10x Better – The Minterest Benchmark

A message from Josh Rogers, Founder & CEO of Minterest

I recently got asked a great question by a Minterest supporter seeking to clarify a point I had made, and thought I’d turn my response into a blog and share it with you. 

It started with me stating, “Given Minterest is doing something different, in order to shift behaviour it needs to convince users the benefit it provides is significantly greater than the alternatives. You can think of the minimum benchmark as 10x.”

I got asked what I meant by a minimum 10x benchmark. Did it relate to yield percentages on Minterest vs other platforms, or something else?

The Short Version

For users to move away from existing sector leaders, Minterest needs to be 10x better.

The TL;DR Explanation

Getting users to change their behaviour from what they already know requires something special. Providing a marginally better solution, say 10% better, is not going to do it. My rule of thumb is 10x. It’s what I consider is the minimum increase in benefit required for any digital offering to work.

If you consider Aave, the market leader in lending protocols, users will simply not move for a modest benefit from what they know is safe, predictable and for them works. Most users will happily pay the price of marginal underperformance when comparing alternative offerings. The result is incumbency, so a strong motivation is required to change.

I’ve learnt over my career the bar which reliably causes people to make that change is 10x better. Yes, it’s possible to cause it with less, but that relies on hope. Hope springs eternal so it’s cheap. I prefer mathematics, even when it’s only 10x!

10x Better 3 Ways

  1. Stunning User Experience 
  2. Optimum Financial Outcomes   
  3. Powerful Network Effects

User Experience

User Experience - Minterest
Photo by Sten Rademaker on Unsplash

Minterest’s extraordinary user dashboard had its stunning design inspired by the dashboard of the Porsche GT3! But more than good looks, it pioneers a new DeFi toolset. Features like its portfolio risk prediction engine accurately inform borrowers of the probability of their portfolio being subject to a liquidation event. Integrated messaging allows the protocol to notify users and its ability to provide insight into future volatility of tokenised assets is incredibly valuable for protocol users and a DeFi first.

Features which provide extraordinary value in supporting user confidence and portfolio safety are important in having users adopt Minterest, but alone are not nearly enough.

Yield Optimising Features

Yield Optimising Features - 10x Better – The Minterest Benchmark
Photo by Shubham Dhage on Unsplash

Minterest has a number of features allowing users to optimise yields. Minterest NFTs deliver boosts in rewards and reward bonuses are earned by users who stake and participate in governance over time. A lot has been covered on this previously so I won’t detail them here and I’ve included links relating to them below.

Note I’ve stated 10x better includes optimising financial outcomes, and yet I’ve just passed over two; Minterest’s NFTs and Loyalty Rewards, and their impact is not insignificant. 

Why would I ignore them? It’s what’s coming that really matters.

Network Effects

Network Effects - 10x Better – The Minterest Benchmark
Photo by Shubham Dhage on Unsplash

People do not generally appreciate the single determining factor in having any app win is network effects. Nothing else comes close, and it is solely the reason firms like Google and Facebook dominate their sectors.

Network effects occur when the features of the app have people interact in ways where each new person who joins the network makes it better for everyone else.

More Is Better

More Is Better - 10x Better – The Minterest Benchmark
Photo by Shubham Dhage on Unsplash

In marketplaces this shows up with supply and demand on opposite sides. More of both makes things better. Each side is better served by more on the other side, which creates what is known as a cross-side network effect. The other type is a same side network effect, where more on the same side makes things better. Buyers writing reviews which other buyers read is an example, but notice it has a cross-side benefit as well, because it supports suppliers too … if the reviews are positive!

As a minimum all marketplaces have these two types of network effects and lending protocols are marketplaces, so they all have them as well. Minterest has three and may possibly have four. The third type of network effect, which I’ll explain shortly, is DeFi unique and very powerful. Facebook has the most of any platform in the world with at least six, which is why despite its many shortcomings it continues to own social media. 

In startups the key thing is to generate more powerful network effects than anyone else. Everything else comes a big second.

Marketplace Network Effects

Marketplace Network Effects - 10x Better – The Minterest Benchmark
Photo by Karine Germain on Unsplash

The way network effects occur in marketplaces is quite specific. More supply supports more demand, and more demand attracts more supply. More of both means most user needs can be fulfilled by the marketplace, creating user convenience. Greater trust develops because if everyone else is using it, then it must be OK. Suddenly, attracting new users is increasingly easier and cheaper.

When those network effects reach a point where they alone are sufficient to attract users, the protocol has reached the tipping point. Aave is an example. Supply and user trust have been strongly developed due to the large number of interactions between its large user community over time. The result is Aave is a natural and easy choice for anyone seeking a safe, reliable lending protocol.

Marketplace network effects were initially hailed in the late 2000s as the ultimate startup defensibility, which is when I first got deep into their design, and I believed it too. Ten years later though, it became pretty apparent they weren’t nearly as strong as network effects in social media or other platforms. It means lending protocols relying on marketplace network effects to defend market position can fail if a new entrant who outcompetes comes along, and as witnessed numerous times the past 20 years, then disrupts and dominates the sector.

A DeFi Network Effect

A DeFi Network Effect - 10x Better – The Minterest Benchmark
Photo by Shubham’s Web3 on Unsplash

Minterest has a third, DeFi unique, very powerful network effect embedded in the protocol’s functions and its token economy. No other lending protocol has it.

The network effect occurs when new liquidity or TVL is supplied to the protocol’s token markets.

1. All things being equal, new supply correlates to more borrowing, which increases fees which are 100% captured by the protocol and therefore the value of its buyback.

2. Increased buyback value supports the value of MNT through increased on-market demand with this MNT distributed to protocol users who stake and participate in governance.

3. This process correlates with higher staking rewards, because MNT being more valuable means the Governance Rewards stakers earn are more valuable.

4. Since total yields are interest plus rewards, more valuable Governance Rewards support higher total yields, which is key in attracting more TVL.

Go to step 1 and repeat.

This is the nature of powerful network effects; a self-supporting, snowballing cycle of growth, resulting in significantly lower user acquisition costs over time. This type of design thinking occurs in Web 2.0 but is essentially non-existent in DeFi.

In short, any lending protocol that generates the strongest network effects wins. Full stop. Nothing else matters. 

Web 3.0 is no different to Web 2.0. Just like Google did with Yahoo, Facebook did with MySpace and Uber did with taxis, Minterest must deliver a 10x benefit in its user features and the way its network effects deliver optimal financial outcomes.

It’s why it was designed from inception to deliver on all three.

Now to 10x

10x Better – The Minterest Benchmark
Photo by Daniele Franchi on Unsplash

Minterest’s network effect just caused something which may not be obvious. 

In lending protocols, borrow is always less than supply. Yet in Minterest supply and borrow are allocated the same number of Standard Rewards; they get the same 50:50 allocation each day.

The percentage of borrow does vary with the market, but currently across the sector it’s about a third of supply. It means the Standard Rewards shared amongst the smaller borrow side results in borrowers getting more than suppliers do, roughly 3x more!

Borrowers can therefore stake 3x more MNT to earn Governance Rewards which offsets their interest cost, since their total cost of borrow is interest less the value of their rewards. 

Minterest’s Governance Rewards distribute the protocol’s fee value to stakers and lending protocol fees can be substantial. Token Terminal revealed recently Aave and Compound generated fees exceeding a billion dollars in the last few years, which was not captured by the protocol but instead extracted by select players. As covered previously many times, Minterest can capture 100% of this fee value due to innovations such as its auto-liquidation engine, so it captures roughly twice as much as any other protocol is even capable of. 

Minterest transferring this maximised fee value as MNT to stakers is part and parcel of the network effect described above. For suppliers and borrowers this matters, because 100% of fee value returned in this way does something seemingly impossible in traditional finance, because it is.

Suppliers earn the highest long term yields and borrowers have the lowest total borrow cost. 

Both are key outcomes in having Minterest outcompete. 

One would be extraordinary. Both is 10x!

09, March 2023