How do DEXs prevent value loss in their native tokens?

A lot of tokens on DEXs follow this basic price action. During bull markets, volume is high, underlying assets are high, a percentage of volume buys the native token which drives the price up, and the token inflates to incentivize liquidity providers. Then during bear markets or when volume is low, that inflation outpaces the fees that the platform feeds back into the token and there is significant value loss to holders. Most of the big players essentially have uncapped inflation.

It seems like something like CAKE would encourage a lot of short term trading because there is a lot of money to be made when the market is hot, but also a guaranteed harsh inflation during slower periods. I think the space is still pretty young, but in a lot of ways the uncapped inflation seems like it heavily discourages holding the native asset, and instead is something that should be dumped as soon as it’s minted, but it also seems like a high volatility reward that doesn’t appreciate over time would slowly strip away the ability of the platform to attract liquidity.

Thoughts on native tokenomics? Am I wrong about having an appreciating asset as a native token being worth pursuing?

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3 thoughts on “How do DEXs prevent value loss in their native tokens?”

  1. only can try, maybe create a positive value loop with its own native token. Since DEXs like other protocols, use their own token for service payments, incentives rewards, support for integration, partnerships, bounty programs, and other expenses, it will be great to pay that with an overvalued token. Every protocol can increase the token price per unit with a combination of different tokenomics mechanisms (sinks), i.e. – utility staking, burning, slashing, time-locking, and a lot of other mechanisms. Every protocol has different value capture and distribution models, and those mechanisms cant use some universal rules for implementation.

    To answer the core question. My opinion is that Defi protocols and especially DEXs don’t use the token economics model properly and on that look primary like a funding tool, but what to expect from TradFi guys when they migrate to Defi? They bring mental models from previous working place, make deals with a bunch of VC funds, copy/paste marketing tricks and try to offer a higher yield than competitors. In short, most protocols made mistakes in the alignment of interests between users and investors. When they take money in the early stage (SAFT deal or something similar) they actually sell control over the protocol to VCs like a16z, Alameda, Framework Ventures, and Dragonfly Capital.

    Initial token distributions are usually designed without some logic and maybe to align all protocol participants to act for the better of the protocol. When you see token allocation for the team + advisors + early investors higher than 15% of the total token supply we can’t talk about the Defi protocol (only permissionless protocol).

    Great observation


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