Value leaks to infrastructure. Most protocols treat infrastructure like Layer 2s, oracles, and bridges as costless commodities, ignoring how their fee structures and data flows create permanent value streams for third parties like Chainlink, Arbitrum, and Stargate.
public-goods-funding-and-quadratic-voting
Blog
The Hidden Cost of Overlooking Long-Term Value Accrual
An analysis of how funding mechanisms like quadratic voting, while elegant, systematically underfund foundational R&D and infrastructure, trading future network resilience for present visibility and engagement metrics.
introduction
THE VALUE LEAK
Introduction
Protocols that fail to architect for long-term value accrual subsidize extractive intermediaries and forfeit their own sustainability.
Short-term UX trades for long-term rent. Optimizing for user onboarding with subsidized gas or free data creates a perverse economic dependency; the protocol's core activity becomes the primary revenue source for its infrastructure vendors.
The accrual test is binary. A protocol either captures fees and governs its stack or it becomes a value-transfer pipeline for others. The difference separates sustainable projects like Frax Finance from perpetual grant-seekers.
Evidence: The $30B+ Total Value Locked in DeFi generates billions in annual fees, yet a dominant portion flows not to protocol treasuries but to underlying Ethereum L1, sequencers, and data providers.
key-trends
THE HIDDEN COST OF OVERLOOKING LONG-TERM VALUE ACCRUAL
Executive Summary: The Funding Mismatch
Venture capital's short-term exit pressure is structurally misaligned with the long-term, protocol-native value creation required for sustainable crypto networks.
01
The Problem: The 3-Year VC Fund Lifecycle
Traditional venture funds operate on a 7-10 year cycle, demanding liquidity events (acquisitions, IPOs) that don't exist for decentralized protocols. This forces founders to prioritize short-term token price over long-term protocol utility, leading to value extraction.
- Mismatch: Protocol maturity requires >5 years; fund timelines demand exits in 3-5.
- Result: Premature token launches, unsustainable incentives, and protocol decay post-TGE.
3-5yr
VC Pressure Window
>5yr
Protocol Maturity
02
The Solution: Permanent Capital & Protocol-Controlled Value
Sustainable funding requires capital structures native to crypto's trustless environment. Protocol-Controlled Value (PCV) and DAO Treasuries create self-funding flywheels, while permanent capital vehicles (e.g., a16z Crypto's permanent fund) align investor horizons.
- Mechanism: Fees accrue to treasury, funding development and security in perpetuity.
- Examples: Uniswap DAO's $2B+ treasury, Frax Finance's algorithmic stability reserve.
$2B+
UNI Treasury
∞
Capital Horizon
03
The Metric: Fee Switch vs. Token Inflation
The critical trade-off is between sustainable protocol revenue and dilutive token emissions. Projects that delay enabling a fee switch to avoid short-term price impact sacrifice long-term viability for VC-friendly optics.
- Real Yield: Protocols like GMX and MakerDAO demonstrate fee accrual supports security without infinite inflation.
- Hidden Cost: ~90% of DeFi tokens still rely primarily on inflationary rewards, a ticking time bomb for tokenomics.
90%
Inflation-Dependent
$50M+
Annual GMX Fees
04
The New Investor Archetype: Protocol Alchemist
The next wave of capital will come from entities that actively engineer protocol economics, not just provide cash. These are liquidity strategists, governance maximizers, and MEV harvesters who derive returns from system mechanics, not equity.
- Shift: From passive equity holder to active economic layer participant.
- Entities: Figment (staking), Flashbots (MEV), Gauntlet (parameter optimization).
0%
Equity Required
100%
On-Chain Activity
thesis-statement
THE INCENTIVE MISMATCH
The Core Argument: Short-Term Metrics Corrupt Long-Term Value
Protocols optimizing for daily active users and TVL sacrifice long-term defensibility for short-term growth.
Protocols optimize for vanity metrics like TVL and daily transactions because VCs and users reward them. This creates a perverse incentive structure that prioritizes artificial growth over sustainable value capture. The result is subsidized liquidity and airdrop farming that evaporates post-incentives.
Long-term value accrues to infrastructure, not applications. Protocols like EigenLayer and Celestia capture value by securing and scaling the ecosystem. Applications built on them, like Arbitrum and dYdX, compete on thin margins and face constant forking pressure.
Evidence: Layer 2s spend >$1B annually on sequencer revenue and incentives to attract users. Meanwhile, Ethereum's base layer captures the majority of the ecosystem's security budget and economic value, demonstrating the infrastructure premium.
PROTOCOL TREASURY STRATEGIES
Funding Allocation: Visibility vs. Vitality
Comparing the tangible costs and long-term value implications of different protocol treasury allocation strategies.
| Metric / Feature | High-Visibility Marketing Spend | Protocol-Owned Liquidity (POL) | Core Protocol R&D |
|---|---|---|---|
Immediate User Growth (MoM) | 15-25% | 2-5% | 0-1% |
TVL Retention After 12 Months | 35% | 85% | N/A |
Protocol Revenue Accrual | Indirect | Direct (Yield + Fees) | Deferred |
Time to Positive Cash Flow | 18-24 months | 6-12 months | 24+ months |
Defensive Moat Strength | |||
Example Protocol | Memecoin Launchpads | Frax Finance, Olympus DAO | Uniswap, Arbitrum |
Annual Runway Burn Rate | $5M - $50M | $1M - $10M | $2M - $20M |
Vulnerability to Mercenary Capital |
deep-dive
THE VALUE LEAK
Deep Dive: The Mechanics of Neglect
Protocols that fail to architect for long-term value accrual create permanent, structural leaks that benefit extractive third parties.
Value accrual is a design choice. Protocols like Uniswap and MakerDAO capture fees directly into their treasuries or token, while others like early Aave versions routed all fees to LPs. The fee switch decision determines whether value compounds on-chain or bleeds out.
MEV is the primary leakage vector. Searchers and builders on networks like Solana and Arbitrum extract billions annually from user transactions. Protocols that lack native order flow auctions or shared sequencer revenue subsidize this extraction.
Liquidity is rented, not owned. Relying on mercenary capital from Curve wars or Uniswap v3 LPs creates fee volatility. Protocols like Frax Finance build owned liquidity via their AMO, creating a more stable revenue base.
Evidence: Lido Finance captures ~10% of all Ethereum staking rewards via its fee structure, while many L2s using third-party sequencers like AltLayer or Caldera capture $0 from transaction ordering.
case-study
THE HIDDEN COST OF OVERLOOKING LONG-TERM VALUE ACCRUAL
Case Studies in Underfunded Resilience
Protocols that fail to architect for long-term value capture often subsidize their own commoditization, creating resilient but underfunded public goods.
01
The Uniswap v2 Fork Problem
The AMM's simple, permissionless design was a masterclass in composability but a failure in defensibility. Its open-source code spawned thousands of forks (SushiSwap, PancakeSwap) that captured ~$20B+ TVL without returning value to the original R&D. The protocol became a resilient public good that funded its own competitors.
0.01%
Fee to Devs
1000+
Direct Forks
02
Ethereum's L1 as a Settlement Dumb Pipe
Pre-EIP-1559, Ethereum's fee market sent 100% of transaction value to miners, creating massive security spend with zero value accrual to the ETH token. This turned the most complex computer in the world into a commodity settlement layer, a problem partially solved by the burn mechanism which now captures ~$10B annually in deflationary pressure.
$10B/yr
Value Now Captured
0%
Pre-1559 Accrual
03
The Oracle Front-Running Subsidy
Early DeFi protocols like MakerDAO used a decentralized but slow (1-hour) oracle design from Maker Foundation nodes. This created a multi-million dollar MEV opportunity for searchers, effectively forcing the protocol to subsidize blockchain latency. The value of price discovery was captured by external actors, not the security stakeholders.
1hr
Oracle Latency
$MMs
MEV Subsidy
04
Bitcoin's Layer 2 Dilemma
Bitcoin's extreme security and simplicity forced scaling and programmability to migrate off-chain. Protocols like Lightning Network and Stacks must bootstrap their own security and token models, creating fragmented liquidity and sovereign risk. Bitcoin captures minimal value from the ~$500M+ TVL ecosystem built atop it, acting as a passive gold-like reserve.
<1%
L2 Value Accrual
$500M+
L2 TVL
05
The MEV-Boost Relay Commons
Post-Merge, Ethereum validators outsourced block building to a competitive market via MEV-Boost. While increasing chain efficiency, the critical relay infrastructure remains an underfunded public good. Top relays like Flashbots, BloXroute, and Agnostic process ~90% of blocks but operate on grants and goodwill, creating systemic risk if they fail.
90%
Blocks Relayed
$0
Protocol Fees
06
Interoperability Protocol Tokenomics
Many cross-chain bridges (LayerZero, Axelar) and messaging layers operate with tokens whose utility is governance-only. This creates a mismatch: they secure $10B+ in cross-chain value but capture fees in native gas tokens, not their own. The value of security is accrued by the destination chain, not the interoperability protocol enabling the transfer.
$10B+
Secured Value
Governance
Primary Utility
counter-argument
THE MISALIGNED INCENTIVE
Counter-Argument: Isn't This Just the Free Market?
The free market optimizes for short-term extractable value, not long-term protocol health.
The market is myopic. It prices immediate yield, not sustainable infrastructure. This creates a principal-agent problem where users (agents) chase the highest APY, while protocols (principals) need long-term capital for security and R&D.
Protocols compete on subsidies. This leads to a race to the bottom where value is extracted by mercenary capital, not created for stakeholders. Compare Curve's veTokenomics to a simple yield farm—one builds loyalty, the other drains the treasury.
Evidence: The "DeFi Summer" yield farming craze saw billions flow into unaudited forks. Protocols like SushiSwap initially succeeded by bribing users from Uniswap, creating massive, unsustainable inflation without corresponding value capture.
takeaways
LONG-TERM VALUE ACCRUAL
Takeaways: Fixing the Plumbing
Infrastructure protocols that fail to design for sustainable value capture become public goods subsidized by their own investors.
01
The Problem: The Oracle Dilemma
Data feeds like Chainlink are critical infrastructure but face commoditization pressure. Value accrues to stakers, not necessarily to the protocol treasury or token.\n- Fee Extraction: Revenue is paid to node operators, creating a ~$1B+ annualized market for node runners.\n- Protocol Saturation: Competition from Pyth, API3, and native chain oracles squeeves margins.
~$1B+
Annual Node Fees
>10
Major Competitors
02
The Solution: Sequencer Fee Markets
Rollups like Arbitrum and Optimism are implementing fee switches and MEV capture to redirect value from operators to the DAO treasury.\n- Direct Capture: A portion of transaction fees or MEV (e.g., >30% of sequencer profit) flows to the protocol.\n- Sustainable Funding: Creates a recurring revenue stream to fund development and security without diluting token holders.
>30%
Profit Share
$100M+
Annual Runway
03
The Problem: Bridge Tokenomics
Most bridges (e.g., Multichain, early Stargate) are fee-for-service utilities. Their tokens are pure governance, with no mechanism to capture the ~$50M+ in monthly bridge volume.\n- Zero-Capture Model: Fees are paid in the native asset of the source chain, bypassing the bridge token entirely.\n- Vampire Attack Risk: Leaves protocols vulnerable to competitors like LayerZero or Across that bundle intent-based swaps.
$50M+
Monthly Volume
0%
Fee Capture
04
The Solution: Stake-for-Access & Insurance
Protocols like Across and Synapse require staking of the native token to act as liquidity providers or relayers, creating direct utility and fee share.\n- Bonded Security: Stakers back transactions and earn fees, tying token value to protocol usage.\n- Insurance Pool: A portion of fees funds a collective insurance pool, reducing counterparty risk and attracting institutional capital.
10-20%
Staker APY
$200M+
TVL in Pools
05
The Problem: L1 Consensus as a Cost Center
Networks like Ethereum and Solana treat consensus and execution as a monolithic cost. Validators earn block rewards and tips, but the protocol itself has no direct revenue from application-layer activity.\n- Subsidy Reliance: Security depends on inflationary block rewards or volatile transaction fees.\n- Missed Upside: The $100B+ DeFi ecosystem built on-chain pays fees to validators, not to the protocol's foundational treasury.
$100B+
DeFi TVL
0%
Protocol Cut
06
The Solution: Sovereign Rollups & Shared Sequencing
Celestia's data availability and EigenLayer's shared security model enable rollups to become profitable businesses. They keep 100% of their execution fees while outsourcing security.\n- Profit & Loss Control: Rollups become sovereign businesses with their own fee models and treasuries.\n- Modular Cash Flow: Creates a new investment thesis: valuing L2s by their fee revenue and margins, not just TVL.
100%
Fee Retention
New Asset Class
L2 Equities
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Protocols Shipped
$20M+
TVL Overall