Why Current DeFi Incentives Are Structurally Misaligned

Yield farming is a subsidy for liquidity, not a payment for utility. This attracts $10B+ in transient TVL that chases the highest APY, creating boom-bust cycles.

• Protocols bleed value to mercenary LPs who exit at the first sign of lower yields.
• Real users subsidize this inefficiency via inflation and higher slippage.
• Examples: SushiSwap's vampire attacks, Curve Wars for CRV emissions.

Governance tokens like UNI and AAVE are mis-sold as value-accruing assets. Their primary utility is voting on treasury emissions, creating a perverse feedback loop.

• Voters are incentivized to approve high inflation to boost short-term token price.
• Zero protocol fee switch means no cash flow to token holders, decoupling price from performance.
• Result: Governance is a subsidy mechanism, not a stewardship tool.

Incentives for security (staking, slashing) are economically weaker than incentives for extraction (MEV, hacking). Validators and oracles are underpaid for critical work.

• Proof-of-Stake chains like Ethereum pay validators ~4% APR, while MEV searchers capture $500M+ annually.
• Oracle networks like Chainlink secure $20B+ in DeFi but compete on cost, not security.
• Systemic risk emerges when the cheapest, least secure option wins.

Protocols pay $10B+ annually in emissions to attract TVL that flees at the first sign of higher yields. This creates a negative-sum game where only the most efficient farmers win.\n- Real Yield Dilution: Emissions inflate token supply, suppressing price for actual users.\n- No Protocol Loyalty: TVL is a vanity metric, not a measure of utility or stickiness.

Token-based voting incentivizes large holders (whales, DAOs) to vote for proposals that maximize their short-term token value, not protocol security or UX. This leads to bribe markets like those on Curve and Convex.\n- Misaligned Stewardship: Voters are profit-seekers, not users.\n- Security Debt: Proposals to reduce fees or increase leverage are prioritized over critical upgrades.

Deep liquidity is treated as the end goal, not a means to enable better applications. This leads to inefficient capital allocation locked in AMMs instead of productive uses like undercollateralized lending or on-chain derivatives.\n- Capital Silos: Uniswap v3 LP positions are non-fungible and idle.\n- Zero-Sum Competition: Protocols fight over the same liquidity instead of creating new demand.

Shift from bribing capital to rewarding verifiable user actions that create real protocol value. This means retroactive public goods funding, proof-of-usage airdrops, and fee-based tokenomics.\n- EigenLayer & EigenDA: Restakers earn fees for providing a service, not just locking capital.\n- Uniswap's Fee Switch: Directly ties token value to protocol revenue, not speculative TVL.

Adopt governance models where influence is earned through proven contribution, not token holdings. This includes proof-of-personhood, delegated expertise, or non-transferable reputation tokens.\n- Optimism's Citizen House: Separates token voting from public goods funding.\n- MakerDAO's Scope Frameworks: Delegates technical decisions to mandated domain teams.

Move from passive LP positions to active, intent-based liquidity that can be routed to where it's needed. This turns capital into a utility layer for applications like CowSwap, UniswapX, and Across Protocol.\n- Cross-Chain Intent Solvers: Liquidity competes to fulfill user outcomes, not just sit in pools.\n- Modular Yield: Capital can be simultaneously deployed across lending, AMMs, and restaking.