Original title: Drift ($DRIFT) Analysis and Valuation

Original author: Spencer Applebaum, co-founder of Multicoin Capital, Tushar Jain, investment partner of Multicoin Capital

Original translation: 0xjs, Golden Finance

On September 11, 2024, Multicoin Capital released a 25-page research report analyzing the valuation model and price target of Dfrit, and stated that it has accumulated a large number of DRIFT positions in its liquidity and venture funds. Multicoin Capital values DRIFT at $3.58, more than 7 times higher than its current market price.

The following are the key points of the Dfrit research report, translated by 0xjs@ Golden Finance.

Multicoin has accumulated a large position in DRIFT, the native token of Drift, the derivatives decentralized exchange on Solana, in our Liquidity and Venture Funds. We have built this position over the past few years through private and public markets.

Below is an executive summary of our 25-page Drift report. Our “Full Report” contains the full report and analysis, including our valuation model and price targets.

Summary

We have long discussed Open Finance, which we define as making all units of value (including but not limited to stocks, bonds, real estate, and currencies) interoperable, programmable, and composable on distributed ledgers to make capital markets more efficient and accessible to everyone on the planet. Open Finance, and by extension Decentralized Finance (DeFi), is one of our three major crypto themes. The biggest opportunity in Open Finance is to build a protocol that gives anyone, anywhere in the world the ability to trade any asset.

A truly global permissionless financial market would be extremely scalable (the market has yet to fully realize how large this market could become). We expect billions of people in developing countries to first seek out derivatives DEXs as their primary means of accessing global financial markets. DEXs ensure that no exchange operator or politically motivated regulator can unilaterally change the rules of an exchange.

We believe that the derivatives DEX market will be a winner-take-all market due to the strong network effects of liquidity. We also expect them to cannibalize the market share of centralized incumbents due to their ability to cut costs and pass on the savings to traders; DEXs do not require large customer support teams, localization, universal deposit/withdrawal and custody systems, etc. In order to grow into the default global trading venue, it is important for teams to make the right trade-offs early and start the flywheel by attracting liquidity providers and takers. We think Drift has done it right, and the results will compound.

Drift is a universal DeFi derivatives platform, underpinned by a liquidity layer on which any derivative can be traded or cross-margined in a completely open, non-custodial, and permissionless manner. We expect hyperlocal third-party front-ends to emerge on top of the Drift liquidity layer around the world. These customer-facing applications will compete on user acquisition, fiat on/off pricing, region-specific user experience, etc. - all without having to build smart contracts or aggregate liquidity themselves.

Drift is committed to providing a better platform for traders and builders. The main novelty of Drift is that it is backed by three types of liquidity provision: 1) Dynamic AMM (DAMM), 2) Decentralized Central Limit Order Book (DLOB), and 3) Just In Time (JIT). The combination of these liquidity sources should create tighter spreads, more reliable liquidity, and faster execution times.

In addition, Drift has evolved into a collateralization platform on which any DeFi derivative can be built. This enables traders to seamlessly collateralize their positions in crypto, forex, prediction markets, commodities, and more using a single global margin account. These traders can trade with anyone in the world who has an internet connection.

We believe Drift is ahead of the large derivatives CEXs in terms of functionality, which are the main drivers of perpetual contract volume today. We expect them to continue to iterate on the core perpetual contract product and continue to grow market share over time. We hold this belief because they have a first-order correct construction to build a competitive DEX that can scale to meet global trading volumes

Multicoin's Investment Thesis on Drift

The executive summary of our investment thesis on DRIFT is as follows:

1. We believe that the most successful derivatives DEXs need to be built on L1s that issue other assets on the chain. We believe that application chain derivative DEXs will not win because they will never be as efficient as centralized exchanges (CEXs) and cannot be combined with other programs and assets on general-purpose chains. They cannot benefit from the ecosystem flywheel that exists on general-purpose L1s.

2. Drift has a unique exchange structure that enables three types of liquidity provision: dynamic AMM (DAMM), decentralized central limit order book (DLOB), and just-in-time (JIT). We have previously written about the trade-offs in the derivatives DEX design space and believe that Drift has chosen the right trade-offs.

3. Drift's core metrics (derivatives, spot, and swaps total trading volume) have increased by about 50 times year-on-year, and the protocol's market share in the derivatives DEX field has increased by about 10 times during this period.

4. The Drift team has been persistent and continues to launch new products and features. In addition to derivatives DEX, they are also building a capital-efficient DeFi platform that is not limited to synthetic trading. We believe that Drift can become a DeFi "super application" because it is able to cross-sell trading products to users.

5. Solana's adoption is growing extremely fast, and we are witnessing a long-term growth trend for all Solana DeFi applications. Drift will disproportionately benefit from the ecosystem's significant growth tailwind because we believe it is the best derivatives DEX built on Solana.

6. The Drift team has the privilege of focusing 100% of its efforts on products, not infrastructure. This is only possible when Solana scales without the Drift team having to invest any effort or thought. Using Solana allows the Drift team to focus on products in an integrated, composable stack, rather than the complexity and bridging of modular environments. As the Solana network continues to improve (for example, the introduction of Firedancer and Agave clients and other network upgrades), the developer experience and infrastructure layers that Drift relies on will get better without any engineering effort from the Drift team or other contributors (note: this is an ideal expression of modularity in software systems. Systems should improve naturally over time without developers having to think or act at all).

We believe that the Drift protocol is poised to grow further as users and liquidity continue to migrate to Drift and Solana. Additionally, we believe that people in developing countries around the world want synthetic access to every asset, and DeFi derivatives are their most innovative and inclusive product.

Based on the valuation framework and market assumptions outlined in our Drift research report, we value DRIFT at $3.58, more than 7 times higher than its current market price.

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