In decentralised finance, Total Value Locked (TVL) has long been the headline metric for success. But as markets mature, a harsh reality is setting in: high TVL is often a mirage, propped up by expensive incentives that vanish the moment the rewards dry up. This dynamic questions the core of DeFi’s most pressing challenge: should a protocol, DAO, or blockchain own its liquidity or incentivise it?
An analysis by DL Research and kpk (formerly Karpatkey), a leading DeFi treasury management firm, cuts through the noise. By examining the successes and failures of real-world liquidity programs, the research provides a clear framework for building sustainable markets. The lesson is simple but profound: liquidity cannot be rented forever. It must be built with purpose, strategy, and a long-term vision. For any protocol treasury, the fundamental question is not just how to attract capital, but how to retain it.
The High Cost of Impermanent Capital
Many protocols fall into the same trap: they throw money at liquidity mining, hoping to attract capital. While rewards can kickstart activity, they often attract “mercenary capital,” which is liquidity that arrives for the yield and flees the second a better opportunity appears elsewhere.
This approach confuses a temporary surge in TVL with genuine market depth. The research conducted by DL Research and kpk highlights three distinct ways this strategy can fail.
Example 1: GHO on Arbitrum → An aggressive incentives program led to rapid growth in TVL. However, much of this activity was driven by users “looping,” a process of repeatedly borrowing and supplying GHO to maximise rewards, with little organic demand for the token itself. When the incentives inevitably tapered, so did the liquidity, leaving behind a shallow market that had cost a fortune to inflate temporarily. The program attracted activity, not adoption.
Example 2: bCSPX on Gnosis → This tokenised S&P 500 tracker saw initial success with a focused incentive program. But the rewards created a highly concentrated pool dominated by a few large providers. Despite a few initiatives to bootstrap DeFi activity, it never really took off. Backed Finance’s shift in strategy led to stalled adoption because liquidity remained dependent on continued payments, creating an unsustainable dependency. The incentives built a pool, not an ecosystem.
Example 3: SAFE on Gnosis → The SAFE treasury took a different route, supplying its own capital through Protocol-Owned Liquidity (POL) to establish stable markets. While this successfully created deep and reliable pools, it came at a high opportunity cost with otherwise useful capital sitting idle and subject to impermanent loss. Without a layer of incentives or a clear utility to draw in external participants, the treasury became the sole market maker. This turned liquidity into a recurring public expense instead of a pathway to a self-sustaining market. The strategy provided stability, but it did not catalyse growth.
In all three cases, the protocols failed to build a foundation for a lasting market. They were merely renting liquidity or bearing the full cost of it themselves.
The Power of Owned Liquidity: The EURe Flywheel
So, what does it look like to own your liquidity? kpk points to the EURe program on Gnosis Chain as the gold standard. This was not just a simple incentive drop but a masterclass in strategic market building, executed in three deliberate phases.
- Seed with POL: The Gnosis treasury first committed its own assets to the EURe pool. This initial act of “owning” the liquidity established a stable foundation, ensuring a baseline level of depth and signalling a long-term commitment to the market.
- Attract with Smart Incentives: With a stable base in place, the protocol layered on targeted incentives like cashback programs and liquidity mining. This was not a blind subsidy. It was designed to attract external capital and bootstrap a wider network of participants around the core POL.
- Anchor in Utility: This was the crucial final step. The program was anchored to real-world utility through Gnosis Pay, a decentralised payment network. Suddenly, EURe had become a necessary component for transactions, and no longer just a token to be farmed. This created organic, sustainable demand that was independent of the rewards.
This three-part strategy created a powerful flywheel. POL provided stability, incentives attracted participants, and utility gave them a reason to stay. As a result, the EURe market deepened, the incentives continue, and the market stood on its own. Gnosis went beyond renting liquidity to build a self-sustaining ecosystem.
The Blueprint for Building to Last
Drawing from these case studies, the analysis conducted by DL Research and kpk offers a clear blueprint for any DeFi treasury aiming to build sustainable markets. The key is to move beyond chasing TVL and adopt a strategic, multi-layered approach.
- Start with a Cohesive Vision: Don’t just launch pools with scattershot incentives. A successful liquidity strategy begins with a clear purpose for the token. Is it for payments, governance, or collateral? The answer should guide every decision, ensuring that liquidity is built where it directly supports the token’s primary function.
- Layer Your Tools Intelligently: POL, incentives, and utility are the three core levers, and they work best in concert. POL is costly infrastructure, but it provides a stable floor. Incentives attract capital, but it is often fleeting. Utility is what convinces participants to stay. The EURe model shows the ideal sequence: use POL to seed, incentives to attract, and utility to anchor.
- Foster Ecosystem Collaboration: Liquidity does not exist in a vacuum. A token’s success is magnified when it is integrated across multiple protocols. Active coordination between treasuries, protocols, and governance bodies can turn isolated liquidity pools into a thriving, interconnected ecosystem where the token has a clear and valuable role.
- Design Programs with Precision: The shape of a liquidity program matters as much as its size. Uncapped, generic rewards attract mercenaries. Carefully designed programs with caps, targeted reward structures, and clear calibration can attract sticky, long-term capital. Governance must lead this process, setting clear rules and timing to keep markets steady and predictable.
- Measure What Truly Matters: It is time to look beyond TVL as the primary success metric. Deeper analytics tell the real story. Treasuries should track utilisation rates, the concentration of liquidity providers, and the true profit and loss of their programs. The goal is not the biggest pool, but the most active, resilient, and cost-effective one.
Liquidity is the lifeblood of DeFi, but for too long, protocols have treated it as a commodity to be bought. kpk’s framework shows us a better way. By shifting the mindset from renting to owning, and from short-term incentives to long-term utility, protocols can finally build markets that are designed to last.