Opinion by: Marc Boiron, Chief Executive Officer of Polygon Labs
Decentralized finances (DEFI) requires a check of reality. Protocols have been pursuing the growth through token releases that promise eye-popping annual percentage (APY) for years, only to watch the liquidity that evaporates when the incentives are dry. The current state of the defi is too driven by mercenary capital, which creates artificial ecosystems that are doomed to fall.
The industry is caught in a destructive cycle: Launch a management token, distribute it generously to liquidity providers to boost the total amount locked (TVL), celebrate growth metrics, and watch helplessly while farmers’ yields withdrew their capital and moved to the next hot protocol. This model does not build a long -term value – it creates a temporary illusion of success.
The defi deserves a better approach to creating the value and efficiency of capital. The current produce model driven by the release has three deadly flaws that continue to undermine the industry’s potential.
Inflationary releases
Most yield in defi is derived Inflationary token emissions Instead of sustaining income. When protocols distribute native tokens as rewards, they suspected their value of the token to subsidize short-term growth. This creates an unstable dynamic -new where the early participating extraction values while users are stuck holding the amounts of ownership.
Capital flight
The capital of the mercenary leads to defi liquidity. If there are no incentive structures for long-term commitment, capital is free to move any protocol that offers the highest temporary yield. This liquidity is dishonest – it follows the opportunistic paths rather than the main value, leaving protocols weak to the sudden Capital flight.
Misigned incentive
False incentives prevent protocols from developing sustainable resources. When management tokens are primarily used to attract liquidity through leaks, protocols fail to get the value for themselves, making investing in long-term development and security impossible.
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These problems are repeatedly played in many defi cycles. The “Defi Summer” of 2020, the boom of the produce of 2021 and subsequent crashing all shows the same pattern: unstable growth followed by devastating contracting.
The liquidity owned by the protocol
How can it be fixed? The solution requires a shift from extractive to regenerative economic models, and protocol-owned liquidity represents one of the most promising techniques for solving this problem. Instead of renting liquidity through leaks, protocols can build permanent capital bases that have developed a sustainable return.
When protocols own their liquidity, they get many advantages. They became resistant to capital flight during the market collapse. They can generate the same income a fee flowing back to the protocol than temporary liquidity providers. Most importantly, they can create a sustainable yield that comes from actual economic activity than token inflation.
Use bridged assets to produce yield
Staking bridged assets offer another path to maintenance. Usually, bridged assets are just sitting there and do not contribute many of the potential liquidity of connected blockchains. By staking the bridge, the properties on the bridge are re-formed at low risk, techniques that carry the yield to the Ethereum, which is used in bankroll boosted yields. It allows protocols to align participating incentives with long -term health, and it is a strengthening of capital efficiency.
For the defi in adults, protocols should prioritize the real yield – the returns generated from the actual income instead of token releases. This means developing products and services that create the real user value and obtain a portion of that value for the protocol and its long -term stakeholders.
While sustainable yield models usually produce lower initial returns than emissions -based techniques, these returns are sustainable. Protocols embracing this change will develop elastic foundations instead of chasing vanity metrics.
The alternative continues a boom-and-bust cycle that bothers the credentials and prevents mainstream adoption. Defi could not fulfill its promise to change finances while relying on unstable economic models.
Protocols that make it will provide wealth designed to market cycles rather than markets. They form a harvest from providing a true utility rather than printing tokens.
This evolution requires a collective mindset shift from the Defi participants. Investors need to recognize the difference between sustainable and uncertain yield. Builders need to design tokenomics that will reward long-term alignment rather than short-term speculation. Users need to understand the true source of their return.
The future of the defi depends on these basics. It’s time to fix our broken produce model before we repeat the mistakes of the past.
Opinion by: Marc Biron, Chief Executive Officer of Polygon Labs.
This article is for general information purposes and is not intended to be and should not be done as legal or investment advice. The views, attitudes, and opinions expressed here are unique and do not necessarily reflect or represent the views and opinions of the cointelegraph.
