Incentives attract capital, not users. Protocols like Arbitrum and Optimism launched with massive airdrop programs, temporarily spiking TVL and transaction counts. This capital is mercenary, flowing to the next incentivized chain once rewards dry up, leaving behind inflated metrics and hollow communities.
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Why 'Build Here' Incentives Are Creating L2 Ghost Towns
A cynical analysis of how L2 ecosystems like Arbitrum, Optimism, and Base are subsidizing empty blockspace by funding deployment while ignoring the core problems of user acquisition and retention.
introduction
THE INCENTIVE MISMATCH
Introduction
Airdrop-driven 'build here' incentives are failing to create sustainable ecosystems, resulting in high-value, low-activity L2s.
Developer grants create features, not products. Teams build for the grant checklist, not market fit, leading to a proliferation of forked DEXs and NFT marketplaces with zero liquidity. The result is a ghost town of deployed contracts where the most common transaction is a bridge withdrawal.
Evidence: Post-airdrop, chains like Arbitrum Nova see TVL plummet by over 60% while daily active addresses stagnate in the low thousands. The activity that remains is often circular, funded by the remaining emission schedule.
thesis-statement
THE INCENTIVE MISMATCH
The Core Argument
Emission-driven growth creates temporary capital, not sustainable economic activity.
Incentives attract mercenary capital. Projects like Blast and Mode launch with massive token programs to bootstrap TVL and transaction volume. This capital is highly elastic and migrates to the next high-yield farm, leaving protocols with empty liquidity pools.
Protocols chase TVL, not users. The success metric for an L2 becomes its Total Value Locked, not its daily active addresses or retained developer activity. This creates a perverse feedback loop where the chain subsidizes activity it cannot monetize.
The result is a ghost chain. After emissions end, the economic flywheel stalls. We observe this in the >90% TVL drop on chains like Boba Network post-incentives, where the underlying application layer failed to develop organically.
Evidence: The Arbitrum STIP. Arbitrum's Short-Term Incentive Program distributed 50M ARB to protocols. While TVL spiked, an analysis by @L2Beat shows a significant portion of this capital was recycled yield farming that did not translate to permanent user growth or fee revenue for the chain.
key-trends
WHY L2S ARE EMPTY
The Ghost Town Playbook: 3 Flawed Trends
Protocols are paying billions for users who leave the moment the incentives stop, revealing a fundamental flaw in growth strategy.
01
The Airdrop Mercenary Problem
Incentive programs attract capital, not communities. Users farm points across Arbitrum, Optimism, and Base, then withdraw liquidity post-drop. This creates volatile TVL spikes of 50-80% that collapse, leaving protocols with no sustainable user base.
- Sybil Resistance Failure: Current models are gamed by bots and farmers.
- Zero Retention: No native demand means users have no reason to stay post-airdrop.
- Capital Inefficiency: $10B+ in cumulative incentives have failed to build lasting ecosystems.
50-80%
TVL Drop
$10B+
Wasted Incentives
02
The Monolithic Appchain Fallacy
Teams launch dedicated chains (e.g., dYdX Chain, Aevo) for sovereignty, but fragment liquidity and user attention. This creates isolated ghost towns with <10k daily active users and higher operational overhead than a shared L2 rollup.
- Liquidity Fragmentation: Forces users to bridge assets for a single app.
- Security Overhead: Must bootstrap a new validator set or rely on costly shared security.
- Developer Drain: Building infra from scratch distracts from core product innovation.
<10k
Avg. DAU
2-5x
Dev Cost
03
The Subsidy-Driven Liquidity Trap
Protocols use liquidity mining to bootstrap pools, creating artificial volume. When subsidies end, >90% of TVL evaporates, as seen on many Arbitrum and Polygon zkEVM DeFi launches. This misallocates capital that could fund real product development.
- False Signals: Inflated metrics mislead builders and investors.
- Wash Trading: Subsidies encourage circular trading for reward extraction.
- Cannibalization: Token emissions dilute long-term token holders and community alignment.
>90%
TVL Evaporation
$0.05-$0.15
Cost per Tx (Real)
L2 INCENTIVE ANALYSIS
The Subsidy vs. Usage Gap
Comparing the economic reality of leading L2s against their incentive-driven growth metrics.
| Metric / Feature | Arbitrum | Optimism | Base | zkSync Era |
|---|---|---|---|---|
Cumulative Incentives Distributed | $3.2B+ (ARB) | $3.3B+ (OP) | $0 (No token) | $1.6B+ (ZK) |
30-Day Avg. Daily Active Addresses | ~450k | ~350k | ~650k | ~200k |
30-Day Avg. Daily Transactions | ~1.1M | ~400k | ~2.1M | ~300k |
TVL / Daily Active User Ratio | $4,200 | $5,700 | $1,500 | $8,100 |
Protocol Revenue (30D Avg.) | $85k | $45k | $120k | $25k |
Incentive-Driven Volume (Est.) |
|
| <15% |
|
Native DEX Liquidity Depth ($10M Slippage) | <0.5% | <0.8% | <0.3% | <1.2% |
Sustained Activity Post-Airdrop |
deep-dive
THE GHOST TOWN PARADOX
The Demand-Side Vacuum
L2s are failing to attract sustainable user demand despite massive supply-side incentives, creating a landscape of well-funded ghost chains.
Incentives target builders, not users. Protocol grants and token airdrops reward developers for deploying contracts, but do not create organic user demand for those contracts. This creates a supply-side glut of forked DeFi protocols with zero liquidity.
The liquidity is synthetic and transient. Yield farming programs on chains like zkSync Era or Linea attract mercenary capital that exits post-incentive. This flywheel is broken; real users follow real utility, not temporary APY.
The bridge is a one-way street. Infrastructure like Arbitrum Bridge and Stargate efficiently ports assets in, but provides no reason for users to stay or transact. The demand vacuum persists because native use cases are absent.
Evidence: TVL-to-Transaction Mismatch. Chains like Kroma and Mantle hold billions in TVL from native tokens or LSD protocols, yet process a fraction of the daily transactions seen on Arbitrum or Optimism, proving capital is parked, not active.
case-study
THE INCENTIVE MISMATCH
Case Studies in Subsidized Emptiness
Billions in token incentives are failing to create sustainable ecosystems, revealing a critical flaw in the 'build here' playbook.
01
The Arbitrum STIP: $100M for Temporary Liquidity
Airdropping tokens to protocols to bootstrap TVL creates mercenary capital, not users. When incentives dry up, so does the activity, leaving behind inflated metrics and empty contracts.
- $100M+ in short-term incentive program (STIP) grants.
- ~50% TVL decline post-incentive for many recipient protocols.
- Incentives attracted yield farmers, not organic users or developers.
$100M+
Program Size
~50%
TVL Churn
02
The Optimism Airdrop Fallacy: Retroactive ≠Sustainable
Retroactive airdrops to early adopters reward past behavior but don't guarantee future engagement. This creates a one-time user acquisition cost with zero retention mechanism.
- Four rounds of OP token airdrops to users and builders.
- Minimal native app retention; users bridge back to Ethereum after claiming.
- Protocol revenue remains negligible despite $5B+ peak TVL.
4 Rounds
Airdrops
$5B+
Peak TVL
03
Avalanche Rush: The DeFi Yield Farm Graveyard
Paying protocols like Aave and Curve to deploy created a transient DeFi summer clone. When $180M in AVAX incentives ended, activity collapsed, proving you can't subsidize a moat.
- $180M in AVAX incentives over 3 months.
- TVL dropped >90% from its $12B peak.
- Exposed the lack of a durable developer ecosystem beyond paid deployments.
$180M
Incentives
>90%
TVL Drop
04
The Base 'Onchain Summer' Honeymoon
Coinbase's brand and seamless onboarding drove initial hype, but sustaining activity requires more than memecoins and low fees. The chain lacks a compelling reason for developers to build unique applications.
- 2M+ daily transactions driven by friend.tech and speculative frenzy.
- ~$500M TVL is largely bridged stablecoins, not productive capital.
- Highlights the gap between user acquisition and ecosystem value creation.
2M+
Daily Tx
$500M
Bridged TVL
counter-argument
THE STRATEGIC LENS
The Steelman: Why Grants Aren't Useless
Grant programs are a necessary, if flawed, tool for bootstrapping network effects in a hyper-competitive multi-chain landscape.
Grants are a signaling mechanism. They signal a foundation's commitment to a specific tech stack, like Arbitrum's Nitro or Optimism's Bedrock. This reduces perceived risk for early builders choosing a platform.
They create initial liquidity hooks. A grant for a DEX like Uniswap or a lending protocol like Aave creates the first on-chain assets and yield opportunities. This is the seed capital for a DeFi ecosystem.
The failure is in execution, not concept. Grants that fund generic forks of Uniswap create ghost towns. Successful programs, like Arbitrum's STIP, fund novel primitives that attract unique capital flows.
Evidence: Base's Onchain Summer and friend.tech grants didn't just fund apps; they created a cultural and economic flywheel that drove sustained user and developer activity.
future-outlook
THE INCENTIVE MISMATCH
The Pivot: From Grants to Growth Loops
Protocols are funding user acquisition but not the core infrastructure that retains them.
Grants attract mercenary capital. Projects like Optimism and Arbitrum deployed massive airdrops to bootstrap users, but these users treat liquidity as a yield farm. They bridge in, claim tokens, and bridge out via Across or Hop Protocol, leaving empty wallets and zero protocol fees.
Growth loops require native utility. A sustainable ecosystem needs applications that create economic gravity, like Uniswap on Ethereum or Aave on Polygon. Without this, incentives are a one-way subsidy to bridge operators and centralized exchanges.
The data shows the churn. Layer 2s like Boba Network and Metis have high TVL-to-transaction ratios, indicating capital is parked but not used. This is the hallmark of a grant-driven, not activity-driven, ecosystem.
takeaways
WHY 'BUILD HERE' INCENTIVES ARE CREATING L2 GHOST TOWNS
TL;DR for Busy CTOs
Short-term capital incentives are failing to bootstrap sustainable ecosystems, leading to high-value, low-activity chains.
01
The Mercenary Capital Problem
Programs like Arbitrum STIP and Optimism RetroPGF attract TVL that chases yield, not utility. This creates a capital efficiency illusion.
- TVL-to-Volume Ratio: Often < 0.1 on new L2s vs. > 0.5 on Ethereum L1.
- Incentive Cliff: >70% of bridged assets exit within 90 days of program conclusion.
- Real User Cost: Subsidies mask true gas fees, creating a price shock post-incentives.
< 0.1
TVL/Volume
>70%
Capital Flight
02
The Application Vacuum
Grants fund infra, not killer apps. Without a native, non-forked application (e.g., Uniswap on Ethereum, Friend.tech on Base**), an L2 is just a cheaper execution layer.
- Dependency Risk: >80% of transaction volume often comes from <5 forked dApps.
- Developer Lock-in: Teams deploy for the grant, not the tech stack, leading to abandoned code.
- Case Study: Chains with Blast-style points programs see ~90% of activity in the native yield farm.
>80%
Forked App Volume
~90%
Native Farm Activity
03
The Interoperability Trap
Fragmented liquidity across 50+ L2s and layerzero/Axelar bridges makes user experience worse, not better. Incentives don't solve the n-chain problem.
- Bridging Latency: ~5-20 minutes vs. L1's ~12 seconds for finality.
- Security Dilution: Relying on third-party bridge oracles adds systemic risk.
- Solution Shift: Projects like Across and UniswapX use intents to abstract this, making the destination chain irrelevant.
5-20min
Bridge Latency
50+
Fragmented L2s
04
The Sustainable Model: Protocol-Owned Liquidity
Successful ecosystems like Solana and Cosmos grew via protocol-owned liquidity and shared security, not transient bribes. The focus is on tooling and composability.
- Developer Retention: Cosmos SDK chains retain builders via sovereignty, not cash.
- Economic Alignment: Solana's low fees and high throughput enabled real consumer apps (e.g., Tensor, Jito).
- Metric: Sustainable L2s show organic TVL growth >20% QoQ post-incentives.
>20%
Organic QoQ Growth
Sovereignty
Key Retention
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