Can DeFi protocols survive without continuous token emissions?

2020 was the year liquidity mining became a thing thanks to the Compound protocol and it has since been a business model for several DeFi projects.

Generally speaking, most decentralized finance projects with liquidity mining-based models depend on token emissions, and this foundational design is sometimes considered DeFi's biggest liability but what does the data say?

First, it is important to realize that even in a perfect world, continuous token emissions as a model to attract investors isn't sustainable and the reason is pretty simple: emissions sooner or later reduces and capital exits right after.

When a DeFi project believes it can attract investors with high yields and still retain them even when said yield diminishes, it is setting itself up for disappointment.

Emissions are debt no one wants to hold

Research from Nansen, cited across multiple market analyses, found that at least 50% of mercenary capital exits projects within the first 15 days of entering a farm, and only 13% of yield farmers maintain long-term contracts.

A massive 70% of yield farmers pulled their capital from DeFi liquidity farms by a protocol's third day of operation. — report

DeFi projects that are dependent on token emissions follow a now common script where at launch, high emissions attract mercenary capital (short-term profit-chasing capital or investors), mercenary capital inflates TVL, inflated TVL paints a "growth narrative", the narrative supports token price, and token price supports emissions. The loop feeds itself until emissions are reduced, or token price falls, or unlocks hit. Then the loop reverses.

When this happens, it's proven that nobody wants to hold the emission token as it is bad debt the protocol could not afford in the first place.

Survival

The comical reality of this question is that people are asking if these projects can survive without continuous emissions when they fail to even survive with it.

The data points to capital exiting when yield percentage drops, not because token emissions are removed completely.

Anyone who understands how these token incentives works should know that as participants grow, yield percentage will drop, not necessarily because the projects want it to, but because simply having more capital trying to harvest one farm will lead to everyone getting less.

The reaction that follows this sees the mined token's price dumped, further discouraging new capital.

The problem, evidently isn't the token emissions, even though complete dependent on a continuous design isn't smart or sustainable, the problem is that DeFi projects are increasingly built completely around yield farming that they can't achieve product-market-fit and effectively cannot generate revenue that can be reinvested into the protocol.

As observed, the simple answer would be yes, DeFi projects can survive without continuous token emissions because that isn't where their survival lies, they just need to build better products and focus on generating revenue.

Posted Using INLEO