Beyond Incentives: How to Build a Lasting DeFi Ecosystem

Author: Jesus Rodriguez Source: coindesk Translation: Shan Ouba, Golden Finance

DeFi is experiencing a resurgence driven by a new generation of blockchains, such as BeraChain, TON, Plume, Sonic, and more. Each new chain brings a wave of incentives to attract users to participate and offer high yields, reminiscent of the days when “yield farming” was popular in early 2021.

But are these really sustainable? As each new chain competes for attention and users, it will eventually face a common challenge: how to build an ecosystem that can continue to operate after the incentives end.

Incentive mechanisms remain one of the most powerful launching tools in the crypto world and an elegant solution to the cold start problem (attracting users and liquidity). However, incentives are just the starting point, and the ultimate goal is to build a self-sustaining economy around DeFi protocols.

While the entire DeFi market has undergone significant development, the basic idea of ​​incentive-driven growth has not changed much. For DeFi to truly thrive in this new phase, these strategies must adjust to reflect the realities of current capital dynamics.

Key Challenges Facing DeFi Capital Formation

Despite the obvious market demand for capital formation, most incentive programs ultimately fail or have poor results. The DeFi market structure today has changed a lot compared to 2021 - at that time, it was relatively simple to run an incentive program. Now that the market environment has changed, the following key aspects are worth considering:

There are more blockchains than valuable protocols

In the traditional software ecosystem, platforms (such as L1) usually give birth to a large number of diverse applications (such as L2 and above). But in today’s DeFi space, this dynamic has flipped. Dozens of new chains — including Movement, Berachain, Sei, Monad (coming soon), and more — are already live or preparing to go live.

However, there are only a handful of DeFi protocols that have truly gained user recognition, such as Ether.fi, Kamino and Pendle. The result is a highly fragmented landscape where blockchains are all vying for collaboration with a small number of successful protocols.

There are no "new degens" in this cycle

Although new chains are emerging one after another, the number of active investors in DeFi has not kept up. The barriers to entry for users are high: complicated operating procedures, difficult to understand financial mechanisms, and unfriendly wallet and exchange experiences - all of which limit the entry of new users.

As a friend of mine often says: "We have hardly cultivated any new degens in this round." As a result, the capital base has become fragmented, and users are only chasing returns between different ecosystems without forming in-depth participation in any one ecosystem.

TVL Fragmentation

This capital fragmentation has already appeared in the TVL (total locked value) data. As more blockchains and protocols compete for the same small portion of users and capital, we’re seeing more dilution than growth. Ideally, capital should flow in faster than the number of protocols and blockchains grows, otherwise capital will simply be spread thinner, weakening the impact that any one ecosystem may have.

Institutional interest is disconnected from retail infrastructure

While the DeFi narrative is often led by retail investors, in reality the majority of trading volume and liquidity comes from institutions. Ironically, many emerging blockchain ecosystems are not equipped to handle institutional capital due to a lack of integration, insufficient custody support, and inadequate infrastructure. Without institutional-grade infrastructure, attracting meaningful liquidity will be extremely difficult.

Inefficient incentives and imbalanced market structure

When many new DeFi protocols were launched, there were problems with their market configuration: unbalanced pools, excessive slippage, mismatch between incentives and goals, etc. These inefficiencies often result in incentive activities that ultimately primarily benefit insiders or whales without delivering much real long-term value.

Beyond incentives, building a sustainable ecosystem

The “holy grail” of the incentive mechanism is: the ecosystem can still maintain its activity and growth after the incentive ends. Although there is no set template that guarantees success, the following basic elements can significantly increase the chances of success in building a lasting DeFi ecosystem:

Real Ecosystem Practicality

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The most difficult but most critical goal is to create an ecosystem with real, non-financial uses. Chains like TON, Unichain, Hyperliquid, etc. are making some attempts to expand the utility of tokens beyond pure profits. But most new chains currently lack this fundamental practicality and have to rely on incentives to attract users.

Stablecoin foundation is solid

Stablecoins are the cornerstone of any DeFi economy. An effective strategy often includes two major stablecoins to support the lending market and provide deep AMM (automated market maker) liquidity. A well-designed stablecoin portfolio is key to stimulating early lending and trading activities.

Liquidity of mainstream assets

In addition to stablecoins, the deep liquidity of blue-chip assets such as BTC and ETH can also reduce the friction of large-scale funds entering and exiting DeFi. This type of liquidity is critical to attracting institutional funds and achieving efficient capital allocation.

Liquidity Depth of Decentralized Exchanges (DEX)

The liquidity of AMM pools is often overlooked, but in fact, the risk of slippage will prevent large transactions from proceeding smoothly and even inhibit the activity of the entire ecosystem. Building deep and resilient DEX liquidity is a prerequisite for any serious DeFi ecosystem.

Perfect lending market infrastructure

Lending is the basic building block of DeFi. In particular, the deep lending market for stablecoins can unlock a large number of natural financial strategies. A robust lending market complements DEX liquidity to improve overall capital efficiency.

Institutional-grade custody support

Custodial infrastructure like Fireblocks or BitGo holds the majority of institutional funds in the crypto world. **If the new chain cannot directly integrate such custody services, institutional funds will not be able to enter its ecosystem. **This is an often overlooked but extremely critical threshold to participation.

Cross-chain bridge infrastructure

In the current highly fragmented DeFi world, interoperability becomes crucial. Bridge protocols such as LayerZero, Axelar, and Wormhole are the core infrastructure for achieving cross-chain value transfer. New ecosystems that support seamless cross-chain bridges have a better chance of attracting and retaining liquidity.

Those “invisible” key factors

In addition to infrastructure, there are some subtle but key factors that affect the success or failure of the ecosystem. For example: whether it has integrated top oracles, whether there are experienced market makers, whether it can access top DeFi protocols, etc. These "intangible assets" often determine whether a new chain is short-lived or prospers in the long run.

Sustainable Capital Formation in DeFi

Most incentive programs have failed to deliver on their initial promises. Excessive optimism, misaligned incentives and dispersed funding are common culprits. Not surprisingly, new plans often draw skepticism and accusations that they are aimed at internal profiteering. However, incentives remain crucial. If designed properly, incentives are a powerful tool to guide ecosystems and create lasting value.

The differentiation of successful ecosystems lies not in the size of the incentive program, but in the direction of subsequent development. A solid stablecoin foundation, deep automated market maker (AMM) and lending liquidity, institutional access, and well-designed user flows are the cornerstones of sustainable growth. Motivation is not the end, it is just the beginning. Moreover, in today’s DeFi space, there are certainly endless possibilities beyond incentivized mining.