Opinion by: Marc Boiron, chief executive officer of Polygon Labs
Decentralized finance (DeFi) needs a reality check. Protocols have chased growth through token emissions that promise eye-popping annual percentage yields (APYs) for years, only to watch liquidity evaporate when incentives dry up. The current state of DeFi is too driven by mercenary capital, which is creating artificial ecosystems doomed to collapse.
The industry has been caught in a destructive cycle: Launch a governance token, distribute it generously to liquidity providers to boost total value locked (TVL), celebrate growth metrics, and watch helplessly as yield farmers withdraw their capital and move to the next hot protocol. This model doesn’t build lasting value — it creates temporary illusions of success.
DeFi deserves a better approach to value creation and capital efficiency. The current emission-driven yield model has three fatal flaws that continue to undermine the industry’s potential.
Inflationary emissions
Most yield in DeFi comes from inflationary token emissions rather than sustainable revenue. When protocols distribute native tokens as rewards, they dilute their token value to subsidize short-term growth. This creates an unsustainable dynamic where early participants extract value while later users are stuck holding devalued assets.
Capital flight
Mercenary capital dominates DeFi liquidity. Without structural incentives for long-term commitment, capital moves freely to whatever protocol offers the highest temporary yield. This liquidity isn’t loyal — it follows opportunistic paths rather than fundamental value, leaving protocols vulnerable to sudden capital flight.
Misaligned incentives
Misaligned incentives prevent protocols from building sustainable treasuries. When governance tokens are primarily used to attract liquidity through emissions, protocols fail to capture value for themselves, making investing in long-term development and security impossible.
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These problems have played out repeatedly across multiple DeFi cycles. The “DeFi summer” of 2020, the yield farming boom of 2021 and subsequent crashes all show the same pattern: unsustainable growth followed by devastating contractions.
Protocol-owned liquidity
How can this be fixed? The solution requires shifting from extractive to regenerative economic models, and protocol-owned liquidity represents one of the most promising approaches to solving this problem. Rather than renting liquidity through emissions, protocols can build permanent capital bases that generate sustainable returns.
When protocols own their liquidity, they gain multiple advantages. They become resistant to capital flight during market downturns. They can generate consistent fee revenue that flows back to the protocol rather than temporary liquidity providers. Most importantly, they can create sustainable yield derived from actual economic activity rather than token inflation.
Use bridged assets to generate yield
Staking bridged assets offers another path toward sustainability. Usually, bridged assets just sit there and don’t contribute much toward the liquidity potential of connected blockchains. Through staking the bridge, assets in the bridge are redeployed into low-risk, yield-bearing strategies on Ethereum, which are used to bankroll boosted yields. This allows protocols to align participant incentives with long-term health, and it’s a boost to capital efficiency.
For DeFi to mature, protocols must prioritize real yield — returns generated from actual revenue rather than token emissions. This means developing products and services that create genuine user value and capture a portion of that value for the protocol and its long-term stakeholders.
While sustainable yield models typically produce lower initial returns than emissions-based approaches, these returns are sustainable. Protocols embracing this shift will build resilient foundations rather than chasing vanity metrics.
The alternative is continuing a cycle of boom-and-bust that undermines credibility and prevents mainstream adoption. DeFi cannot fulfill its promise of revolutionizing finance while relying on unsustainable economic models.
The protocols that do this will amass treasuries designed to weather market cycles rather than deplete during downturns. They’ll generate a yield from providing real utility rather than printing tokens.
This evolution requires a collective mindset shift from DeFi participants. Investors need to recognize the difference between sustainable and unsustainable yield. Builders need to design tokenomics that reward long-term alignment rather than short-term speculation. Users need to understand the true source of their returns.
The future of DeFi depends on getting these fundamentals right. It’s time to fix our broken yield model before we repeat the mistakes of the past.
Opinion by: Marc Boiron, chief executive officer of Polygon Labs.
This article is for general information purposes and is not intended to be and should not be taken as legal or investment advice. The views, thoughts, and opinions expressed here are the author’s alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.
