How token incentives can actually slow down DeFi ecosystem growth
🧵
I never read long threads so I’ll be quick:
1/ Too much focus on token design rather than mechanism design.
2/ Incentives conceal actual innovation.
3/ Some mechanisms weirdly rely on incentives.
4/ What can we do about it?
1/
After discussing it with many VCs, a lot of DeFi founders' attention has been on token designs lately (and how to pump a protocol) rather than improving primitives themselves.
Why? Most DeFi users are farmers: incentives make founders feel like they found product market fit.
2/
It is hard for a protocol that improves yield through efficient mechanisms (+1-2% APY max) to be noticed against a 20% yield farming protocol.
Innovators have to raise huge amounts to thrive in the long term, especially during bear markets 👌
3/
Mechanism designs are complex → not always clear if it works because of the token and for how long it will.
Take Aave or Compound for example:
- Borrowers farm rewards
- Lenders come because borrowers pay
- Price pumps as protocol grows
- 🔁
Now, incentives are stopped to find a path to profitability:
- Borrowers leave for other protocols that offer incentives (eg. Euler)
- APY is low, lenders leave
- Token goes down as metrics go down
- 🔁
Simplifying ofc, I just mean that tokens concealed the room for improvement
4/
1. Wait for investors to rationalize → FDV becomes more correlated to protocols’ actual added value (putting token model aside) → Token bootstrapping cost for a relevant mechanism becomes much lower.
2. DYOR on a cool +1% native APY innovation like morpho.xyz.
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