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The term “blue chip” is used in the business world to describe financially sound enterprises (like Apple, Microsoft) with built-in profit margins even in difficult economic times. In the crypto space, blue-chip refers to blockchain currencies with a market capitalization of at least $2 billion.
The Blue Chip distinction is also based on dependability and supremacy in the specific market. Bitcoin, for example, had its tenth anniversary in 2019 and now has a market capitalization of more than $1 trillion.
When it comes to crypto blue chips, it's important to distinguish between regular and DeFi coins. Although both use the blockchain concept, the traditional ones refer to the pioneer currencies.
DeFi Protocols as Blue-Chips
DeFi protocols can be considered pioneers, claiming new areas that are currently inexpensive but could become the next Silicon Valley, due to their reliance on financial innovation. Although DeFi is still so new that calling any DeFi projects "blue chips" is a stretch.
Bitcoin and other digital assets are often associated with one word: volatility. While high-frequency traders live on volatility, it's not something that comes to mind when thinking about blue-chip stocks. Despite their current volatility, several DeFi projects have the potential to become blue-chip projects in the future as investors have locked up more than $65 billion in DeFi protocols, according to DappRadar.
DeFi projects are free to investigate and experiment with, as there is no central authority regulating them. Additionally, DeFi is not reliant on federal monetary policies. Though the Federal Reserve in the United States can intervene to rectify stock market disruptions caused by the economic slump, the economy may delve into a vulnerable position with many uncertainties due to rising inflation.
When it comes to protecting your financial future from inflation, there are numerous options. DeFi projects can be considered one of these strategies because they exist outside the Fed's or regulator's domain. The blockchain, cryptographic logic, and algorithmically enforced smart contracts derive the value of DeFi protocols instead of monetary policies, which make them at the forefront of financial technology.
From Humble Beginnings to DeFi Behemoths
Yearn.finance and SushiSwap are two examples of companies that grew from humble beginnings to become DeFi behemoths or blue chips. On the other hand, two projects that appeared to be shakier at first: Yearn.finance started out as a shady yield farm. It has grown into a financial technology conglomerate. SushiSwap began as a fork of Unsiwap that was copied and pasted. Currently, the total value locked (TVL) in SushiSwap is $4.92 billion and $4.71 billion in yearn.finance, according to DeFiPulse.
“Huge total value locked in drives optimism, which makes a DeFi project a blue-chip company”
Moreover, Uniswap offers cross-platform integrations with 69 types of software and platforms like Meter, ZenLedger, MetaMask, to name a few. On Uniswap v2, all trades are charged a fixed fee of 0.3%. This means that traders that add their coins to the exchange, known as liquidity providers, earn 0.3% pro-rata on every deal made for a specific token pair.
As a result, the pair with the most significant trading volume also has the highest fee-earning advantage. And the more money you put in, the bigger your cut of the fees will be. This is similar to ‘more shares you own; the more enormous your future dividends’ will be!
The fact is that blue-chip companies serve as a safe investment option for most investors. With this security comes the assurance of earning consistent, predictable earnings. This principle applies to projects in the DeFi space too. The TVL in Uniswap is $7.28 billion, which makes it a blue-chip project, according to DeFiPulse.
The maturity of prominent DeFi protocols, as well as the general optimism around these projects, add to market trust, which boosts the investors’ confidence. Therefore, the large market capitalization, well-established name, strong focus on financial innovation, success, competitive advantage in the market, and frequently at or near the top of its industry are the various factors that make DeFi protocol a blue-chip project.
So, if Blockchains are countries, then DeFi protocols are like franchises.
Franchise Business Models v/s DeFi Projects
Let’s compare McDonald's with Chick-fil-A to understand if DeFi protocols are franchises or not. McDonald's operates on a heavily franchised model. The benefit of this approach is that the revenue stream (rent and royalty money collected from franchisees) is significantly more steady and, most crucially, predictable.
At the same time, operating expenses are noticeably lower, making the path to profitability much easier. On the contrary, McDonald's competitor Chick-fil-A does not have that spread. It relies upon local businesses to market or sell its products.
Decentralization and the Rise of Ethereum Blockchain as a Franchisor
In terms of the DeFi protocols, open-source code is at the heart of the DeFi movement, with Ethereum and its decentralized network handling the execution of contributed code. For instance, Uniswap is a decentralized exchange that allows anyone to swap ERC-20 tokens straight from their Ethereum wallet using Ethereum's smart contracts protocol.
The fact that Uniswap does not rely on revenue fees is one of the factors that has contributed to its current levels of success and acceptance. There are no costs for people who use the platform to conduct transactions, and no middlemen are necessary to complete transactions. As a result, the company is entirely decentralized, and all trades are unrestricted.
In this case, the owner of Ethereum blockchain (franchisor, i.e., the original business) permits a third party called Uniswap (franchisee) to develop and market financial products in return for a fee (Uniswap users need to pay gas fees in Ethereum). Hence, DeFi protocols are franchisees.
Despite the proliferation of competing blockchain networks, decentralized apps (dApps) are virtually entirely based on the Ethereum blockchain. The Ethereum Virtual Machine (EVM) is the key driver of this movement, with application templates and development kits helping to improve the developer experience on a regular basis.
These tools, when used together, enable the construction of any application that does not have its own platform. Using the Ethereum platform, projects can skip the building of their own blockchain. Hence, Ethereum being the franchisor offers existing and prospective DeFi protocols a transparent and cost-effective path to monetization (which is the fundamental motive of adopting a franchise business model), which appeals to developers. Around 220 of DeFi projects (out of 242 listed projects) are built on Ethereum.
Franchisees, i.e., DeFi Protocols in their business and understand that their success will benefit them directly. Franchisees will take great pride in their service because it is their own business, and they will constantly strive to exceed their users' expectations.