Beyond Incentives: How to Build a Sustainable Decentralized Finance Ecosystem

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

DeFi is experiencing a revival driven by the new generation of blockchains, such as BeraChain, TON, Plume, Sonic, and so on. Each new chain brings a wave of incentives to attract users, offering high yields, reminiscent of the days in early 2021 when "yield farming" was all the rage.

But are these truly sustainable? Each new chain, while competing for attention and users, will ultimately face a common challenge: how to establish an ecosystem that can continue to operate after the incentives cease.

The incentive mechanism is still one of the most powerful launch tools in the crypto world and is an elegant solution to the cold start problem (attracting users and liquidity). However, incentives are just the starting point; the ultimate goal is to build self-sustaining economic activities around DeFi protocols.

Despite the significant development of the entire DeFi market, the fundamental idea of growth driven by incentives has not changed much. For DeFi to truly thrive in this new phase, these strategies must be adjusted to reflect the realities of current capital dynamics.

Key Challenges Facing DeFi Capital Formation

Despite the obvious demand for capital formation in the market, most incentive programs ultimately failed or had disappointing results. The structure of the DeFi market has changed significantly compared to 2021—at that time, running an incentive program was relatively simple. Now that the market environment has changed, several key aspects are worth considering:

The number of blockchains exceeds valuable protocols

In the traditional software ecosystem, platforms (such as L1) typically give rise to a large variety of applications (such as L2 and above). However, in today's DeFi space, this dynamic has reversed. Dozens of new chains—including Movement, Berachain, Sei, Monad (coming soon), and others—have gone live or are preparing to launch.

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

There are no new degens appearing in this round period

Despite the emergence of new blockchains, the number of active investors in DeFi has not kept pace. Users face high barriers: complex operation processes, difficult-to-understand financial mechanisms, and unfriendly experiences with wallets and exchanges—these all limit the onboarding of new users.

As a friend of mine often says: "In this round, we hardly cultivated any new degens." The result is that the capital base has become fragmented, and users are merely chasing profits between different ecosystems without forming deep participation in any one ecosystem.

Fragmentation of TVL

This fragmentation of capital has already been reflected in the TVL (Total Value Locked) data. As more and more blockchains and protocols compete for the same small portion of users and funds, what we are seeing is more dilution rather than growth. Ideally, the speed of capital inflow should outpace the growth in the number of protocols and blockchains; otherwise, capital will only be spread thinner, weakening the potential impact of any one ecosystem.

Disconnection Between Institutional Interest and Retail Infrastructure

Although the narrative of DeFi is often led by retail investors, in reality, most of the trading volume and liquidity comes from institutions. Ironically, many emerging blockchain ecosystems lack the capability to accommodate institutional capital due to issues such as lack of integration, inadequate custody support, and insufficient infrastructure. Without institutional-grade infrastructure, attracting meaningful liquidity will become exceptionally difficult.

Incentives for Inefficiency and Market Structural Imbalance

Many new DeFi protocols face issues with their market configuration when they launch: pool imbalance, excessive slippage, misalignment of incentives and goals, etc. These inefficiencies often result in incentive activities ultimately mainly benefiting insiders or whales, without bringing much real long-term value.

Beyond Incentives, Building a Sustainable Ecosystem

The "Holy Grail" of incentive mechanisms is: the ecosystem can still maintain activity and growth after the incentives end. Although there is no guaranteed template for success, the following basic elements can significantly increase the chances of building a lasting DeFi ecosystem:

True Ecological Practicality

The most difficult yet critical goal is to create an ecosystem that has real, non-financial use cases. Chains like TON, Unichain, and Hyperliquid are making some attempts to expand the utility of tokens beyond pure yield. However, most new chains still lack this fundamental practicality and have to rely on incentives to attract users.

The foundation of stablecoins is solid

Stablecoins are the cornerstone of any DeFi economy. An effective strategy often involves two main stablecoins to support lending markets and provide deep AMM (Automated Market Maker) liquidity. A well-designed stablecoin combination is key to stimulating early lending and trading activities.

Liquidity of mainstream assets

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

Liquidity Depth of Decentralized Exchanges (DEX)

The liquidity of AMM pools is often overlooked, but in reality, slippage risks can hinder large transactions from proceeding smoothly and even suppress the overall activity of the ecosystem. Building deep and resilient DEX liquidity is a prerequisite for any serious DeFi ecosystem.

Complete lending market infrastructure

Lending is a fundamental component of DeFi. In particular, the deep lending market for stablecoins can unleash a significant amount of natural financial strategies. A robust lending market complements DEX liquidity, enhancing overall capital efficiency.

Institutional-grade Custody Support

Custodial infrastructures like Fireblocks or BitGo control a significant portion of institutional funds in the crypto world.** If new chains cannot directly integrate such custodial services, institutional funds will be unable to enter their ecosystems.** This is a frequently overlooked but extremely critical barrier to entry.

Cross-Chain Bridge Infrastructure

In the current highly fragmented DeFi world, interoperability has become crucial. Bridge protocols like LayerZero, Axelar, and Wormhole are the core infrastructure for achieving cross-chain value transfers. New ecosystems that support seamless cross-chain bridges have a greater chance of attracting and retaining liquidity.

The "Invisible" Key Factors

In addition to infrastructure, there are some subtle yet critical factors that influence the success or failure of an ecosystem. For example: whether top-tier oracles are integrated, whether there are experienced market makers, and whether it can connect to leading DeFi protocols, etc. These "intangible assets" often determine whether a new chain is a flash in the pan or has long-term prosperity.

Sustainable Capital Formation in DeFi

Most incentive programs have failed to deliver on their initial promises. Over-optimism, misaligned incentive mechanisms, and dispersed funding are common culprits. New programs often face skepticism and accusations of being aimed at internal profit, which is not surprising. However, incentive mechanisms remain crucial. If designed properly, incentive mechanisms are powerful tools for guiding ecosystems and creating lasting value.

What differentiates a successful ecosystem is not the size of the incentive program, but where it goes next. A solid stablecoin foundation, deep automated market maker (AMM) and lending liquidity, institutional onboarding, and well-designed user processes are the cornerstones of sustainable growth. Motivation is not the end, but only the beginning. And, in today's DeFi space, there are certainly endless possibilities beyond incentivized mining.