Introduction

Since the explosive growth of decentralized finance (DeFi) during the “DeFi Summer” of 2020, DeFi tokens have become a critical component of the crypto market. As the core assets of protocols, their value-adding mechanisms directly determine the sustainability and appeal of their ecosystems.

This article examines DeFi token value-adding mechanisms from multiple perspectives, including governance rights, profit-sharing incentives, liquidity mining, protocol utility, cross-chain interoperability, and future innovation trends.

Mainstream Mechanisms

DeFi tokens derive value from governance, profit-sharing, liquidity incentives, staking security, functional utility, cross-ecosystem integration, and brand/community strength, which span technical, economic, and cultural dimensions.

Multiple mechanisms interact to ensure DeFi tokens are speculative assets and create enduring value through utility, yield generation, and network effects. Leading projects often combine multiple mechanisms to build unique competitive advantages.

Governance Rights

Core Mechanism:

Governance tokens grant holders voting power over protocol decisions (e.g., fee structures, upgrades), decentralizing control from developers to users. For instance:

Uniswap (UNI): Votes on fee redistribution and new trading pairs.

Compound (COMP): Adjusts interest models and asset listings.

Value Proposition:

Governance enhances users’ sense of participation and trust in the project. When community decisions align with market demands, the protocol’s adaptability and competitiveness improve, and the token value rises accordingly. This mechanism incentivizes users to actively participate and promote ecosystem development, forming a virtuous cycle.

Source:https://atise.medium.com/protocol-fee-sharing-and-the-future-of-uniswap-9c636afeef28

Risks:

Governance Attacks and Centralization: If large holders (whales) possess a significant amount of tokens, they may manipulate voting outcomes, leading to centralized governance and undermining the original intention of decentralization.

Inefficient or Incorrect Decision-Making: A lack of professional knowledge or divided opinions within the community may lead to misadjusted protocol parameters or missed market opportunities. Case Study – Compound (COMP): In its early stages, there were controversies over whales dominating proposals through voting, raising concerns in the community about fairness.

Impact: Imbalanced governance may reduce user trust, weaken token value, and even trigger sell-off pressure.

Source: https://www.theblock.co/post/308215/compound-reaches-truce-with-crypto-whale-humpy-after-controversial-vote-to-move-24-million-in-tokens

Revenue Sharing

Core Mechanism:

Revenue sharing captures economic value by distributing the income generated by the protocol (such as trading fees) to token holders, or by buying back and burning tokens to reduce circulating supply. This mechanism is similar to dividends or stock buybacks in traditional finance.

Representative Projects and Cases:

SushiSwap (SUSHI): SUSHI holders can earn a portion of the platform’s trading fees by staking their tokens, incentivizing long-term holding.

MakerDAO (MKR): The protocol reduces MKR supply by buying back and burning tokens. When the system generates excess profit, this deflationary mechanism increases token scarcity.

Value Proposition:

Revenue sharing directly links the protocol’s economic success to token value, providing holders with dividend-like returns or potential appreciation. This mechanism enhances the long-term appeal of the token, especially for users seeking stable returns.

Source: https://crypto.com/en/university/what-is-maker-dao-dai

Risks:

Unsustainable Revenue: If protocol income decreases (e.g., due to reduced trading volume), the returns distributed to holders may not be attractive enough to sustain interest.

Deflation Model Failure: Buyback and burn depend on protocol profitability. The deflationary effect may be insignificant if the market is sluggish or competition intensifies.

Case – SushiSwap (SUSHI): Early high returns attracted users, but trading volume fluctuations led to unstable rewards, affecting the token price.

Impact: Decreased revenue may result in holder loss and a decline in token value, especially for users relying on short-term returns.

Source: https://www.gate.io/trade/SUSHI_USDT

Liquidity Incentives

Core Mechanism:

Liquidity incentives attract users to provide liquidity to pools by distributing token rewards, supporting the protocol’s trading depth and ecosystem growth. Common forms include liquidity mining, where rewards typically decrease over time to balance short-term speculation and long-term value.

Representative Projects and Cases:

Curve (CRV): CRV token rewards liquidity providers, and through the veCRV (vote-escrowed CRV) mechanism, encourages long-term token locking to improve capital stability.

Yearn Finance (YFI): Initially distributed YFI via liquidity mining, attracting large amounts of capital to rapidly scale the liquidity pool.

Value Proposition:

Liquidity incentives improve trading efficiency and market competitiveness of the protocol. A well-designed mechanism (such as gradually reducing rewards and combining with other empowerment strategies) can prevent the exit of “mercenary capital” and promote long-term value accumulation.

Source: https://insights.deribit.com/market-research/yfi-a-tale-of-fair-launch-governance-and-value/

Risks:

Exit of “Mercenary Capital”:

High yields from liquidity mining attract short-term speculators. Once rewards decrease, capital may quickly withdraw, leading to a shrinkage of the liquidity pool.

Impermanent Loss (IL):

Liquidity providers face price fluctuation risks. If the token value drops, losses may offset the earned rewards.

Case – Yearn Finance (YFI):

After the early mining boom, some pools saw a sharp drop in liquidity due to reduced rewards.

Impact:

Unstable liquidity may impair protocol functionality, and the token price may come under selling pressure.

Staking and Security

Core Mechanism:

Staking requires users to lock up tokens to support the protocol’s security or stability, usually serving as a buffer fund to guard against risks. Stakers are rewarded with additional incentives. This mechanism is commonly seen in lending or derivatives protocols.

Representative Projects and Cases:

Aave (AAVE): AAVE tokens can be staked in the “Safety Module” and used as a safeguard in case the protocol incurs losses (e.g., due to under-collateralized liquidations). Stakers receive rewards in return.

Curve (CRV): By locking CRV, users enhance the stability of liquidity pools. Stakers receive higher voting power and yield.

Value Proposition:

Staking improves the protocol’s risk resilience while reducing the token’s circulating supply, which may drive up its price. By staking, users participate in ecosystem development, enhancing community engagement and fostering stronger long-term support.

Source: https://github.com/aave/aave-stake-v2

Risks:

Smart Contract Vulnerabilities: Staked funds can become targets for hackers. If vulnerabilities exist in the smart contract, staked tokens may be stolen.

Market Volatility Risk: During the lock-up period, if the token price crashes, stakers may suffer significant losses.

Case – Aave (AAVE): Although no major attacks have occurred, frequent smart contract exploit incidents in the DeFi industry (e.g., Cream Finance’s 2021 hack) highlight the potential risks of staking mechanisms.

Impact: Security incidents can destroy user confidence, leading to a sharp decline in token value and triggering a crisis of trust in the ecosystem.

Source: https://x.com/CreamdotFinance/status/1453455806075006976

Utility Use Cases

Core Mechanism:

Utility use cases embed the token into the core functions of a protocol—such as paying fees, adjusting parameters, or unlocking services—making the token essential for using the protocol. This practicality enhances the intrinsic demand for the token.

Representative Projects and Cases:

Balancer (BAL): BAL tokens are used to adjust the weights of liquidity pools, allowing holders to optimize pool returns.

Chainlink (LINK): LINK is used to pay for oracle services. As DeFi increasingly depends on external data, demand for LINK continues to grow.

Value Proposition:

Utility transforms tokens from speculative assets into necessities, reinforcing market demand. Without the token, users cannot fully access the protocol’s services—this irreplaceability directly increases the token’s value.

Risks:

Competitive Substitution: If other protocols offer similar functions at lower costs, demand for the token’s utility may decline.

Dependence on External Factors: External ecosystems can influence utility tokens’ value. For example, Chainlink (LINK) depends on demand within the oracle market.

Case – Balancer (BAL): Facing competition from platforms like Uniswap, if Balancer’s features lose appeal, demand for BAL may weaken.

Impact: A decline in functional utility may cause the token to lose its core value support, weakening its market position.

Source: https://www.gate.io/trade/BAL_USDT

Cross-Ecosystem Integration

Core Mechanism:

Cross-ecosystem integration enhances token interoperability and network effects by enabling usage across multiple chains or protocols. This approach is common in cross-chain bridges or aggregator protocols, where the token connects different ecosystems.

Representative Projects and Cases:

THORChain (RUNE): RUNE acts as the settlement token in a cross-chain liquidity network, supporting multi-chain asset swaps.

Curve (CRV): CRV is used by yield aggregator protocols like Yearn, expanding its application within the DeFi ecosystem.

Value Proposition:

Cross-ecosystem integration broadens the token’s usage scenarios and demand for liquidity, creating a positive feedback loop through network effects. This multi-platform utility enhances the token’s value-capturing potential.

Risks:

Cross-chain Technology Risk: Cross-chain bridges may suffer from technical failures or hacker attacks, leading to asset loss and reduced trust in the token.

Ecosystem Dependence: If partnering protocols fail, the token’s value may suffer collateral damage.

Case – THORChain (RUNE): In 2021, the protocol suffered multiple hacking incidents, resulting in price volatility for RUNE and a decline in user confidence. \

Impact: Instability in cross-chain integrations can amplify risk, weakening the token’s network effect and diminishing its value.

Source: https://www.coindesk.com/business/2023/06/20/atomic-wallet-hackers-use-thorchain-to-conceal-stolen-35m-funds

Branding and Community

Core Mechanism:

Branding and community build recognition and cultural consensus around a token, granting it intangible value. A strong community not only promotes the project but also provides support in times of crisis.

Representative Projects and Cases:

Yearn Finance (YFI): Gained community support through a “fair launch” (no pre-mining, no VC involvement). Despite limited functionality, strong community consensus drove price appreciation.

SushiSwap (SUSHI): Early on, the community took over development, demonstrating the resilience of a decentralized project.

Value Proposition:

Though difficult to quantify, branding and community can provide essential support during market turbulence. A strong community can collectively take action during crises (e.g., after a hack), reinforcing long-term project stability.

Risks: Community Fragmentation: Internal conflict or a crisis of trust (e.g., the departure of core developers) can lead to community collapse and loss of brand value.

Overreliance on Consensus: If a token’s value is sustained mainly by community belief rather than actual utility, it risks becoming a “hype coin.”

Case – SushiSwap (SUSHI): The anonymous departure of the founder sparked a trust crisis in the community, causing the token’s price to plummet.

Impact: Community instability may drive away supporters, eroding intangible value and exacerbating token price volatility.

Source: https://news.bitcoin.com/sushiswap-founder-reportedly-exit-scams-as-sushi-token-price-tanks/

General Risk

Source of Risk:

As the scale and influence of DeFi expand, global regulatory agencies have begun focusing on its compliance issues. Possible regulatory measures include:

KYC/AML Requirements: Mandating user identity verification, which may conflict with the decentralized nature of DeFi.

Application of Securities Laws: If tokens are classified as securities, they may face stringent registration and disclosure requirements.

Tax Policies: Imposing taxes on trading, staking rewards, or mining incentives, which increases user costs.

Potential Impact:

Regulatory restrictions may weaken DeFi’s openness and global accessibility, leading to user attrition.

Projects may be forced to adjust mechanisms (e.g., restrict certain functions), impacting the token’s economic model and value.

Uncertainty could trigger market panic, putting downward pressure on token prices.

Case Studies:

Uniswap (UNI): In 2021, the U.S. SEC investigated Uniswap Labs, raising community concerns over DEX regulation. Although the token was not directly affected, market sentiment took a hit.

Stablecoin Regulation: Tokens like USDT and USDC have faced regulatory scrutiny, indirectly impacting DeFi ecosystems that rely on stablecoins.

Extended Reflection:

If a globally unified DeFi regulatory framework emerges in the future, small to mid-sized projects may exit the market due to high compliance costs, while large protocols could dominate. This would affect the diversity of the token ecosystem.

Source: https://www.ccn.com/analysis/crypto/uniswap-uni-price-support-sec-investigation/

Market Sentiment Volatility

Source of Risk:

The cryptocurrency market is highly speculative, and DeFi token prices are often driven by the following factors:

Macroeconomic Changes: For example, actions such as the Federal Reserve raising interest rates or economic recessions lead to capital moving away from high-risk assets.

Market Hype and FUD (Fear, Uncertainty, and Doubt): Rumors or emotional statements on social media platforms (like Twitter/X) can trigger irrational buying and selling.

Bitcoin Dominance Effect: Bitcoin’s price fluctuations often influence the entire market, and DeFi tokens are rarely immune to this effect.

Potential Impact:

Token prices may become disconnected from the project’s fundamentals, with short-term spikes and crashes undermining long-term investor confidence.

High volatility may lead liquidity providers to withdraw their investments, further destabilizing the ecosystem.

The speculative atmosphere can obscure the true value of a project, increasing the risk of a bubble burst.

Case Studies:

2022 Bear Market: The collapse of Terra (LUNA) triggered a chain reaction, causing several DeFi tokens (such as AAVE and CRV) to sharply decline alongside market sentiment, even though their protocols were not directly harmed.

Early YFI Hype: Yearn Finance’s YFI token surged in 2020 due to community enthusiasm, but its subsequent correction highlighted the instability of market sentiment.

Extended Reflection:

Market sentiment risk is difficult to avoid entirely, but projects can gain relative resilience during volatility through transparent communication and strong fundamentals (such as high TVL or actual revenue).

Sources: https://www.forbes.com/sites/billybambrough/2020/08/30/a-niche-crypto-just-blew-past-the-bitcoin-price-all-time-high-up-3500-in-just-one-month/

Technology Dependence

Source of Risk:

The value and functionality of DeFi tokens depend on underlying blockchain technology, which may face the following issues:

Network Congestion and High Fees: For example, a spike in Ethereum Gas fees can reduce protocol usability.

Cross-chain Compatibility Issues: Multi-chain deployments may experience delays or errors due to immature technology.

Infrastructure Failures: Issues like node outages or consensus mechanism vulnerabilities can affect transaction execution.

Potential Impact:

High costs or low efficiency may drive users to shift to competing chains (such as Solana or BSC), weakening the token ecosystem.

Technical failures could lead to loss of funds, erode user trust, and trigger token sell-offs.

Over-reliance on a single blockchain (e.g., Ethereum) may limit the project’s scalability.

Case Studies:

2021 Ethereum Gas Fee Crisis: Uniswap and Aave, among other protocols, experienced a significant increase in transaction costs, leading users to migrate to Layer 2 solutions or other chains, affecting token usage in the short term.

Solana Network Outages: Solana experienced multiple outages in 2021, impacting DeFi projects like Saber and decreasing token prices.

Extended Reflection:

As Layer 2 solutions (such as Arbitrum and Optimism) and multi-chain ecosystems develop, the risks of technology dependence may be mitigated. However, adopting new technologies can also introduce new uncertainties, such as cross-chain bridge security issues.

Source: https://www.helius.dev/blog/solana-outages-complete-history

Economic Model Unsustainability

Source of Risk:

Many DeFi tokens rely on high-yield or inflationary models to attract users, but their long-term sustainability is questionable:

Excessive Inflation: Early high token issuance (e.g., mining rewards) can dilute value.

Dependency on External Funds: If the influx of new users slows down, Ponzi-like models may collapse.

Increased Competition: New projects divert funds and attention, weakening the appeal of existing tokens.

Potential Impact:

Excessive inflation may lead to a long-term decline in token prices, undermining holder confidence.

Projects lacking intrinsic revenue sources may fail to sustain the ecosystem, causing the token to become a “pump-and-dump” coin.

Market saturation may compress profit margins, reducing the appreciation potential of all tokens.

Case Studies:

Terra (LUNA): The high-yield model dependent on UST’s stability collapsed in 2022, revealing the fatal risks of unsustainable economic design.

Early Liquidity Mining Projects: For example, Yam Finance, quickly declined due to uncontrolled inflation and unsustainable high yields.

Extended Reflection:

Successful projects need to shift to self-sustaining models (e.g., fee-driven), but this requires a large user base and market recognition, which is difficult for small-to-medium-sized projects to achieve.

Source: https://www.coindesk.com/learn/the-fall-of-terra-a-timeline-of-the-meteoric-rise-and-crash-of-ust-and-luna

Systemic Contagion Risk

Source of Risk:

The DeFi ecosystem is highly interconnected, and the failure of a single project can trigger a chain reaction:

Interdependence Between Protocols: For example, lending protocols relying on oracles or stablecoins—issues in one link can affect the entire system.

Excessive Leverage: High-leverage user liquidations can trigger a crisis, impacting the stability of the liquidity pool.

Black Swan Events: Major hacks or market crashes can affect the entire industry.

Potential Impact:

The risk of a single token spreading throughout the ecosystem can cause the price of multiple tokens to plummet.

A trust crisis could lead to mass withdrawals, reducing the Total Value Locked (TVL) sharply.

The recovery cycle is extended, hindering the industry’s development.

Case Studies:

2022 Terra Collapse: The UST decoupling caused LUNA to crash to zero, affecting protocols like Anchor and Mirror. Due to market panic, Several DeFi tokens (e.g., CRV, AAVE) saw declines.

2021 Poly Network Hack: A cross-chain protocol was hacked for $613 million in 2021, triggering widespread concerns about multi-chain DeFi security.

Extended Reflection:

Systemic risks could be mitigated through decentralization (e.g., multi-chain deployment) and deleveraging, but complete elimination is difficult and requires overall industry maturation.

Source: https://www.reuters.com/technology/how-hackers-stole-613-million-crypto-tokens-poly-network-2021-08-12/

Future Outlook

Technological Advancements and Multi-Chain Integration

The empowerment of DeFi tokens will become more diverse and efficient due to technological advancements, particularly with the maturation of Layer 2 and cross-chain technologies. As solutions like Arbitrum and Optimism (Layer 2) and cross-chain protocols like Polkadot and Cosmos continue to improve, tokens will become the value hub of multi-chain ecosystems, offering lower transaction costs and greater efficiency.

Additionally, the introduction of Zero-Knowledge Proof (ZKP) technology will bring privacy features, offering new use cases for tokens in privacy transactions and security. The application of AI and automation (e.g., strategy optimization in Yearn Finance) will also enhance the utility of tokens in smart finance.

Opportunities arise from technological innovations that reduce Gas fees and network congestion, expand the user base, and increase token demand. The introduction of privacy features or AI integrations may also create stronger market competitiveness.

However, the introduction of new technologies also brings potential security vulnerabilities and technical barriers. Cross-chain bridge attacks and ZKP implementation flaws could become risk points. Cross-chain tokens (e.g., RUNE) and privacy tokens (e.g., TORN) could become representative directions in the future.

Source: https://www.chainalysis.com/blog/cross-chain-bridge-hacks-2022/

Market Maturity and Value Return

As the DeFi market gradually shifts from speculation-driven to value-driven, token empowerment will place more emphasis on sustainability and practical utility. Yield-sharing tokens (e.g., SUSHI, MKR), which rely on transaction fees or real revenue, may be more attractive than inflation-based models, similar to traditional finance’s “dividend assets.”

At the same time, the strengthening of brand and community consensus will become an important pillar of token value, with “cultural tokens” like YFI showing greater resilience during market fluctuations.

Market maturity will help filter out fundamentally strong projects, providing long-term appreciation potential for quality tokens. Institutional capital inflows could further drive the growth of TVL (Total Value Locked), improving token liquidity and stability.

However, reduced speculation may lead to increased short-term market volatility, and institutional participation could weaken the decentralization spirit, causing community backlash. The tokenization of real-world assets (such as MakerDAO’s exploration of RWA) and stable income models (e.g., Curve’s veCRV) could become benchmarks in the future.

Source: https://beincrypto.com/maker-dao-position-real-world-tokenization-rwa/

Regulatory Adaptation and Compliance Evolution

Regulation will become an important variable in the development of DeFi tokens. In the future, a dual-track system may emerge, combining proactive compliance and regulatory sandbox approaches. Some projects (e.g., Aave Pro) may introduce KYC/AML compliance mechanisms to cater to different user groups. In contrast, countries may introduce DeFi experimental zones to provide controlled environments for token innovation. The widespread use of regulated stablecoins (e.g., USDC) will further drive the process of DeFi compliance.

A clear regulatory framework can attract more traditional capital and users, increasing token legitimacy and market recognition. Compliant projects may also benefit from policy advantages.

However, overly strict regulation could stifle innovation, limiting the token value. Global regulatory differences could fragment the market and increase the compliance challenges of cross-border projects. Compliance-governed tokens (e.g., COMP) and regulatory-friendly ecosystems (e.g., Algorand) may become typical representatives in the future.

Source: https://www.circle.com/usdc

Modularization and Increased Composability

DeFi’s modular design and composability allow different protocols to collaborate, creating a “Lego-like” financial system seamlessly. Different projects can integrate and extend each other through standardized smart contracts and open protocol interfaces, improving system flexibility and innovation speed.

For example, Yearn Finance aggregates multiple lending protocols (e.g., Aave, Compound) to optimize user yields, demonstrating efficient use of composability. Uniswap V3’s concentrated liquidity model provides liquidity management tools for other protocols (e.g., Instadapp, Gelato Network). Balancer’s modular pool design allows for custom weights and trading fees, offering more possibilities for DeFi protocol and investment strategy innovations.

Modular design reduces development costs and barriers and allows users to combine and customize features based on their needs freely. However, overly complex composability could introduce security risks and system vulnerabilities. For instance, the 2022 Nomad Bridge attack exposed security vulnerabilities in cross-protocol interactions. A flaw or failure in a single component could trigger a chain reaction throughout the ecosystem. Therefore, ensuring compatibility and security between protocols is crucial while enhancing modularization and composability.

Source: https://yearn.fi/apps/integrations

AI and DeFi Integration

AI technology is bringing a new level of efficiency and user experience to DeFi, playing a key role in risk control, investment strategies, and smart contract optimization through machine learning and big data analysis. By analyzing real-time market data, on-chain activities, and user behavior, AI models provide accurate credit scoring and liquidation predictions for lending protocols (such as Aave), improving capital utilization and security. AI-driven quantitative trading bots (like dHEDGE) automatically execute arbitrage, market-making, and asset management strategies, achieving higher returns and lower risks. Additionally, AI can be used for automated auditing and vulnerability detection in smart contracts, further enhancing security and stability.

For example, Numerai uses decentralized machine learning models to predict financial markets and incentivizes global data scientists to contribute predictive models through tokens. Gauntlet Network applies AI to simulate and optimize the parameter configurations of DeFi protocols, helping platforms maintain stability and capital efficiency under different market conditions.

However, the integration of AI and DeFi also faces challenges. The accuracy and fairness of training data, as well as the transparency and interpretability of algorithms, are current issues that need to be addressed. Additionally, highly automated systems could lead to “black box” operations and uncontrollable risks. Moving forward, the integration of AI with DeFi will continue to drive the development of smart financial systems, providing users with more personalized and efficient services.

Source: https://www.antiersolutions.com/blogs/the-complete-guide-to-building-crypto-ai-quantitative-trading-bots/

Ecosystem Integration and Diversified Development

DeFi tokens will evolve from single-function assets to multi-scenario integrated ones, deeply merging with other blockchain sectors such as NFT, GameFi, and SocialFi. Tokens could be used in NFT lending, staking, or dividend-sharing to enhance liquidity (e.g., Blur’s BLUR); within GameFi, in-game assets could be optimized for earnings or used across different games via DeFi tokens. Additionally, the integration of decentralized identity (DID) systems presents new possibilities for token empowerment.

Ecosystem integration expands the usage scenarios of tokens, enhancing network effects and value capture capabilities. Diversified development attracts a wider user base, pushing DeFi from a niche market to the mainstream. However, cross-domain integration may increase system complexity, raising development and user-entry barriers. At the same time, competition across different fields may divert resources, weakening the core competitiveness of DeFi tokens. NFT-Fi tokens (e.g., BendDAO’s BEND) and SocialFi tokens (e.g., Friends.tech) may play an important role in this trend.

Source: https://www.benddao.xyz/en/

Conclusion

Looking ahead, the evolution of DeFi will continue in the direction of diversification and intelligence. With the improvement of modular architectures and enhanced composability, the interoperability and efficiency of DeFi protocols will further increase, providing users with more comprehensive financial services and innovative scenarios. The deep integration of AI technology will also drive breakthroughs in risk control, strategy optimization, and security, offering the industry smarter and more efficient solutions.

However, the future development of DeFi also comes with risks and challenges. Ecosystem integration and cross-domain collaboration may bring system complexity and potential security risks; the “black box” nature of AI technologies and data biases may lead to transparency and misjudgment issues; and uncertain regulatory policies may impact the sustainability and compliance of the entire industry.

Looking forward, the path of DeFi innovation is filled with both opportunities and challenges. Only by striking a balance between technological optimization, improved user experience, and risk management can DeFi truly move into the mainstream market and realize broader applications and value capture.-