**Opinion by: Marc Boiron, Chief Executive Officer of Polygon Labs** Decentralized finance (DeFi) is at a crossroads and desperately needs a reevaluation. Over the past few years, many protocols have focused on aggressive growth strategies that rely heavily on enticing token emissions, often showcasing unsustainable annual percentage yields (APYs). When these incentives stop, the liquidity that was once attracted dissipates almost immediately. The current DeFi ecosystem is plagued by mercenary capital, leading to superficially successful yet fundamentally broken frameworks that are ultimately destined for failure. The prevalent growth strategy involves launching governance tokens, incentivizing liquidity providers with generous distributions, and boasting metrics like total value locked (TVL). Unfortunately, such an approach only creates temporary success. As liquidity providers, often labeled yield farmers, swiftly withdraw their investments to chase the next lucrative opportunity, the lasting value within these protocols deteriorates. To break this vicious cycle, DeFi must prioritize genuine value creation and capital efficiency over token-driven short-term rewards. The emission-dominated yield model has three significant flaws: ### Inflationary Emissions DeFi primarily generates yield from inflationary token emissions rather than stable revenue streams. When native tokens are distributed as rewards, they lead to value dilution, allowing early protocol participants to profit while later investors struggle with depreciating assets. ### Capital Flight The liquidity landscape in DeFi is characterized by mercenary capital, with no incentive structure that encourages long-term loyalty. Investors are quick to shift their capital to the highest temporary yield opportunities, often leading to sudden and dramatic capital flight. ### Misaligned Incentives Current governance token models fail to create sustainable treasury reserves for protocols. When protocols utilize emissions as a primary mechanism for attracting liquidity, they are ultimately unable to retain value for long-term development and security, rendering them vulnerable. The trend of unsustainable growth has been evident in multiple DeFi cycles, notably during the “DeFi summer” of 2020 and the yield farming craze of 2021, both of which culminated in significant market contractions. ### Protocol-Owned Liquidity Possible remedies to these issues involve a fundamental shift from extractive economic models to regenerative ones. One promising approach is the concept of protocol-owned liquidity. By owning their liquidity rather than renting it through emissions, protocols can establish a stable capital base that yields consistent returns. Owning liquidity provides several benefits: it creates resilience against capital flight, ensures a steady revenue stream that benefits the protocol instead of temporary liquidity providers, and generates yield based on real economic activity rather than inflationary pressures. ### Bridged Assets for Yield Generation Leveraging bridged assets can further enhance sustainability. Instead of simply sitting idle, bridged assets can be staked, enabling low-risk, yield-generating strategies on blockchains like Ethereum. This approach aligns participant incentives with long-term growth and enhances capital efficiency. To foster the maturation of DeFi, protocols need to prioritize real yields—profits derived from actual revenue rather than token emissions. This entails a commitment to developing products that offer genuine value to users while ensuring that they capture a portion of that value for the benefit of the protocol and its stakeholders. Though sustainable yield models may yield lower initial returns compared to emission-based strategies, they promise long-term viability. Protocols adopting this mindset will prosper by forming resilient foundations instead of obsessively pursuing vanity metrics. Continuing down the path of unsustainable practices will only perpetuate cycles of boom-and-bust that erode trust and hinder mainstream adoption. For DeFi to realize its transformative potential, it requires a shift away from unsustainable economic models. Protocols that successfully adapt will cultivate treasuries equipped to withstand economic fluctuations, deriving yield from genuine utility rather than constant token generation. This evolution demands a collective reassessment from all DeFi participants: investors must discern between sustainable and unsustainable yields, developers must design tokenomics that reward long-term commitment over short-term gains, and users must understand the underlying sources of their returns. The future of DeFi hinges on addressing these foundational issues. It’s critical to reform our faltering yield models before we replicate past mistakes. **Disclaimer:** This article is for informational purposes only and should not be interpreted as legal or investment advice. The opinions expressed reflect the views of the author and do not necessarily represent the opinions of Cointelegraph.

**Opinion by: Marc Boiron, Chief Executive Officer of Polygon Labs** Decentralized finance (DeFi) is at a crucial juncture, requiring urgent reevaluation. Over recent years, many DeFi protocols have pursued aggressive growth strategies fueled by enticing token emissions, often showcasing unsustainable annual percentage yields (APYs). When these incentives diminish, the attracted liquidity evaporates almost instantaneously. This creates an ecosystem plagued by mercenary capital, leading to superficially successful yet fundamentally flawed frameworks bound to fail. The common growth trajectory involves launching governance tokens, incentivizing liquidity providers with generous distributions, and celebrating metrics like total value locked (TVL). However, such practices yield only temporary success. As liquidity providers—often referred to as yield farmers—rapidly withdraw their investments to pursue the next high-yield opportunity, the lasting value within these protocols disintegrates. To escape this vicious cycle, DeFi must emphasize authentic value creation and capital efficiency over token-driven short-term rewards. The emission-distribution yield model suffers from three critical flaws: ### Inflationary Emissions Most DeFi yields derive from inflationary token emissions rather than stable revenue streams. When governance tokens are distributed as rewards, they dilute the token's value, allowing early investors to reap profits while later entrants grapple with depreciated assets. ### Capital Flight The liquidity within DeFi is dominated by mercenary capital, lacking incentives for long-term loyalty. Investors readily shift their capital to whatever protocol offers the highest temporary yield, leading to sudden capital flight. ### Misaligned Incentives Current governance token frameworks often fail to construct sustainable treasury reserves for protocols. Relying on emissions as a primary liquidity attraction tool hampers their ability to retain value for long-term growth, leaving them vulnerable to market shifts. Trends indicating unsustainable growth are evident across multiple DeFi cycles, particularly during the “DeFi summer” of 2020 and the yield farming frenzy of 2021, each culminating in significant market downturns. ### Protocol-Owned Liquidity Addressing these challenges necessitates a foundational shift from extractive to regenerative economic models. One encouraging strategy is the notion of protocol-owned liquidity. By owning their liquidity, as opposed to renting it through emissions, protocols can cultivate stable capital bases that yield consistent returns. Owning liquidity offers several advantages: it enhances resilience against capital flight, ensures a continuous revenue stream benefiting the protocol rather than temporary liquidity providers, and generates yield rooted in genuine economic activity, not just inflationary pressures. ### Bridged Assets for Yield Generation Utilizing bridged assets can further improve sustainability. Often, bridged assets remain idle; however, by staking these assets, protocols can engage in low-risk, yield-generating strategies on blockchains like Ethereum. This aligns the incentives of participants with long-term growth and enhances capital efficiency. For DeFi's maturation, protocols must prioritize real yields—profit derived from actual revenue streams as opposed to token emissions. This calls for a commitment to developing products that provide genuine user value while enabling the protocol to capture a portion of that value, benefitting both the protocol and its stakeholders. While sustainable yield models might offer lower initial returns compared to emissions-driven methods, they promise long-term viability. Protocols embracing this mentality will thrive by establishing resilient foundations rather than fixating on vanity metrics. Persisting on the path of unsustainable practices will only perpetuate cycles of boom and bust, undermining trust and obstructing mainstream adoption. For DeFi to fulfill its transformative potential, it must shift away from unsustainable models. Protocols that effectively adapt will nurture treasuries capable of withstanding economic fluctuations, deriving yields from meaningful utility instead of ceaseless token production. This evolution requires a collective reassessment from all DeFi participants: investors must distinguish between sustainable and unsustainable yields, developers should design tokenomics that incentivize long-term commitment over short-lived rewards, and users must comprehend the true sources of their returns. The future of DeFi hinges on resolving these fundamental issues. It is essential to reform our faltering yield models before we replicate past mistakes. **Disclaimer:** This article serves informational purposes only and should not be construed as legal or investment advice. The opinions expressed are those of the author and do not necessarily reflect the views of Cointelegraph.