Drift ($DRIFT) Analysis and Valuation

Multicoin has accumulated a large position across our funds—both liquid and venture—in DRIFT, the native token of Drift, a derivatives decentralized exchange (derivatives DEX) on Solana. We built the position over the last few years via private and public markets.

An executive summary of our 25 page report is presented below. You may download the complete report and analysis, including our valuation model and price target, by clicking the "Read Full Report" button.

Executive Summary

We have long talked about the opportunity for 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, thus making capital markets more efficient and accessible to everyone on the planet. Open Finance, and by extension decentralized finance (DeFi), is one of our three Crypto Mega Theses. The biggest opportunity in Open Finance is a protocol which is built to allow anyone anywhere in the world the ability to trade any asset.

True global permissionless financial markets would be extremely market expansionary (the market does not fully appreciate just how big this market could get). We expect billions of people in developing countries to seek out derivative DEXs first and foremost as the primary means to access global financial markets. DEXs ensure that no exchange operator or politically motivated regulator can unilaterally change the rules of the exchange.

We believe the derivatives DEX market will be a winner-take-most market due to the strong network effects of liquidity. We also expect them to cannibalize market share from centralized incumbents due to their ability to cut costs and pass those savings on to traders; DEXs don’t require large customer support teams, localization, universal deposits/withdrawals and custody systems, etc. In order to grow into the world’s default trading venue, it’s very important that teams make the right set of trade-offs early, and to get the flywheel started by attracting liquidity providers and takers. We think Drift has gotten it right, and the results will compound.

Drift’s north star is a generalized DeFi derivatives platform underpinned by a liquidity layer that any derivative can be traded or cross margined on top of, in a completely open, noncustodial, and permissionless way. We expect hyper-localized, third-party front ends to emerge on top of Drift’s liquidity layer all over the world. These customer-facing applications will compete on user acquisition, fiat on/offramp pricing, UX experiences catered towards specific geographies, etc. — all while not having to build out smart contracts or aggregate liquidity themselves.

Drift seeks to offer a superior platform to traders and builders. Drift’s primary novel feature is that it is supported by three types of liquidity provisioning: 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 fills in time.

Additionally, Drift has evolved into a collateral platform upon which any DeFi derivative can be built. This enables traders to seamlessly collateralize their crypto, forex, prediction markets, commodities, etc., positions using a single global margin account. And those traders can match those trades against anyone in the world that has an Internet connection.

We think Drift leads the pack in terms of feature parity with the large derivatives CEXs, which drive most of the volume in perps today. We expect them to continue iterating on the core perps product, and continue to build market share over time. We hold this belief because they have the first-order correct construction to build a competitive DEX capable of scaling to serve the world’s trading volume

Our Investment Thesis

The executive summary of our DRIFT thesis is as follows:

1. We believe that the most successful derivatives DEX needs to be built on an L1 that has other assets issued on the chain. We do not think that appchain derivatives DEXs will win because they will never be as performant as centralized exchanges (CEXs), nor will they be able to compose with other programs and assets on a general-purpose chain. They do not benefit from ecosystem flywheels that exist on generalizable L1s.
2. Drift has a unique exchange construction that enables three types of liquidity provisioning: dynamic AMM (DAMM), decentralized central limit order book (DLOB), and just-in-time (JIT). We previously wrote about the trade-offs in the design space of derivatives DEXs here and believe Drift has chosen the proper set of trade-offs.
3. Drift’s core metric—total volume across derivatives, spot, and swaps—is up ~50x year over year, and the protocol’s market share in the derivatives DEX sector is up ~10x in that time.
4. The Drift team is relentless and constantly ships new products and features. Beyond a derivatives DEX, they are building a capital efficient DeFi platform that expands beyond synthetic trading. We believe Drift could be a DeFi “superapp” due to its ability to cross sell trading products to users.
5. Solana adoption is growing extremely quickly, and we are witnessing a secular growth trend across all Solana DeFi applications. Drift will disproportionately benefit from significant ecosystem growth tailwinds because we believe it’s the best constructed derivatives DEX on Solana.
6. The Drift team has the privilege of focusing 100% of their efforts on product rather than infrastructure. This is only possible because Solana is scaling without any input or thought from the Drift team. Being on Solana allows the Drift team to focus on product in an integrated, composable stack, vs the complexity and bridging of a modular environment. As the Solana network continues to improve (e.g., the introduction of Firedancer and Agave clients and other network upgrades), the developer experience and infra layer Drift lives on gets better without any engineering effort from the Drift team or other contributors (Note: this is the ideal expression of modularity in software systems. Systems should naturally improve over time without developers having to think or act at all).

We think the Drift protocol is poised to grow further as users and liquidity continue to migrate to Drift and Solana. Additionally, we think people all over the world in developing nations want synthetic access to every asset, and DeFi derivatives are the most innovative and inclusive products for them.

Based on our valuation framework and market assumptions, which we outline in the report, we value DRIFT in our base case at $3.58, more than 7x above its current market price.