Building Sustainable Capital Formation in DeFi

DeFi is getting a boost from the emergence of a host of new blockchains such as BeraChain, TON, Plume, Sonic and many others.

DeFi is heating up again with the emergence of a host of new blockchains. BeraChain, TON, Plume, Sonic and many others are launching in rapid succession, each one bringing with it a flood of incentives to attract users and liquidity. These new chains are promising high yields and interesting economic models, harkening back to the early days of yield farming in 2021.

But is any of this sustainable?

As every new blockchain punches up and tries to build momentum, they inevitably confront the same dilemma: how to build ecosystems that survive beyond the end of their incentive programs.

Incentives remain one of crypto’s most elegant bootstrapping tools—a neat solution to the cold-start problem of attracting users and liquidity. Yet, incentives are just a starting point. The ultimate goal is to build self-sustaining economic activity around DeFi protocols.

While the broader DeFi market has evolved considerably, the foundational approach to this capital dynamic has changed little. For DeFi to thrive in this new phase, these strategies must be adapted to reflect the realities of today’s capital dynamics.

Some Key Challenges of Capital Formation in DeFi

Despite the obvious need, most incentive programs today end up failing or producing underwhelming results. The composition of the current DeFi market is very different from 2021 where it was relatively simple to run an incentive program. The market has changed and there are some key aspects to consider when thinking about capital formation in DeFi.

1. More Blockchains Than Relevant Protocols

In traditional software ecosystems, platforms (layer-1s) typically give rise to a larger, diverse set of applications (layer-2s and beyond). But in today’s DeFi landscape, this dynamic is flipped. Dozens of new blockchains—including Movement, Berachain, Sei, Monad (upcoming), and more—have launched or are preparing to. And yet, the number of DeFi protocols that have achieved real traction is still limited to a few standout names like Ether.fi, Kamino, and Pendle. The result? A fragmented landscape where blockchains scramble to onboard the same small pool of successful protocols.

2. No New Degens in This Cycle

Despite the proliferation of chains, the number of active DeFi investors hasn’t kept pace. Users experience friction, complex financial mechanics, and poor wallet/exchange distribution have all limited the onboarding of new participants. As a friend of mine likes to say, “We haven’t minted many new degens this cycle.” The result is a fragmented capital base that continually chases yield across ecosystems, rather than driving deep engagement in any one.

3. TVL Fragmentation

This capital fragmentation is now playing out in TVL (total value locked) statistics. With more chains and protocols chasing the same limited pool of users and capital, we’re seeing dilution rather than growth. Ideally, capital inflows should grow faster than the number of protocols and blockchains. Without that, capital simply gets spread thinner, undermining the potential impact of any individual ecosystem.

4. Institutional Interest, Retail Rails

Retail may dominate the DeFi narrative, but in practice, institutions drive most of the volume and liquidity. Ironically, many new blockchain ecosystems are ill-equipped to support institutional capital due to missing integrations, lack of custody support, and underdeveloped infrastructure. Without institutional rails, attracting meaningful liquidity becomes a steep uphill battle.

5. Incentive Inefficiencies and Market Misconfigurations

It’s common to see new DeFi protocols launch with poorly configured markets including leading to pool imbalances, slippage issues, or mismatched incentives. These inefficiencies often result in campaigns that disproportionately benefit insiders and whales, leaving little behind in terms of long-term value creation.

Building Beyond Incentives

The holy grail of incentive programs is to catalyze organic activity that persists after the rewards dry up. While there’s no blueprint for guaranteed success, several foundational elements can increase the odds of building a durable DeFi ecosystem.

1. Real Ecosystem Utility

The hardest but most important goal is building ecosystems with real, non-financial utility. Chains like TON, Unichain, and Hyperliquid are early examples where token utility extends beyond pure yield. Still, most new blockchains lack this kind of foundational utility and must rely heavily on incentives to attract attention.

2. Strong Stablecoin Base

Stablecoins are the cornerstone of any functional DeFi economy. An effective approach often includes two leading stablecoins that anchor borrowing markets and create deep AMM (automated market maker) liquidity. Designing the right stablecoin mix is critical to unlocking early lending and trading activity.

3. Major Asset Liquidity

Alongside stablecoins, deep liquidity in blue-chip assets like BTC and ETH lowers the friction for large allocators. This liquidity is crucial for onboarding institutional capital and enabling capital-efficient DeFi strategies.

4. DEX Liquidity Depth

Liquidity in AMM pools is frequently overlooked. But in practice, slippage risk can derail large trades and stifle activity. Building deep, resilient DEX liquidity is a prerequisite for any serious DeFi ecosystem.

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