Opening Remarks
In our recent AAVE research, we highlighted a steady uptick in DeFi activity. The first half of 2024 has been particularly significant, with TVL climbing to $81 billion from $54.4 billion at the beginning of the year, a clear sign of renewed interest in DeFi.
Source: DeFiLama
According to Multicoin Capital, the derivatives DEX market is poised to be a “winner take -most” landscape, driven by the strong network effects of liquidity and the ability of these platforms to offer lower fees and better trading conditions compared to centralized exchanges. The liquidity advantage creates a strong barrier for dominant players, making it difficult for new entrants to compete without a compelling value proposition.
Hedge funds are making a strong return to crypto, according to the latest Global Crypto Hedge Fund Report by the Alternative Investment Management Association and PwC. Nearly half of US hedge funds, up from less than 30% in 2023, are now investing in crypto, with 60% trading derivatives—an increase from the previous year.
Source: Bloomberg
This surge brings greater liquidity, and crypto blue chips like Solana are no longer seen as purely high-risk. With more advanced derivatives markets, hedge funds can better manage their exposure to crypto.
Their tolerance for volatility makes crypto’s 24/7 market especially appealing, and their growing involvement is set to boost market infrastructure.
With Solana’s rapid adoption, Drift’s expanding share, and the launch of their new BET prediction market, now is the perfect moment to explore Drift’s potential.
Drift’s Value Proposition
Drift Protocol is a DEX specializing in derivatives trading, built on the Solana blockchain. Launched in 2021, it reached $1 billion in trading volume in just 39 days. The platform offers a fast and low cost trading experience by leveraging Solana’s scalable infrastructure and employing a combination of unique liquidity and execution methods, providing a trading experience comparable to centralized exchanges while maintaining the transparency and openness of DeFi.
Drift uses a combination of three liquidity solutions:
- Dynamic Automated Market Maker (DAMM): Initially used in Drift V1, DAMM offers passive liquidity, enabling smooth trading even when professional market makers are absent.
- Decentralized Central Limit Order Book (DLOB): Introduced in Drift V2, this facilitates precise order placement with limit orders, executed by a network of keepers that ensure optimal pricing.
- Just-In-Time (JIT) Liquidity: A novel addition in Drift V2, allows market makers to provide liquidity only when needed, minimizing costs and ensuring better trade execution.
This helps Drift provide better spreads, higher liquidity, and faster trade execution than most DEXs. Traders can use up to 20x leverage on larger assets and access features like limit orders and prediction markets, all in a fully decentralised and transparent setup.
This is significant because DEXs are rapidly gaining momentum, as evidenced by the growing trading volume ratio between DEXs and CEXs in both spot and derivatives markets. The increasing preference for decentralised platforms highlights a shift in trader behaviour, likely driven by a focus on self-custody of assets.
Source: Multicoin Capital, The Block
Source: Multicoin Capital, The Block
Additionally, in February 2024, Drift introduced the Drift Market Maker Program, attracting major crypto market makers to integrate through its APIs. This initiative led to a significant transition from passive to active liquidity, improving trading efficiency and deepening the order book.
As highlighted by DefiLlama, Drift’s TVL is steadily rising, driven by several key factors. The launch of its Market Maker Program attracted major liquidity providers, significantly boosting trading volumes. This growth is positioning Drift well to capitalize on the increasing demand for DEXs trading.
Source: DeFiLlama
According to Multicoin Capital, Drift saw around $5 billion in trading volume across perpetuals, spot, and swaps in August 2024, marking an impressive 50x increase compared to the same period last year, when the cumulative volume was just $97 million in August 2023.
Source: Multicoin Capital, Top Ledger
Drift’s annualized trading fees are close to $10 million, while trading revenue is $7.3 million, indicating around $2.7 million in costs. This gap is typical, as it accounts for expenses like liquidity incentives and operational overhead.
Source: Dune Analytics
Drift’s Next Leap: Liquid Prediction Markets
Prediction markets have become a cornerstone in Web3, with platforms like Polymarket drawing strong user interest and revenue. Even Ethereum’s Vitalik Buterin has praised these markets as unbiased alternatives for forecasting real world events.
Polymarket has been a standout recently, reporting a massive $533 million in trading volume for September 2024—a 60x increase from last year. Its market insights are frequently cited by major media outlets, underlining its growing influence.
Source: The Block
Building on this momentum, Drift launched its own prediction market, Drift BET, in February 2024, making it Solana’s first liquid prediction market. The platform allows users to bet on a variety of real world events, from elections to sports outcomes, tapping into a fast-growing sector that’s attracting more attention.
The upcoming US election brought in over $3.5 million in first day liquidity and 1,000+ active positions. With three initial political markets, Drift BET has room to potentially to expand into sports to maintain interest beyond the election season.
Drift’s unique edge lies in its enhanced earnings model, allowing traders to continue generating returns even as bets settle. Using Pyth oracle data, the platform ensures up-to-date prices and transparent settlements.
To boost engagement, Drift has launched the FUEL Rewards System, offering 5 FUEL for every $1 traded and 10 FUEL for staking DRIFT tokens. Although redemption options haven’t been revealed yet, the initiative is expected to keep users engaged as new markets roll out.
Source: Drift
Competitors
The derivatives DEX market has changed quickly. It started on Ethereum Layer 1 and later shifted to Layer 2 solutions like Arbitrum, where GMX was a key player last cycle. The focus shifted to specialized appchains for DeFi derivatives. However, these appchains face challenges with liquidity, composability, and decentralization, which can limit their potential.
Drift is taking a different route by blending derivatives trading and prediction markets on Solana, offering a new solution to these problems.
Drift’s Competitors in the Derivatives DEX Market
Drift stands out by combining derivatives trading and prediction markets on Solana. This allows it to cater to both speculative traders and those interested in real-world event markets, leveraging Solana’s speed and low fees for an integrated user experience. Additionally, its FUEL Rewards System and continuous earnings model set it apart from traditional trading platforms, potentially making Drift more engaging and rewarding for its users.
Drift’s Competitors in the Liquid Prediction Market
- Polymarket: Polymarket is the leading prediction platform. It’s known for its simple design and focus on binary outcome markets using USDC. Although it has a strong reputation and a solid user base, Polymarket struggles with liquidity issues, giving Drift an opportunity to gain market share. Recently, Polymarket’s trading volume surged during the U.S. election cycle, but sustaining this momentum post-elections will be a challenge.
- Azuro: Launched in 2021, Azuro acts as a liquidity layer for on-chain prediction and betting projects, primarily focused on sports. It uses a peer-to-pool model, allowing users to earn returns by providing liquidity. With over 30 applications built on its platform, Azuro is well-established but faces higher costs and slower transaction times compared to Drift due to its reliance on EVM-compatible chains.
Polymarket leads the space but struggles with liquidity, as Polygon has a limited user base and higher fees compared to Solana, while Azuro focuses on sports but faces scaling issues. Drift BET, launched as Solana’s first liquid prediction market, quickly gained traction and even surpassed Polymarket’s daily volume. With strong liquidity, multi-token support, and advanced DeFi tools, Drift BET could offer a more versatile solution that could reshape the competition.
Tokenomics
$DRIFT is the native token of the Drift ecosystem. Its primary role is governance, allowing holders to vote on proposals and shape the protocol’s development. However, beyond governance, DRIFT’s utility is still evolving.
Source: Drift
Only 23.64% of the total DRIFT supply is in circulation, with a large portion set to be unlocked over the next five years. This creates the risk of future selling pressure. 22% of the supply is held by early investors and not locked, while 25% is allocated for development and will vest gradually over 18 months.
Source: Drift
DRIFT is designed to capture value as the Drift protocol grows. With plans to expand utility and refine its token economics, DRIFT has the potential to be more than just a governance token, similar to the trajectory seen with other successful exchange tokens.
Drift has successfully raised funds across multiple rounds, attracting prominent investors:
Other investors include notable names such as Blockchain Capital, Jump Capital, Bixin Ventures, and Anatoly Yakovenko.
Bullish Fundamental Factors
- Drift achieved over $3.5 million in liquidity within 24 hours of launch, comparable to established players like Polymarket.
- The BET platform offers yield-bearing bets in over 30 tokens, attracting interest and increasing user engagement.
- Utilizes Dynamic AMM, Decentralized Central Limit Order Book (DLOB), and Just-in-Time (JIT) liquidity provisioning to ensure deep liquidity and improved trading experiences.
- Trading volume across derivatives, spot, and swaps is up ~50x year over year, with its market share in DeFi derivatives increasing 10x.
- As a Solana native project, Drift benefits from Solana’s low latency and composability advantages, enhancing liquidity provision.
- As Solana continues to expand its market share and dominance, Drift is well positioned to capitalize on this growth and secure a strong foothold within the ecosystem.
Bearish Fundamental Factors
- The prediction market industry is under scrutiny by the CFTC, and a potential ban on event contracts could significantly impact Drift’s core business.
- Current focus on election-themed markets poses a sustainability risk beyond the US election period.
- Limited token utility with DRIFT primarily functioning as a governance token, which provides little incentive for long-term holding.
- Only 21% of DRIFT tokens are in circulation, with large strategic investors holding 22% of the supply, leading to potential selling pressure from unlocks.
- Despite its growth, DRIFT currently has relatively low trading volume, which can lead to sudden price swings and increased volatility.
Disclaimer
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