Messari responds to AC's criticism: Inflation, incentives, and fair launches in DeFi

On January 12, Yearn's founder Andre Cronje wrote a piece criticizing the community. A few days later, Messari researcher Ryan Watkins published a response on their official website, discussing how to design a reasonable reward mechanism for the project's core contributors, which is worth reading.
How should we fund the development of open-source DeFi protocols?
In the summer of 2020, the community once believed that new DeFi protocols could be launched without the support of venture capital, and this wave of "fair launches" indeed stimulated the birth of many exciting DeFi projects, including Yearn, SushiSwap, and Empty Set Dollar. However, the DeFi community has recently realized the challenges brought by the lack of proper funding at launch.
Earlier this week, Yearn's founder Andre Cronje wrote an excellent article discussing the dilemmas faced by DeFi developers, expressing his frustration that he received no positive exposure during the project's success, but rather faced a lot of negative exposure. The core point of this article is that Yearn's development contributors are not receiving enough rewards, while token holders are gaining more rights.
I must say I foresaw this situation long ago.
In October last year, I proposed to the Yearn community to stop dividends and buy back YFI to reward its core developers. At that time, I was very clear that if the community decided early on to limit the supply of YFI to 30,000 and permanently stop inflation without establishing a proper fundraising mechanism for core contributors, it would be problematic. On the contrary, some members of the community believed that canceling dividends to ensure that Yearn's developers were adequately compensated would be disastrous for the token.
A few days ago, some members of the Yearn team shared a revised buyback proposal with me, called "Buyback and Build," which focuses on buying back YFI and distributing it to core developers. Given Andre's latest news, they have a more detailed understanding and greater consensus on the proposal. Within 24 hours of everyone realizing the incentive misalignment between token holders and core contributors, a more radical proposal emerged, suggesting the establishment of a new YFI mechanism.
All of this made me start to think about how we can appropriately incentivize the core contributors of these grassroots projects to work long-term in a self-sustaining manner.
Inflation
Inflation is the simplest way to fund project development. In fact, it forces every token holder to pay for development by losing proportional ownership of the protocol. Although many in the community mock inflation due to the anti-Keynesian knowledge roots in the industry, this mindset is meaningless in the context of DeFi protocols.
DeFi tokens are not money; why should we limit inflation to support scarcity memes? If the sustainability of the protocol depends on inflation, then long-term holders of the token should use inflation without reservation to fund the future.
There is a reasonable argument that if a protocol is to maintain its attributes as a reliable public infrastructure with minimal trust, introducing inflation beforehand would undermine the predictability of the protocol, as the most important factor is the community's consensus on the best path forward.
In fair launch projects, Empty Set Dollar and SushiSwap are good examples of this strategy, as they both pay developers and fund new initiatives through tokens generated by inflation.
Pragmatism > Dogmatism.
Treasury
If a protocol does not have inflation, the second simplest way to fund development is through a treasury. For fair launch projects, there is not just one option, as they do not benefit from token issuance or venture capital. However, some projects do have a "community treasury," which controls a portion of the token supply.
PowerPool provides a great example; they use their treasury to appropriately incentivize their core contributors' community. At launch, the PowerPool team allocated their supply to zero. But after executing the roadmap over the following months, the community was happy to grant them 5% of the total CVP supply, with a 12-month lock-up and an 18-month release schedule, as a long-term incentive for project development.
Another approach is to establish a treasury using protocol revenues to compensate contributors if the community treasury does not own a pre-supplied portion of tokens. This is the fundamental idea behind our recent "Buyback and Build" proposal for Yearn, which aims to buy back YFI to distribute to core contributors and fund new initiatives. This mechanism provides a clever way to gain the benefits of inflation without introducing inflation into the protocol. It bridges the gap between raising funds and ensuring a limited token supply.
Incentives
Funding existing contributors is not enough. The protocol also needs to be able to fund new contributors. Without inflation or fiscal expenditure, the protocol will struggle to attract new talent. In the future, existing token holders will become entrenched. A key part of ongoing financing in the form of token rewards is that it can recycle funds from older passive token holders back to active contributors. This is a key mechanism to ensure that the protocol remains vital even after it matures. This is the difference between a living protocol and a dead protocol.
Fair Launch
Fair launches are not perfect, but they should not be abandoned. If a protocol is to become a community-governed entity, it is important that ownership is distributed as fairly as possible. One good way to ensure this is to make the initial token distribution as fair as possible; a fair release may be our best chance.
That said, a fair launch of tokens needs to ensure that they meet the interests of all stakeholders in the ecosystem, not just token holders. This is not to avoid institutional investors but to ensure that the interests of token holders and funders are aligned. A protocol's core contributors should not put themselves in poverty to satisfy investors' desires for grassroots protocols.
Reality > Narrative.
Funding the Future of DeFi
Whether using existing treasuries to fund development, using buybacks and redistribution to fund development, or minting tokens to fund R&D, what is more important than any meme is that the protocol creates a way to fund itself now and in the future.