1/ Do #DeFi protocols really need a token to work? ๐งต
2/ Yesterday I asked CT to 'name a #DeFi protocol that wouldn't work without a token.'
Answers are eye-opening.
Ranging from 'all of them' to 'could prove there is none'.
So... is there any?
Answers are eye-opening.
Ranging from 'all of them' to 'could prove there is none'.
So... is there any?
3/ I'd argue that the majority of projects launch a token out of financial necessity.
Token sale is a preferred and the easiest way to raise funds.
Without a necessary funding there wouldn't be that many projects in the first place.
Token sale is a preferred and the easiest way to raise funds.
Without a necessary funding there wouldn't be that many projects in the first place.
4/ Secondly, token serves a role for bootstrapping liquidity.
Without liquidity mining, Sushiswap wouldn't have been able to attract any TVL/users since it didn't add any additional value to Uniswap's V2.
I wonder if Uniswap launched $UNI because of Sushi threat? ๐ง
Without liquidity mining, Sushiswap wouldn't have been able to attract any TVL/users since it didn't add any additional value to Uniswap's V2.
I wonder if Uniswap launched $UNI because of Sushi threat? ๐ง
5/ Token is also used as a community building tool.
But building a community around the token and NOT around the protocol itself is a short-term strategy.
Your community will abandon you when the price plummets.
But building a community around the token and NOT around the protocol itself is a short-term strategy.
Your community will abandon you when the price plummets.
6/ Some #DeFi protocols integrate their tokens into the core functioning mechanism:
โข $SNX, $GNS, $AMP, $RUNE facilitate liquidity creation & transfer
โข $USDD, $USDN, $UST, $FRAX are backed by native tokens
โข $OHM bonding for liquidity
โข $SNX, $GNS, $AMP, $RUNE facilitate liquidity creation & transfer
โข $USDD, $USDN, $UST, $FRAX are backed by native tokens
โข $OHM bonding for liquidity
7/ Yet many protocols could technically function without a token:
โข DEXes, derivative exchanges, DEX aggregators
โข Lending protocols
โข Yield aggregators
โข Collateralized stablecoins
โข Wallets
Their core business models don't depend on the token.
โข DEXes, derivative exchanges, DEX aggregators
โข Lending protocols
โข Yield aggregators
โข Collateralized stablecoins
โข Wallets
Their core business models don't depend on the token.
8/ Token for (some) of these protocols is a risk management tool!
$MKR is a backstop for insolvency: holders take risk of dilution to cover undercapitalized debt.
Perpetual DEXes use the token to build up insurance fund in case of failed liquidations.
multicoin.capital
$MKR is a backstop for insolvency: holders take risk of dilution to cover undercapitalized debt.
Perpetual DEXes use the token to build up insurance fund in case of failed liquidations.
multicoin.capital
9/This risk management extends to the protocol ownership.
Would you use Aave or Compound if one entity controlled a key to all assets and protocol parameters?
Protocols can use multi-sig to prevent it, but a governance token scales multi-sig to millions of people.
Would you use Aave or Compound if one entity controlled a key to all assets and protocol parameters?
Protocols can use multi-sig to prevent it, but a governance token scales multi-sig to millions of people.
10/ Unfortunately, not all protocols reached this level of governance decentralization.
But decentralization is a spectrum and 'a token is an option on future utility.'
So while a token serves as a fundraising tool at first, the utility is can be added later on.
But decentralization is a spectrum and 'a token is an option on future utility.'
So while a token serves as a fundraising tool at first, the utility is can be added later on.
11/ It coincides with the a16z's vision of Progressive Decentralization as the protocol matures.
When a product market fit is established, control and risk management is granted to the community via a token.
Increasing MC also provides a stronger guarantee against bad actors.
When a product market fit is established, control and risk management is granted to the community via a token.
Increasing MC also provides a stronger guarantee against bad actors.
12/ On the final note, $UNI seems to be a controversial one.
โข $UNI doesn't manage any risk, and contracts are immutable so no parameters to change
โข Revenue sharing is value-destructive for LPs @multicoincap
But $UNI is the largest $DeFi token by market cap.
โข $UNI doesn't manage any risk, and contracts are immutable so no parameters to change
โข Revenue sharing is value-destructive for LPs @multicoincap
But $UNI is the largest $DeFi token by market cap.
13/ IMO $UNI's value comes from:
โข Option for future utility
โข Governance to influence other protocols
Uniswap DAO voted to launch on zkSync, potentially giving zkSync a leadership position in zk-Rollup race.
That's power.
โข Option for future utility
โข Governance to influence other protocols
Uniswap DAO voted to launch on zkSync, potentially giving zkSync a leadership position in zk-Rollup race.
That's power.
14/ Overall, many protocols exist thanks to the token: from fundraising to liquidity attraction.
They facilitate community building and redistribute revenue.
But at the end, ensuring security of the protocol and governance gives the ultimate reason for a token to exist.
They facilitate community building and redistribute revenue.
But at the end, ensuring security of the protocol and governance gives the ultimate reason for a token to exist.
15/ Did I miss something important? Please let me know ๐
Follow me @DefiIgnas for more.
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