DeFi has a bubble, but there are also magic weapons for organic growth

Written by: Vadym Nesterenko, Product Manager of Risk Transfer Protocol Atomica Translated by: Perry Wang

Since DeFi projects widely introduced liquidity mining strategies, the total assets locked in DeFi protocols have grown rapidly, indicating that liquidity mining is an effective strategy in the short term for these protocols to cold start or expand liquidity. However, high annualized yields (APYs) will not last forever, making this growth a controversial topic: Is this conducive to sustainable protocol development, improved functional design, and attracting target customers? Undoubtedly, it is a good tool to increase initial liquidity, and more importantly, to distribute governance tokens to users of the protocol, with the ultimate goal of allowing token holders to control the future of the protocol.

In the traditional world, organic growth in product management and marketing refers to acquiring users without paid advertising. In the crypto space, this paid advertising can be equivalent to liquidity mining. It is necessary to study whether liquidity mining is a key way to stimulate organic growth in DeFi. At the same time, I also hope to provide a playbook for new entrants so that they can build and expand great products based on the experience of pioneers.

The question immediately arises: What is so special about the DeFi space? After all, there is a lot of material about the growth of startups.

This is an interesting question. Let’s first clarify the inherent limitations of DeFi products:

1. Most crypto users value their privacy, which makes it more difficult to gain insights from methods such as user research and running usability tests. In addition, the DeFi user base is not large enough to make data-driven decisions through a/b testing and analyzing large examples. However, there are still many outgoing enthusiasts willing to help in this regard.

2. In this market, paid user acquisition is not common. First, when startups are validating their products, need to scale, and have a clear business model, paid traffic is reasonable. The DeFi we are currently discussing is not at these stages. Secondly, forced advertising is likely to bring more negative effects.

3. Decentralization means more responsibility for developers, which means that DeFi products that adopt a quick minimum viable product (MVP) approach to experimentation may result in the loss of user funds. However, "testing in production" is a completely acceptable approach as long as the risks are transparent.

These limitations also leave a lot of room for creativity to find great ways to improve the user experience and ensure sustainable growth. It is worth mentioning that if a project's product/market fit is not at least suitable for the DeFi market, then none of the actions described above will work. To scale, there must at least be something worth scaling. Let's take a deeper look at some technologies and examples.

Composability

The biggest advantage of DeFi is of course composability, a property that makes it possible to develop new solutions by using existing resources (infrastructure, data, liquidity) that act like building blocks like Lego in terms of security and reliability. This is important because now teams can reduce protocol development and focus on their core business.

In addition, building in DeFi is in line with the lean startup concept, you can even deliver products within a single design and validate them directly through the market. This is very important because before, due to the complexity of decentralized protocols and the lack of users, you could not know whether what you are building is valuable. The main reason why building products on Ethereum gives you more opportunities is the network effect.

Protocol Layer

The main task of a protocol is to be integrated by as many other decentralized applications (DApps) as possible, giving your protocol the best chance of exponential growth. The most outstanding example is MakerDAO's Dai, as well as Aave, Compound and Uniswap. Therefore, we can observe a clear correlation between the number of protocol integrations and the total value locked (TVL) / transaction volume.

Maker, Aave, and Compound are among the top 7 in TVL in the DeFi field. Uniswap ranks first in terms of transaction volume. Source: DeFi Pulse, Dune Analytics

Interactive interface

The previous article refers more to B2B use cases, but for end users, there is an urgent need to access DeFi protocols in an easy way. Zerion, Zapper, and Argent provide a better user experience to interact with dApps.

Monthly visitors to Zerion and Zapper (based on data from the past three months) Source

The total number of newly created and accumulated Argent wallets per day. Source

Aggregator

Even if you are confident in using DeFi, it is a complicated task to track the best quotes, lowest fees and highest returns on each exchange by yourself. Aggregators came into being:

• Decentralized exchange DEX aggregators: 1inch, Paraswap, Totle, DEX.ag, dex.blue

• Yield aggregators: Yearn, RAY, Rari Capital, Idle

• Automated trading: DefiZap, Furucombo

However, there are very different views on the relationship between aggregators and long-term operations:

Other major components

• Infrastructure: Chainlink, IPFS

• Data Lego: Dune Analytics, The Graph, Nansen

• Content comprehensive processing: Defiprime, DefiPulse

The icing on the cake of composability is flash loans, which can provide zero-collateralized loans with the only condition that the borrower must repay in the same block, as if nothing had happened. You can also imagine that flash loans can bring arbitrage opportunities that did not exist before, and more importantly, help test the protocol to see if it can be executed at scale.

User Experience

User experience and scalability are the biggest challenges for decentralized protocols, hindering their mass adoption. Ordinary users don’t want to remember the mnemonics of crypto wallets, and any operation that may cost $5-20 or cannot guarantee that the funds are safe will lead to a poor user experience.

The Argent team has made a breakthrough in this regard. By implementing smart contract wallets and meta transactions, they have the opportunity to pay gas fees on behalf of users. Another feature is Guardian, which allows users to back up their wallets through social connections, without the need to use mnemonics to open wallets in a non-custodial manner.

Dharma’s smart wallet also provides similar functionality, allowing users to avoid mnemonics and gas fees.

Another example of handling gas costs is 1inch’s integration of CHI tokens, and Loopring’s implementation of zkRollup. The Matcha project also adopted meta transactions and gas fee tokens.

There is still a huge space for improving user experience in the DeFi field. In the DeFi user survey, the respondents' answers to what factors most hinder the promotion of DeFi mainly revolve around security and insurance. Crypto-native FDIC insurance products are closely related to lending products and applications, and are mainly aimed at non-DeFi users.

trend

Keeping up with trends is nothing new or unique, but implementing new features that the market needs immediately is commendable, especially considering the complexity of setting up a test environment when dealing with various protocols. Responding quickly to market needs can lead to rapid growth in users.

The highest honor in this area should belong to the Zapper team. As the yield farming trend emerged, Zapper was the first portfolio tracker to list all relevant new assets, liquidity. This allows DeFi users to monitor the complete portfolio balance and manage it effectively.

Another great example of a team being able to add new features when they are highly relevant is 1inch. They added Uniswap v2 to their service just hours after it went live, exposed order books at the start of the IDO frenzy, and implemented the Chi token to save on gas fees when gas prices were skyrocketing.

1inch daily trading volume in USD. Source: Dune Analytics

The pinnacle of yield farming came with the launch of the YAM protocol. The project was originally a social experiment to achieve decentralized control of the project through fair distribution of governance tokens. With no audits and SSL certificates, the protocol, which took only 10 days to build, locked $500 million in TVL in 24 hours.

YAM TVL. Source

Community Ownership

The community is always the main building block of any open source project. However, only through DeFi and decentralized DAO collaboration can it be possible to empower the community and economically incentivize the community to actively participate in decision-making.

There are three components to a successful crypto project:

• Finding Product/Market Fit

• Distribute tokens to encourage community participation

• Ultimately, tokenization will allow everyone to own the project

Yearn.finance is a great example of a community-driven protocol development. Why?

• There is no pre-mining, the tokens are not held by the team and venture capital funds VC, and the tokens are fairly distributed to early supporters

• Community-created dashboards, tools, discord and telegram chats

• Actively participate in designated governance proposals

• Endorsement from a large number of heavyweights in the DeFi community

Yearn community health. Source

Achieving even one of these is a pretty impressive feat, and if your project has all of them, you’re definitely doing something right.

What if a project has just launched and cannot offer a high APY to incentivize early users? With the funding of new DAO VC type funds, this is not a problem. Don’t hesitate to ask MolochDAO, Metacartel DAO/Ventures and LAO for help, they can help you with initial idea validation and community building.

On the other hand, you can choose the fair launch path and bootstrap the deployment of a new crypto network that is acquired, owned, and governed by the community from the outset.

Summarize

Liquidity mining is an excellent marketing program to quickly introduce liquidity or scale projects that have achieved product and local market fit, but it cannot be without further sustainable growth.

Here is a playbook on how to scale a decentralized product organically:

1. Take advantage of composability. If a protocol is not composable and does not add any value to the network, you may spend a lot of money to attract users and developers, but still not make good progress.

2. As they say, don’t fight the market trend. The same goes for growth. See the trend? Take it.

3. The small group of DeFi geeks don’t care about UX/UI unless the APY is very high. However, the users who adopt the DeFi protocol will force developers to care about the user experience and not make it painful for new users.

4. Hand over the project to the community, and let the community decide its development path. Distribute governance tokens fairly and incentivize the community to participate in project development.

Source link: medium.com