Anti-fork strategies for DeFi products

Reposted from: Ethereum Enthusiasts

Since publishing “Quick Forks in DeFi” a week ago, I’ve been talking to many founders and investors about the impact of forks and how to design fork-resistant (or pro-fork) protocols. Many teams are preparing to release quick forks, and existing projects that have not yet issued tokens are talking to investors about restructuring their token issuance cap tables to make them more “fair” (and therefore more fork-resistant, at least that’s the hope).

The protocol wars have officially arrived, marking the birth of a new era of cryptocurrencies, which means that competitive positioning and strategy are just as important as composability and collaboration.

As a former consultant specializing in competitive strategy, I find this phenomenon very interesting, fascinating, and familiar.

However, it takes more than just smarts. For crypto projects and founders today, competitive strategy is key to building valuable, attack-resistant, and enduring products.

Not all forked products are created equal

First of all, it’s important to understand that not all forks are created equal. Each fork has different expected outcomes, approaches, and strategies. Since Sushiswap launched its “blood-sucking attack” on Uniswap two weeks ago, many fork prototypes have emerged — some of which we expected, and some of which are new.

Quick-to-fork products in DeFi:

Forked products that pump and dump: The purpose of this type of forked product is to allow a few people to cut the leeks of the majority, and then switch to another forked product to continue cutting. Recently, many such forked products have appeared, including YFI forked products, Sushiswap forked products (Sushiswap itself is a fork of Uniswap), and YAM forked products. Quick-to-build forked products: The purpose of this type of forked product is to replace the original protocol, or to make small improvements on the basis of the original protocol, such as token distribution, incentive mechanism design, and key functions. This is what I mean by "blood-sucking attack": these forked products will steal the liquidity of the forked product. Typical examples are (the original forked product is placed in brackets): YAM (AMPL), YFII (YFI), Sushiswap (Uniswap), Hotdog (Uniswap), Kimchi (Sushiswap), CREAM (Compound), Swerve (Curve), etc. Marketing forks: These forks are designed to adapt their protocol, interface, brand, and messaging to specific geographies, regions, customers, and market segments. These forks take advantage of deep client knowledge and intimacy. For example, YFII (forked from YFI) has translations in Chinese, Japanese, Korean, and Thai to connect with users in these markets. Big protocol forks: These forks are derived from existing well-known protocols and can provide more features and/or products to existing users. There are no forks of this type yet, but it is expected to be seen soon.

Emerging fork product prototypes:

Governance forks: These protocols attempt to centralize governance of one or more networks by introducing a meta-governance token. Examples include Unipool (Uniswap), PowerPool centralized voting tokens (Compound, Synthetix, Curve, YFI, etc.), and so on. Interface forks: Copy commonly used user entry products in the circle, introduce new features, integrations, and experiences to attract users from the original product to the forked product. Common areas of this type of fork include aggregators, statistics dashboards, and wallets. Once enough users are attracted, these interface forks can replace some of the underlying protocols. Cross-chain forks: These forks can transfer existing DeFi protocols based on Ethereum to new chains, or enable cross-chain interactions. I bet that there will be many cross-chain fork product projects on Layer 1 blockchains such as NEAR, Polkadot, Cosmos, Tezos, and Tron. Layer 1 blockchain teams themselves may also create cross-chain forks to develop the DeFi ecosystem. New application fork products: This type of fork product will use existing protocols or components to create new applications for new user groups. It can be said that this type of fork product has a completely different purpose - not to compete with the original chain for the same users or market, but to create new markets, application scenarios, and user groups.

By clarifying the differences between different fork product prototypes, teams can better defend against the fork products that pose the greatest threat to them. For example, some forks target the same user groups and introduce similar products/protocols, while other forks target different user groups and introduce new products/protocols.

As you might expect, different approaches to defending against fork attacks are needed for different fork prototypes. There is no one-size-fits-all solution. Each protocol team may need to develop multiple strategies.

Let’s face it: Forks are endless

Whether we like it or not, we need to accept the fact that forks are endless and inevitable (there will always be a team with higher technical skills to fork). This is the disadvantage of open source software.

So, if we assume that each of the forks above is likely to happen in the future, what steps can DeFi founders take to make their protocols more resilient to future forks?

Is it possible to transform forks from a zero-sum game to a positive-sum game through the design of the DeFi protocol, so that both the forked product and the original chain can benefit from it?

1. Rapid fork: Strengthen defense and win through innovation

“Fast forks” are by far the most common type of fork, in part because they are relatively simple to execute. However, there is no good strategy for how to defend against fast forks. As projects like Sushiswap and Swerve have shown, liquidity alone is not a “moat.” Liquidity providers will switch from one protocol to another to maximize their profits.

To defend against “fast fork” attacks from both emerging and existing teams (e.g., large protocols), protocols should employ methods other than liquidity to strengthen their defenses while continuing to innovate to remain competitive.

Strong economic defense

On your token issuance cap table, minimize the amount of tokens held by VCs, distribute as many tokens as possible to users (thereby preventing people from forking on the grounds of unfair distribution), and increase flexibility. Design incentive mechanisms in your protocol to attract/retain liquidity, and think about how to use liquidity migration anti-incentive mechanisms or re-migration incentive mechanisms to prevent and/or attack forked products. In 2018, Simon de la Rouviere introduced the design of such mechanisms.

User Experience

Design and provide the best user experience — not just for your own protocol, but for other protocols that integrate with yours. If you provide the best experience, you will win and retain customers. Build user experiences that forked products cannot provide (e.g., token-permissioned chat rooms provided by Collab.Land), and design the best overall experience for community members — from the core interface, to communications and forums, to governance tools and experiences (e.g., through platforms such as Boardroom).

Unforkable product social network

Focus on attracting and retaining the highest quality users with the highest lifetime value. These can be key opinion leaders in the cryptocurrency space (e.g., founders and investors in the cryptocurrency industry), trusted institutions (e.g., OTC platforms and exchanges), or DeFi communities that will not be shaken by high-yield forks. Show users’ on-chain connections and personal information through leaderboards, simple anonymous reputation engines (e.g., 3Box), or new social experiences that give people a real sense of community (e.g., token-permissioned chat rooms).

Real-world adoption and integration

Get companies and systems outside the cryptocurrency industry to adopt and integrate your protocol. Do some high-level work that forked product teams won’t bother doing. Make well-known and trusted institutions your users and increase your global visibility. This will become especially important as more and more institutional and individual users participate in DeFi.

DeFi composability and integration

Let other top DeFi protocols adopt, integrate, and whitelist your protocol. Make sure your assets are composable and can serve as collateral in other top DeFi protocols to bring more positive network effects to these protocols.

Have the resources needed for continuous innovation

Make sure your protocol has access to enough funding (e.g., a treasury, foundation, or venture capital) to enable continued innovation to prevent being surpassed by forked products in the future. "If you don't innovate, you will die." - So, whether it is through venture capital or a foundation with fair distribution, don't give 100% of the network to short-term arbitrageurs, because they will not help the protocol remain competitive in the long run.

Trustworthy brand, team and contract

Create a long-lasting, globally recognized and reputable brand. Create a unified team through strong leadership, consistent external communications, and the same principles of action. Have plans to handle any situation. Conduct security audits on your contracts, and don’t just disclose “audited by X”, but detail what security audits and tests were conducted. Make some audit reports public.

2. Meta-fork: Fast follow-up and cooperation

The interesting thing about meta forks is that we usually don’t know in what way (some form of governance or UI/UX abstraction) they intend to support/attack the underlying protocol. In these cases, the best approach is to contact these teams, assume they are well-intentioned, and establish a cooperative relationship with them.

Who knows, if they really want to better support your protocol and community, you might as well become a true partner with them. However, if they have bad intentions, you can consider the following two options:

Fast-Following Forks

Give the meta-fork a taste of its own medicine and leverage your existing brand and user base to fast-track the meta-fork. Copy the meta-fork’s new products and features and add them to your product’s existing experience or as a standalone project. Worried about the meta-fork issuing a governance token? Issue one too. Worried about them forking your UI? Add their features to your UI. Make the R&D work on the forked product a better fit for your product/protocol.

Building collaborative creative relationships

Partnering with other DeFi protocols not only allows you to quickly follow up, but also creates new features, integrations, and experiences with multiple DeFi protocols, which is something that meta forks cannot do right now. By establishing partnerships, you can do far more than you can do on your own or on a forked product, while attracting and retaining customers.

3. Forks for new markets: incentives, integration

If they are forks targeting new markets or new user bases, you can either ignore them or embrace them.

In my opinion, you should think more about how to accept such forks: how to find ways to incentivize and ultimately integrate those marketing forks or cross-chain forks to achieve a win-win result.

Integrate forked product tokens

Design a mechanism in your protocol to use the forked product’s token to incentivize the forked product’s liquidity to move to your network. For example, combine the forked product’s token with your token to create a new/scarce asset using a token bonding curve.

Providing Collateral for Forks

Design mechanisms to incentivize users to use your token as collateral on new forks, allowing forked products to leverage your liquidity to grow (while also giving your token new use cases). Further incentivize forks to integrate into your protocol, giving them access to and benefit from your users, tools, experiences, etc.

Fork Integration Incentive Mechanism

Design incentives to encourage forks to integrate into your protocol so that both sides benefit from each other’s users, tools, and experience. You may also consider hiring integration managers to support forks.

Shared infrastructure

Create infrastructure for your protocol and offer it to forks (perhaps in return for integration), e.g. shared fiat on/off-ramps, wallets, user profiles, social graph, codebase, documentation, etc.

Establishing an ecological fund for forks

Set aside a portion of your tokens to establish a treasury, foundation, or community-governed DAO to support the creation, development, and integration of forks into your protocol.

4. New Application Forks: Investment and Integration

You should invest in forks that leverage your protocol or artifacts to create new types of applications and integrate them into your protocol when appropriate.

To this end, your protocol may need to establish an ecosystem or community development fund to make this type of investment. For example, many DeFi founders are now involved in angel investment.

However, a more structured approach could be to establish a “venture capital arm” for your protocol. By investing in new applications, your protocol can identify new markets, products, services, and protocols, thereby taking advantage of new opportunities that could lead to significant growth.

Forks can meet DeFi needs

While there are many ideas listed above, DeFi is still in its early stages of development. Right now, we can only see the tip of the iceberg regarding the development of forked products and defense strategies.

However, these frameworks provide great ideas for DeFi teams, including the scope of the impact of forks, potential responses and strategies, how the cryptographic ecosystem should transform forks from a zero-sum game to a positive-sum game, and how to find new ways to accommodate forks, because forks not only help promote the decentralization of protocols, but also open up new markets, users, and applications in their own unique way.