DeFi's Obsession With "Fair Launches" Needs Hefty Revision
Chasing yields at every opportunity could spell the end of DeFi’s glory phase.
Key Takeaways
- SushiSwap popularized fair launches, causing forks of nearly every significant DeFi protocol to emerge.
- Fair launches are a flawed concept and can severely erode development incentives in DeFi and crypto.
- Putting in a few weeks of work on a fork versus years of effort into building something new has a lopsided reward and risk.
- If DeFi investors pursue short-term opportunities and ignore long-term value accretion, the space could find itself in serious trouble.
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Fair launches are now the hottest trend in DeFi, but poorly aligned incentives may mean the industry trades true innovation with short-term gains.
Fair for Who?
It’s hard to believe SushiSwap launched less than a month ago. The Uniswap fork had an accelerated boom-bust cycle with copious amounts of controversy, drama, and twists.
But the greatest impact of SushiSwap was popularizing the concept of “fair launches.
Uniswap raising $11 million from eminent VC funds didn’t sit well with the community. Specific individuals believed in the spirit of decentralization, indicating that all protocols should adhere to a broad public distribution of tokens.
Community members were drawn to SushiSwap because 90% of all tokens would be given to liquidity providers (LPs). These same people harbored disdain for Uniswap because the team raised capital and put off a token launch.
Their reasoning was simple: Uniswap was being greedy by refusing to issue a token.
A token would allow DeFi community members to share in the protocol’s upside. Others argued that it would have been greedy to ask the team that built Uniswap from scratch and bootstrapped it into a potential Coinbase-killer to give up their share in the upside.
In the end, Uniswap was redeemed on two levels.
First, SushiSwap’s “developer fund” ended up becoming Chef Nomi’s (SushiSwap creator) personal retirement fund. If it weren’t for widespread anger and a potential doxxing, the pseudonymous creator would’ve walked away with funds earmarked to improve SushiSwap.
Second, Uniswap eventually did launch a token – and the distribution was fairer than most blue-chip DeFi protocols.
Still, fair launches, as they are currently defined, will be the death of development incentives.
If a person can make $14 million in a week just by forking two years of someone else’s hard work, why would any developer buckle down and build something fresh?
he Reality of Fair Launches
There are, of course, fair launch outliers. Cream Finance appears to be one such exception. The project is a fork of Compound but has somewhat established itself through new features.
Cream has lending and borrowing for more assets than Compound, implemented a new interest rate model, and gives fees earned by the protocol back to users (Compound doesn’t). This kind of fork makes sense. Though it leverages Compound’s base code, it adds new functionality to it.
But the majority of fair launches have a single goal in mind: make more money off investors’ greed. Crypto is undeniably in a bull market, and this has many users hunting big profits rather than true innovation.
The darkest side of fair launches, however, is the effect they could have on developers.
Imagine the founder of a new, cutting edge DeFi protocol. They’ve spent the last two years of their lives pouring blood, sweat, and tears into their product. In the name of decentralization and transparency, the founder makes all of the code open source.
On the token front, they issue 60% of tokens to the community through liquidity mining rewards. The founder sells 20% of their tokens to a group of investors to fund the hiring of employees and expenses for development, testing, auditing, marketing, and operations. The rest of the tokens are then distributed amongst the founder and the core team.
A month after the mainnet launch, operations are running smoothly. That is until an anonymous Internet character forks the protocol. Moreover, they say that giving the community a mere 60% is unfair. Instead, their fork will issue 95% of all tokens to the community while keeping 3% in the treasury and 2% for themselves.
The community hails the anonymous character as a harbinger of “true” decentralization for their perceived lack of greed. What some people seem to miss is that 2% of the tokens for forking code and playing a marketing game is not the same as pouring years of one’s life into something trailblazing and keeping a 20% reward.
At a $50 million market cap, that’s either $1 million for a week’s work versus $10 million for years of work. Not to mention, that $10 million doesn’t include the expenses incurred by the founder to get the project up and running.
Innovation Costs More than Money
Fair launches are a message that founders shouldn’t raise money from investors to bootstrap operations, because, for some reason, that’s unfair.
There’s nothing wrong with forking a protocol and building a new design into it. At the very least, that helps test a new version of the same protocol in the marketplace to gauge demand for such a service.
But forking a protocol and making no changes beyond a larger allocation for the public serves little purpose other than making a handful of users a bit richer.
If DeFi users turn to these so-called fair launches to make a quick buck, it could result in a mass exodus of developers from the ecosystem. And without the builders, the DeFi industry will have a much bigger problem moving forward.
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