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

Here are the key points of the Dfrit report, compiled by 0xjs@ Jinse Finance.

Multicoin has accumulated a large amount of DRIFT positions in our liquidity and risk fund. DRIFT is the native token of Derivatives Decentralization exchange Drift on Solana. We have established this position through private and public markets over the past few years.

Below is the executive summary of our 25-page Drift report. Our ‘full report’ contains the complete report and analysis, including our valuation model and price target.

Summary

We have long discussed Open Finance, which we define as making all value units (including but not limited to stocks, bonds, real estate, and currency) interoperable, programmable, and composable on a Distributed Ledger, making Capital Markets more efficient and allowing everyone on earth to participate. Open Finance, along with the extended Decentralized Finance (DeFi), is one of our three major cryptocurrency themes. The biggest opportunity of Open Finance is to establish a protocol that enables anyone, anywhere in the world, to trade any asset.

The true global permissionless financial market will have tremendous market expansion potential (the market has not yet fully realized how large this market can develop). We expect that billions of people in developing countries will first seek Derivatives DEX as the primary means to access the global financial market. DEX ensures that any exchange operator or politically motivated regulatory agency cannot unilaterally change the rules of the exchange.

We believe that due to the powerful network effect of Liquidity, the Derivatives DEX market will become a winner-takes-all market. We also expect them to erode the market share of centralized existing enterprises, as they have the ability to reduce costs and pass on the saved costs to traders; DEX does not require a large customer support team, localization, general deposits/withdrawals, and custody systems, etc. In order to grow into a globally default trading venue, it is very important for the team to make the right trade-offs early on and to kickstart the flywheel by attracting Liquidity Providers and takers. We believe that Drift did it right, and the result will bring about increasingly good compound interest.

Drift is a universal Decentralized Finance Derivatives platform, supported by a Liquidity layer, where any Derivatives can be traded or cross-margin in a completely open, non-custodial, and permissionless manner. We expect decentralized third-party front-ends to emerge on top of Drift Liquidity layers around the world. These customer-facing applications will compete in areas such as user acquisition, fiat on/off-ramp pricing, and user experience tailored to specific regions—all without having to build their own Smart Contracts or aggregate Liquidity.

Drift is committed to providing traders and builders with a better platform. The main novelty of Drift lies in its support from three types of Liquidity sources: 1) Dynamic AMM (DAMM), 2) Decentralization 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 mortgage platform where any Decentralized Finance Derivatives can be built. This allows traders to seamlessly collateralize their Cryptocurrency, forex, prediction market, commodity, and other positions with a single global Margin account. These traders can match trades with anyone connected to the internet around the world.

We believe that Drift is ahead of large Derivatives CEX in terms of functionality, and these CEX are the main drivers of Perptual Futures volume at present. We expect them to continue iterating on the core Perptual Futures product and expand market share over time. We hold this belief because they have a first-order correct structure to build a competitive DEX that can scale to meet global volume.

Multicoin’s investment philosophy towards Drift

Our summary of the investment philosophy and execution of DRIFT is as follows:

1. We believe that the most successful Derivatives DEX needs to be built on-chain issuance of other assets on L1. We believe that application chain Derivatives DEX will not win because they will never be as efficient as centralized exchange (CEX) and cannot benefit from the ecosystem flywheel of general on-chain programs and asset portfolios that exist on L1.

2. Drift has a unique exchange structure that can provide three types of Liquidity: Dynamic AMM (DAMM), Decentralized Limit Order Book (DLOB), and Instant (JIT). We have previously written about the trade-offs in the design space of Derivatives DEX and believe that Drift has made the appropriate trade-offs.

3. The core indicators of Drift (derivatives, spot, and total volume) have risen by about 50 times compared to the same period last year, and the market share of this protocol in the derivatives DEX field has risen by about 10 times during this period.

4. The Drift team persists in launching new products and functionalities. In addition to the Derivatives DEX, they are also building a capital-efficient Decentralized Finance platform that is not limited to synthetic trading. We believe that Drift can become a ‘super app’ for Decentralized Finance, as it can cross-sell trading products to users.

5. The adoption rate of Solana is rising rapidly, and we have witnessed the long-term rising trend of all Solana Decentralized Finance applications. Drift will disproportionately benefit from the significant rise of the ecosystem, as we believe it is the best Derivatives DEX built on Solana.

6. The Drift team is fortunate to be able to focus 100% of their energy on the product, rather than on infrastructure. This is only possible when scaling Solana, and the Drift team does not need to invest any effort or thought. Using Solana allows the Drift team to focus on integrating products in a composable stack, rather than the complexity of a modular environment and bridge. As the Solana network continues to improve (for example, by introducing the Firedancer and Agave clients and other network upgrades), the developer experience and infrastructure layer that Drift depends on will become better without any engineering effort from the Drift team or other contributors (Note: This is the ideal expression of modularity in a software system. The system should naturally improve over time without developers needing to think or take action).

We believe that as users and Liquidity continue to migrate to Drift and Solana, Drift protocol is expected to further develop. In addition, we believe that people in developing countries around the world want to be able to synthetically access each asset, and Decentralized Finance Derivatives are the most innovative and inclusive product for them.

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

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