you bought a money market fund could you earn a more reasonable yield. But the demand for yield has always existed, and products like exchange-traded funds (ETFs), which take the hassle out of picking individual stocks, and robo-advisors, which can manage your entire portfolio, have made previously restricted yields more accessible to non-professional market participants.

A similar situation exists in the cryptocurrency space, where earning returns through staking or lending is not easy and requires knowledge. Products that simplify the process of earning returns will continue to develop and put an end to this knowledge arbitrage phenomenon that puts retail users at a disadvantage. Today, you can just bring your cryptocurrency to a wallet or application and get staking or lending returns with a few simple clicks - knowledge of staking, lending, etc. is not required. Products such as Fuse Wallet and StakeKit can do this. In the future, wallets and DeFi applications will automatically allocate and rebalance assets across validators, lending protocols, and liquidity pools to get the best returns for users 24/7.

Innovation reduces banking costs

By Vishal Kankani, Venture Partner at Multicoin Capital

In the 15th century, the Medici family pioneered the development of modern banking. At the time, banking was slow, physical, expensive, and required a high level of trust. Over time, the cost of accessing financial services has dropped dramatically. With blockchain technology, we see a clear prospect of 24/7, global, zero-cost banking.

No matter how advanced the financial infrastructure becomes, the need for banking will always exist. Banking as a Service (BaaS) emerged because it is difficult to build basic financial components within the framework of the traditional financial system, no matter how innovative the application layer is; naturally, this has led to modularization at the software level, resulting in the separation of the front-end and back-end. Today, the back-end part is called BaaS.

BaaS providers license their infrastructure to fintech companies, enabling businesses to launch digital banking, corporate credit cards, and lending products with minimal time and cost. By providing these services through application programming interfaces (APIs), BaaS providers allow technology companies to focus on customer experience and unique products while the BaaS provider handles the “boring but critical” back-end stuff: compliance, risk management, and money flows.

Assume that the BaaS system before the advent of blockchain includes banking infrastructure, KYC/AML compliance, payment processing, card issuance and data aggregation. Although this system is feasible, it is complex and inefficient because it is still based on the traditional banking infrastructure established in the 1970s (SWIFT/ACH), has high fees, cannot provide 24-hour service, is capital inefficient and does not have global applicability.

Blockchain will disrupt modern BaaS because it represents a fundamental innovation. By using blockchain-based assets and protocols, we can build a new BaaS model that is simpler, cheaper, faster, global, and more transparent.

A blockchain-based BaaS system might look like this: self-custodial wallets like Squads, on-chain KYC and compliance protocols that enhance programmability (such as zkMe), stablecoin payment infrastructure (such as 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 leaner, more efficient, and more transparent model for financial services.

Multicoin's portfolio company Squads is essentially a banking-as-a-service protocol on Solana that allows businesses, individuals, and developers to create a secure account to store value and conduct programmable transactions. Squads is the first formally verified protocol on Solana and has processed more than $1 billion in stablecoin transaction volume. The assets protected by the Squads protocol are growing exponentially. We expect Squads to firmly lead the development of BaaS in 2025.

Removing friction increases usage

By Matt Shapiro, Partner at Multicoin Capital

When you make something easier to do by removing cost and friction, people will naturally do it more. Email changed the way we communicate. The iPhone made it easier to take photos and document our lives. Amazon made it easier for us to shop online. Social media made sharing content seamless.

It’s clear that the same results would occur if transactions and transfers were made easier. Stablecoins may well spark one of the most significant financial changes of our time. Being able to transfer money with near-instant settlement around the clock would have far-reaching consequences. It would allow dollars to penetrate new markets and get into the hands of real users in a way that Treasury auctions cannot. It would allow commerce to proceed more efficiently, uninterrupted, at night, on weekends, or on holidays. It would reduce working capital requirements and drastically reduce the cost and time of cross-border transactions. The supply of stablecoins is already at record highs, as is the volume of stablecoins traded, both of which should accelerate as regulatory clarity opens the door to stablecoin acceptance.

The growth of stablecoins will further the concept of open finance. When transactions become easier, more transactions will occur. People who hold stablecoins will seek yield on these assets and will gravitate to platforms like Kamino and Drift, which automatically match lenders and borrowers by reducing friction. Once on-chain, stablecoin holders will have access to money market funds like BlackRock's BUIDL and decentralized exchanges like Drift, Jupiter, Raydium, and Uniswap with just a tap. As on-chain assets continue to grow, stablecoin holders will undoubtedly have more assets to choose from and participate in. Stablecoins are a "Trojan horse" into the on-chain economy, which is expected to develop into a more inclusive and open global financial system.