Why does the next phase of DeFi growth depend on “infrastructure”?

source:Dewhales ResearchTranslation: Shan Oppa, Bitchain Vision

introduction

Although billions of dollars of liquidity flow across protocols every day, the lack of measurement of value creation is threatening the sustainability of DeFi.In 2020, DeFi users will deposit tokens into a protocol to earn income, and that’s all.Today, the same user may span five different blockchains in a matter of minutes, interact with dozens of protocols, executing complex strategies, and protocols are difficult to track what exactly is going on.

Why does this become a problem?Because the protocol now cannot distinguish which users are creating real value and which users are playing with the system just to get rewards quickly.When a user’s activity spans multiple chains and protocols, existing infrastructure cannot connect these points.Ultimately, the agreement rewards mercenary users who leave after extracting value, but completely ignores the most valuable contributors.It is this complexity of DeFi that is destroying systems designed to sustain its development.

Why is the problem only highlighted now?

The two major market changes have pushed the attribution problem into the spotlight.First of allscale.DeFi’s total locked value (TVL) has grown from $1 billion to over $100 billion, meaning that the money wasted by attribution failures was several orders of magnitude more than DeFi’s early days.The acceptable losses in 2020 are now a substantial risk to the sustainability of the agreement.

followed bycompete.With the surge in the number of DeFi protocols and the rising cost of user acquisition, the ability to identify and retain valuable users has become a competitive advantage.A protocol that can distinguish between true contributors and mercenary-style users will be able to beat competitors who still use rough metrics like TVL or trading volume.The infrastructure that underpins this competitive advantage has finally begun to mature, making attribution a critical moment to distinguish winners from losers.

DeFi Invisible “Trails”

Infrastructures that track user activity and allocate rewards have become the most critical bottleneck for DeFi.When protocols fail to properly attribute users’ actions across chains and cross-activity, they make bad decisions when allocating incentives.Robots and value grabbers can easily play with fragmented reward systems, thereby exaggerating metrics without contributing to the long-term health of the protocol.The agreement wasted millions of dollars in growth funds, which evaporate instantly when the rewards ceased.

The failure of incentive mechanism

The risk has been verified.pictureAlchemixandCompoundSuch an agreement has been experienced personally.AlchemixRadical token rewardsIt attracted mercenary-style capital, and liquidity soared sharply during the incentive period, but it turned out to be just a flash in the pan.As shown in the figure below, TVL fell sharply after the token release slowed down, losing most of its early growth.

Figure: Alchemix (ALCX) Historical Chart

Compound’sCOMP allocationSimilar dynamics were also exposed.Most of the COMP tokens distributed are sold immediately by opportunistic miners rather than being held.Governance participation is limited to a small percentage of recipients, and rewards mainly flow to short-term speculators rather than contributors to governance and protocol health.This dilutes the quality of governance and increases volatility in the ecosystem.

Figure: Compound (COMP) 5-year chart

These failures reveal a deeper problem: protocols cannot distinguish between value creators and value grabbers because they lack visibility into user behavior.Alchemix and Compound are not recognized, and the users they reward the most are actually those mercenaries who recycle the same amount of money between different protocols to maximize profits and exit immediately when the rewards are reduced.

Today’s challenges are much more complex.A high-order user may provide liquidity on Uniswap v3, hedge on Arbitrum, perform liquidity mining via bridges to Optimism, and utilize lending protocols, but the current infrastructure sees these actions as irrelevant isolated actions rather than a coherent value creation strategy.

This attribution crisis has spawned a new class of infrastructure that specifically addressed these blind spots.

Infrastructure layout

• Merkl: An attribution and reward distribution system that can track liquidity providers’ behavior beyond simple deposit events.It can measure rewards based on factors such as liquidity depth, utilization, etc.For example, on Uniswap v3, liquidity is provided near the active price range.Merkl is responsible for handling the indexing and data standardization required for these cross-chain computing, allowing DeFi protocols to encode more detailed reward rules directly on the chain.

• Layer3: A coordination layer for on-chain actions.It initially focused on user bootstrapping and now provides attribution for multi-step workflows across protocols (e.g., staking → providing liquidity → bridging → lending).By recording the provenance of completed actions at the wallet level, it captures user intentions and engagement more accurately than purely raw transaction volumes.

• Galxe: An infrastructure for identity-associated rewards.It issues and verifies credentials from on-chain actions, off-chain data, or specific protocol requirements.Rewards can be weighted based on persistent identity or reputation, which makes the system more witch attacks than attribution methods based on wallet activity.

These platforms are all designed to solve attribution challenges but serve different use cases.Merkl specializes in tracking liquidity depth and capital efficiency for DEX and lending agreements.Layer3 focuses on a multi-step user journey across protocols.Galxe rewards long-term community engagement through lasting identity, rather than wallet-level activities.Although these methods are targeted, the basic gap in cross-chain attribution remains.

Current gaps and bottlenecks

Despite these progress, basic infrastructure issues remain unresolved.Each blockchain uses a different data format and event structure, which makes it almost impossible to associate a user’s cross-chain behavior without custom integration for each protocol combination.

Cross-chain data fragmentationEach blockchain is an independent data silo with different data patterns, event structures and transaction finality rules.Indexing Ethereum events is completely different from parsing the runtime of Solana or reading states from Rollups such as Arbitrum or Optimism.In fact, this means that a protocol to understand how a user behaves in multiple environments must:

1. Build custom indexers for each chain and protocol integration, which is expensive and tedious to maintain, or

2. Relying on incomplete coverage and heuristics leads to severe blind spots when analyzing complex strategies.

There is currently no inter-chain visibility standardization framework across different blockchain architectures, and this fundamental gap means that “overall attribution” is still out of reach.

Superficial attribution signalsMost reward systems currently rely on rough signals such as raw transaction volume, wallet age, or transaction volume thresholds.These indicators are easily manipulated because funds can be recycled, wallets can be registered in batches, and transaction spam can be disguised as real activities.

Experienced players have used these blind spots to obtain rewards by simulating high-engagement behaviors, while their actual economic utility contribution is minimal.As noted above, a deeper framework is still missing to considerContext.For example, is liquidity provided during market volatility to stabilize the market, or is it only during periods of easy arbitrage?Does the user bridge the funds and use them for a long-term strategy?Today’s tools cannot parse this nuance.

These technical limitations create specific operational problems.If a protocol tries to internally resolve attribution issues by running multi-chain indexers, archiving on-chain data, and maintaining cross-protocol associations, its resource consumption will be huge.Real-time analysis requires synchronization across chains of different transaction final speeds.For most protocols, this is not only technically challenging, but also economically unfeasible unless there are dedicated infrastructure partners.Therefore, attribution is often lagging, incomplete or completely inaccurate.

Next Generation Evolution: Smarter Incentives and Better Filters

The next generation of DeFi infrastructure must address three key challenges:

1. As the user behavior changes,Dynamically adjust reward parameters

2. supplyInstitutional-level audit trail, able to track complex strategies across protocols and time frames

3. It can still be maintained even when the user performs multi-layer operations involving dozens of contractsClear attribution

The current reward system is essentially static.A liquidity mining plan sets a fixed annualized rate of return (APY) regardless of market conditions or ecosystem health.Future infrastructure needs to respond to changing behavior in real time.When advanced users discover new arbitrage cycles or institutional players deploy systemic strategies, reward parameters should be automatically adjusted to balance growth and sustainability.

Now, retail users may be able to tolerate rough attributions, but institutions need to accurately calculate which actions produce returns.As hedge funds and financial managers allocate a larger proportion of their portfolio to DeFi, they demand the same attribution standards as traditional finance.This means a comprehensive audit trail that is capable of tracking every component of a complex strategy, real-time risk monitoring across protocols, and detailed reports that meet compliance requirements.

Ultimately, infrastructure must maintain clarity of attribution, and even when users perform multi-layer operations involving dozens of smart contracts, causal chains must be preserved through complex sequences (such as borrowing, exchanging through aggregators, providing liquidity, hedging positions).

As strategies become more complex, maintaining clear causal tracking is critical to ensuring the accuracy of value attribution.This creates a recursive loop: Advanced users demand better infrastructure, which makes more complex strategies possible, which in turn attracts more sophisticated participants.The result is that DeFi evolves toward operational maturity at the traditional financial level while retaining its open and programmable advantages.

Conclusion: Infrastructure is the real frontier of growth

While new protocols and applications have dominated the headlines, the real determinant of DeFi’s long-term success is invisible infrastructures that are responsible for connecting, tracking and rewarding user behavior in the ecosystem.The current attribution crisis is more than just a technical issue, it directly threatens the sustainability of DeFi as protocols waste millions of dollars on ineffective incentives, while their most valuable users are unrecognized.

Protocols that correctly attribute value creation, adjust incentives to changing user patterns, and filter signals from noise will establish a composite, sustainable competitive advantage over time.Until protocols can seamlessly correlate users’ behaviors on different blockchain architectures, they will continue to make incentive decisions based on incomplete data.

With the continuous evolution of advanced DeFi users, infrastructure must evolve with it and should not be regarded as post-remediation, but as the basis for realizing the next stage of decentralized finance.The winner of the next chapter of DeFi is not necessarily the protocol with the most dazzling application, but the protocol with the smartest infrastructure to understand and reward those complex behaviors that create lasting value.