Do farming incentives create artificial demand for DeFi protocols?

In this brief article, guest author Patrick Hansen from Unstoppable Finance writes about boosted farming incentives and their implications for DeFi tokens.

I am super bullish on DeFi, but the truth is: Apart from Uniswap and MakerDAO and a handful of other DApps almost all other protocols have artificially boosted demand (token incentives) largely outweighing a limited genuine demand.

This Compound Finance/Messari Q3 report highlights that when token incentives were factored in, protocol earnings were negative. Compound has been trading equity to rent liquidity that may or may not be sticky when it eventually decides to stop emitting COMP.

This is true for most DeFi apps. For example Curve emitted 33.3 million CRV to liquidity providers over the past 30 days worth $156 million. During the same period, it had $5.7 million in earnings for its protocol and token holders.

Figure 1: Dune analytics for Curve (Source: https://bit.ly/3lpFFol)

I think that tokenized yield and real adoption are likely a positive feedback loop and I expect DeFi to generate more and more real world demand. Still, be sceptical towards TVL and governance tokens. Currently, most of the valuations are unsustainable in my opinion.

Remarks

This article was originally published as tweet storm on twitter (source: https://bit.ly/3lr05gF).

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Patrick Hansen is head of strategy & growth at Unstoppable Finance, a Berlin based startup with the mission to empower people around the world to access, interact with and unlock financial opportunities of the decentralized economy. Before that he was head of blockchain at Bitkom, the largest tech association in Europe with over 2k member companies, where he led blockchain & crypto related regulatory work, research, partnerships and communications. Patrick holds master degrees in business and political science. You can contact Patrick via Twitter and connect with him on Linkedin.

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International Token Standardization Association

The International Token Standardization Association (ITSA) is a not for profit organization working on holistic market standards for the global token economy.