Analyzing Incentives – Is Your Favorite Protocol Really Profitable?

I think most DeFi users need to approach the way they value protocols a bit differently. Traders often trumpet things like FDV and TVL as the best indicators, but I wonder if that matters in the context of a truly long-term investment. People seem to write off protocol incentives. With more people locking their tokens up in smart contracts for months or years, we should refine our approach a bit.

The thing I’d like to focus on in this piece is profitability, and whether an organization is truly sustainable. We can look at this as a function of Overhead and Revenue.

For a ten-person team with basic infrastructure and marketing costs, we can estimate their monthly overhead would amount to around $100,000. If the protocol is generating $210,000 in fees each month we can analyze it as such:

$210,000 – $100,000 = $110,000 profit

The nice thing about the above analysis is the person making it is getting wrecked.

The Breakdown

This is because the problem is much more complex than it seems. Let’s try to do a more granular breakdown of the company above:

ItemRevenue per Month
Operations($100,000)
Token Emissions($900,000)
Asset Sales$65,000
Fees$210,000
Profit($725,000)

While we could go much deeper than this, you can see the above analysis paints a much different picture than the one we did originally. This would also tell us why protocol incentives that over-emit so consistently fail in long time frames.

So, where is this loss realized?

Unfortunately, it’s often on the backs of liquidity providers and token lockers, who are the two most valuable users in the ecosystem. In our efforts to make $OATH an ultra-premium asset, we’ve made a lot of efforts to analyze the costs and benefits of token emissions and how they will play into our long term strategy, ensuring that we can trend toward sustainability as we push further into our roadmap.

If you’re  interested in getting a better mental model of emission strategies and how they play into successful protocol design, check out this spreadsheet I made:

Incentive Design – Targeting Principal & Interest Rates

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