Over a rolling 24-hour period, $ETH rose 2.73%. Over a rolling 24-hour period, $AAVE rose 4.11%. Over a rolling 24-hour period, $UNI rose 3.16%. All three spot prices went up, but that only shows that prices changed. It does not prove that protocol revenue increased, much less that token holders automatically received a share of it. In DeFi, what I care more about scrutinizing is the fees users pay—and whose accounts they ultimately end up in.
Fees and incentives are often lumped together. Borrowing interest and trading fees are charges users pay to use a service; liquidity incentives are rewards offered to attract participants to provide assets. The former may generate revenue, while the latter may be an expense, and the parties paying and receiving them may not be the same. This describes general mechanisms, not the arrangements these protocols currently use.
We also need to distinguish between stocks and flows: the amount of assets in a pool at a given point in time is a stock; the fees actually collected over a period of time are a flow. A large pool does not necessarily mean high fee revenue, and a protocol collecting fees does not automatically mean token holders are entitled to a share or other benefits. A governance proposal, its approval, and its implementation are three distinct stages. A proposal under discussion should not be described as already in effect.
For users, the risks go beyond fees. Borrowing may involve liquidation risk if collateral falls in value, and providing liquidity may expose users to asset price fluctuations. Without reliable information, I won't guess at current parameters, yields, or protocol revenue, let alone use market prices as evidence of what's on a protocol's books.
So I would first ask: What service am I paying for? Where do the fees go? Who funds the rewards? Then I would check whether token holders have clearly defined rights. Looking separately at service fees, incentive expenses, and token holder rights is far more reliable than treating a rising token price as proof that the protocol has “made money.”
Fees and incentives are often lumped together. Borrowing interest and trading fees are charges users pay to use a service; liquidity incentives are rewards offered to attract participants to provide assets. The former may generate revenue, while the latter may be an expense, and the parties paying and receiving them may not be the same. This describes general mechanisms, not the arrangements these protocols currently use.
We also need to distinguish between stocks and flows: the amount of assets in a pool at a given point in time is a stock; the fees actually collected over a period of time are a flow. A large pool does not necessarily mean high fee revenue, and a protocol collecting fees does not automatically mean token holders are entitled to a share or other benefits. A governance proposal, its approval, and its implementation are three distinct stages. A proposal under discussion should not be described as already in effect.
For users, the risks go beyond fees. Borrowing may involve liquidation risk if collateral falls in value, and providing liquidity may expose users to asset price fluctuations. Without reliable information, I won't guess at current parameters, yields, or protocol revenue, let alone use market prices as evidence of what's on a protocol's books.
So I would first ask: What service am I paying for? Where do the fees go? Who funds the rewards? Then I would check whether token holders have clearly defined rights. Looking separately at service fees, incentive expenses, and token holder rights is far more reliable than treating a rising token price as proof that the protocol has “made money.”
