Growth or Value Accumulation: What Should Crypto Projects Prioritize in the Early Stage?
Choose growth to improve position or focus on accumulating value for tokens and protocols? These are two different perspectives on crypto projects in the early stages of development.
Current status
Currently, many crypto application layer projects focus on growth, expanding market share and attracting users to consolidate their position. These projects pay less attention to accumulating and distributing value from the core business activities of the protocol.
This trend is clearly demonstrated by some top projects in DeFi, namely Uniswap and Lido.
Uniswap
Uniswap is the DEX with the largest TVL in the market. Uniswap Labs has transferred the management of the Uniswap Protocol to the DAO, while delaying the accumulation of value for the Protocol and UNI token to prioritize growth.
Uniswap Labs has built a sustainable business model with revenue coming from additional fees applied on the front-end fee they develop. Meanwhile, Uniswap Protocol has not yet had a specific mechanism to accumulate value from its core business activities.
Lido
A similar case is Lido, Ethereum's largest Liquid Staking Protocol. Unlike Uni, Lido has built a profit distribution model among participants, including Stakers, Node Operators, and Lido DAO. Staking rewards are redistributed proportionally;
· 90% for Stakers.
· 5% for Node Operators.
· 5% for Lido DAO.
Although Lido has a mechanism to accumulate value for the Protocol, they still delay distributing the accumulated value to stakeholders, including LDO token holders.
Lido and Uniswap have in common that they are both leading protocols in their respective fields, Uniswap leading in the DEX space, and Lido leading in Liquid Staking.
However, neither of them accumulates direct economic value for their native tokens. Despite this, the market capitalizations of UNI and LDO have still surpassed billions of dollars.
This leads to an important question;
· Should application layer projects focus on growth and market share over aspects such as accumulating and distributing economic value to stakeholders?
· Is this a strategy that other projects should learn and adopt?
Perspective: Prioritizing Market Share
In the case of Lido and Uniswap, the two projects are competing in the dynamic, highly competitive DeFi market, namely the Liquid Staking and DEX segments, respectively.
The core business models of the two groups of projects are not different, so small differences in profitability for participants can lead to a shift in liquidity, TVL, and users to competing protocols.
For example, if Uniswap activates its fee sharing mechanism too early, this could weaken its competitive advantage and create opportunities for other DEXs to attract liquidity providers (LPs) with higher returns.
Moreover, the issues related to the accumulation and distribution of economic value are complex. If not implemented optimally, the project may fail and lose market share to competitors.
Therefore, the safe and reasonable choice in the early stages is to focus on attracting users and prioritizing market share growth to consolidate market position.
Once a solid and stable position has been achieved, the project can deploy value accumulation and distribution mechanisms more effectively, ensuring that value is not shared too early and does not affect long-term competitiveness.
Perspective: Balancing growth and value accumulation
Delaying price accumulation and value distribution to focus on growth is a strategy that many projects have chosen, but this is not an ideal choice in all cases.
Below are some views in favor of projects that balance growth, value accumulation and distribution.
Issues related to equity and group interests
As the protocol decentralizes and evolves over time, issues related to equity and group interests can complicate things and even cause conflicts within the community. A case in point is the Uniswap DAO, which is having a hard time enabling fee switching.
The winner-take-all assumption
The approach of spending money to drive growth (e.g., spending big to attract users without focusing on immediate profits) only makes sense if the market in which the project operates has a “winner-take-all” structure, such as exchanges, where a leader can dominate and dominate the market share.
Conversely, if the project is operating in a fragmented and competitive market where there is no clear leader and competitors share the market share relatively evenly, then spending money to drive growth may be wasteful. Potential returns are often eroded by competition, making the initial investment less worthwhile.
Meme Governance Token
The value of a token is an important factor for the development of a protocol, often used as a currency to drive growth (e.g., pay salaries or provide incentives). However, for a token to maintain its value in the long term, a mechanism for value accumulation is needed.
This does not need to happen immediately, but delaying it can lead to issues such as conflicts of interest or equity complications. So if this is inevitable, why not do it as soon as possible while the barriers are low?
We live in the real world, where market structures already exist. If projects want to attract capital from large institutions, they need to avoid Meme Governance Tokens. This is why it is so important for protocols to start accumulating and distributing value, even if the amount accumulated may not be large.
Author's views
The author basically agrees with both perspectives presented. However, it is important to put the project in its specific context. The development context of each project is often different and must be carefully considered before deciding on a strategy.
Some factors to consider include:
Category and sub-Category of the project: For example, projects in the DeFi space can fall into different categories such as DEX (decentralized exchange) or Liquid Staking. Each category will have its own characteristics and challenges, requiring different development strategies.
Category Characteristics: The way value flows in a category such as AMM (Automated Market Maker) will be different from Liquid Staking. Therefore, the value accumulation and distribution strategy needs to be customized to suit the characteristics of each category.
Market Position: The development strategy of a new project in a category that is already dominated by large competitors will be different from that of a project that is already a market leader. The strategy for developing, growing, accumulating and distributing value of a project depends very much on the context around it. There is no one-size-fits-all formula.
