The growth in total value locked in DeFi protocols since the introduction of widespread liquidity mining strategies shows that it is an effective strategy to bootstrap or scale liquidity in a protocol in a short-term period. However, the high APY won’t last forever making this growth hack a debatable topic whether it’s a good way to have a sustainable protocol development, design features, and onboard target customers. Nevertheless, it’s a great tool to boost initial liquidity and more importantly distribute governance tokens to users of a protocol with the ultimate goal of giving the token holders control of the protocol’s future.
Organic growth in traditional product management and marketing stands for user acquisition without paid advertisement which in the crypto world could refer to liquidity mining. The goal of this article is to emphasize the key ways to stimulate organic growth in DeFi and hopefully provide a playbook for newcomers to build and scale great products based on pioneers’ experience.
Right off the question arises: what’s so special about DeFi? After all, there are numerous materials about growth for startups. This a valid question, let’s figure out what limitations are inherent for DeFi products in the first place:
- Most crypto users respect their privacy which complicates getting insights from user research, running usability tests, and so on. Additionally, the user base is not that huge to make data-driven decisions through a/b tests and analyzing large samples. However, there are many outgoing enthusiasts who are more than welcome to help you out.
- Paid user acquisition is not very common in this market. Firstly, paid traffic makes sense when a startup gets product validation, needs to scale, and has a clear business model. What we can’t say about DeFi right now. Secondly, imposing advertising more likely will be taken negatively. The exceptions are materials that develop the market in general, e.g. user research and surveys.
- Decentralization implies more responsibility for developers meaning that lean DeFi with quick MVP to conduct experiments may cause loss of user funds. However, “test in prod” is a totally acceptable approach as long as risks are transparent.
These limitations open up room for creativity to find extraordinary ways to improve user experience and assure sustainable growth. Worth to say that none of the described down the line will work if a project doesn’t reach a product/market fit at least in the DeFi market. To scale, you need to have something to scale. Let’s dive into some of the techniques and examples.
The greatest merit of DeFi certainly is composability that allows developing a new solution by using already existing resources (infrastructure, data, liquidity) that have a track record of security and reliability as building blocks like Lego. This is important because now teams can do less protocol development and focus on their core businesses. Moreover, building in Defi aligns with a lean startup concept, you can deliver a product within even a single design sprint and validate it directly through the market. This is huge, because some time ago due to the complexity of decentralized protocols and lack of users, you couldn’t know whether you’re building something valuable. The network effect is the main reason why building on Ethereum provides much more opportunities.
Your main job as a protocol is to be integrated by other dApps as much as possible which can give you the best opportunity for exponential growth. Among the great examples are MakerDAO’s DAI, Aave, Compound, and Uniswap. So we can observe a clear correlation between the integrations and TVL / trading volume.
Maker, Aave, Compound are top 7 by TVL and Uniswap is top 1 by trading volume. Source:
If the previous statement was referring more to a B2B use case, there is a crucial need to access DeFi protocols in a convenient way for an end-user. A UX-advanced ability to interact with dApps is provided by Zerion, Zapper, and Argent.
Monthly unique visitors of Zerion and Zapper (based on the last 3 months data). Source
Total number of Argent wallets created, accumulated daily over time. Source
Even if you’re a confident DeFi user, it’s complicated to track by yourself the best exchange rates, the lowest fees, and the highest yield. Here in the game aggregators come:
- DEX aggregators: 1inch, Paraswap, Totle, DEX.ag, dex.blue
- Yield aggregators: Yearn, RAY, Rari Capital, Idle
- Zaps: DefiZap, Furucombo
Although, there is an opposite thought about aggregators’ relevancy in the long-term run:
Other important building blocks
- Infrastructure: Chainlink, IPFS
- Data Lego: Dune Analytics, The Graph, Nansen
- Content curation: Defiprime, DefiPulse
The icing on the cake at this composability party is flash loans that allow you to make a loan with zero collateral with a single condition — you have to pay it back in the same block like it never happened. As you figure out, flash loans open up previously unavailable arbitrage opportunities, and more importantly, it helps to test the protocol to see if it can perform at scale.
2. User Experience
User experience along with scalability is the biggest challenge of decentralized protocols that are standing in the way of mass adoption. A common user does not want to remember mnemonics and pay a $5–20 fee for any operation or have no guarantees of funds being safe.
One breakthrough in this area was done by the Argent team. By implementing smart-contract wallets and meta transactions, they’ve got the opportunity to pay gas fees on behalf of their users. The other feature is Guardians that allow users to backup a wallet via social connections without a seed phrase in a non-custodial way.
A similar feature set is provided by Dharma’s smart wallet that allows users to avoid seed phrases and gas fees as well.
There is a big room for UX improvement. According to the DeFi User Survey question what holds DeFi back the answers were mostly centered around insurance and security. Crypto-native FDIC insurance products are highly relevant for lending protocols and apps that are focused on non-DeFi users.
Following the trends isn’t something new or unique, but still to implement new features that the market requires right away deserves credit especially considering the complexity to set up a testing environment when dealing with various protocols. Responding quickly to the market needs can trigger rapid user growth.
The first kudos is going to the Zapper team. With yield farming trends emerging, Zapper is the first portfolio tracker that lists all new assets, liquidity. This allows modern DeFi users to monitor the complete portfolio balance and to manage it efficiently.
The other great example of how a team adds new features when it’s highly relevant is 1inch. They added Uniswap v2 in a matter of hours, added limit orders when IDO madness begun, implemented CHI token when gas prices have mooned.
1inch USD Volume Per Day. Source: Dune Analytics
An apogee of yield farming was the YAM protocol release. The project was started as a social experiment to enable decentralized control over the project through fair governance token distribution. A protocol that was built over the 10 days without having audits and SSL certificate reached $500m TVL in 24h.
YAM TVL. Source
4. Community ownership
A community was always the main building block of any open source project. However only with DeFi and DAO collaboration, it became possible to empower and economically incentivize a community to proactively participate in decision-making. According to a Playbook for building crypto applications, there are three components of crypto success:
- Find product/market fit
- Distribute tokens and incentivize community participation
- Eventually, let everybody own the project by tokenizing it
Yearn.finance is a prominent example of community-driven protocol development. Why so?
- No pre-mine, no team and VC tokens, fair distribution to early supporters
- Dashboards, tools, discord and telegram chats were created by a community
- Active participation in governance proposals forming
- High endorsement across DeFi community
Yearn community health. Source
Having one of these is already a great achievement, but If your project has all of them, you’re definitely doing the right thing.
But what to do if a project is just launched and can’t offer high APY to incentivize early users? With new DAO VC types of funding, it’s not a problem. Do not hesitate to apply MolochDAO, Metacartel DAO/Ventures, and The LAO who can help with initial idea validation and community building.
On the other hand, you can pick a path of a fair launch that enables bootstrapping new crypto networks that are earned, owned, and governed by their community from the outset.
Liquidity mining is a great marketing program to instantly bootstrap liquidity or scale already achieved local product/market fit, but it doesn’t guarantee further sustainable growth. Here is a playbook how to scale decentralized product in an organic way:
1. Leverage composability. If a protocol is not composable and doesn’t add any value to the network, you’ll spend tons of money for user and dev acquisition ending without any significant result.
2. As they say, don’t trade against the market trend. This refers to growth as well. See the trend? Capture it.
3. DeFi Chads don’t care about UX/UI unless APY is high. However, the upcoming adoption forces you to care about the users, but not make them suffer.
4. Let your community own the project and decide its course. Launch a fair distribution of governance tokens, incentivize
I would like to thank Jon Tompkins, Tom Schmidt, Peter Pan for their helpful feedback on earlier versions of this text.