Title: Embracing Speculation as a Go-To-Market Approach in DeFi

Author: Derek Walkush, Variant Fund

Compiled by: Kaori, BlockBeats

The question of whether new crypto products can quickly attract an initial user base by encouraging financial speculation has become a hot topic in the consumer social space, with the recent Friend.tech project being a prime example. This project leveraged a new speculative asset, the social "key," to rapidly attract a large number of enthusiastic users.

However, in the DeFi space, this question is no longer up for debate: some of the most notable success stories in DeFi have achieved rapid product-market fit (PMF) through financial speculation. Moreover, as the DeFi space matures, this trend is likely to continue.

This speculative behavior serves a specific purpose: to provide the initial liquidity spark necessary for the protocol to operate normally.

New entrants in DeFi should focus on creating a user experience that welcomes speculators (if you build it, they will come).

As builders know all too well, DeFi protocols are incredibly difficult to launch; most people are reluctant to try with their own money. Due to users' concerns about the risks of new smart contracts, projects often struggle to attract sufficient liquidity in the early stages, leading to a significant cold start problem.

Therefore, new protocols need a compelling product that offers users the chance to achieve potential returns enticing enough to draw them in.

DeFi does not represent simple incremental technological advancements within existing categories; rather, it is a new financial infrastructure built around an entirely new category of digital assets. These are brand new protocols, not just new fintech applications, and they need to find active participants in a completely new financial market.

For most emerging fringe technology applications, initial users are almost always individuals deeply embedded in specific industry communities (in the case of DeFi, crypto natives), who try new applications until they evolve (or disappear), at which point the initial group turns to shinier, more profitable new toys.

Think of the early internet's homebrew computer clubs, the core Ethereum community of the first smart contracts, and other emerging technologies. Once a certain critical mass is reached and the Lindy effect takes hold, technology always transcends this initial, more experimental guiding phase.

Translator's Note: The Lindy effect refers to the idea that for non-perishable things, such as a technology or an idea, their expected lifespan is proportional to the time they have already existed. That is, the longer they survive, the longer their remaining expected lifespan increases. In cases where the Lindy effect applies, the mortality rate decreases over time.

In the context of DeFi, the most effective way to attract early adopters is through high-risk, high-reward opportunities: the incentive for significant potential upside (and downside) for risk-taking behavior. Crypto projects can employ various strategies to satisfy speculative demand, including airdrops, liquidity mining, and high leverage, and many projects have achieved varying degrees of success. This speculative behavior can primarily be divided into two aspects: entirely new financial products and innovative token incentive mechanisms.

The two biggest success stories in DeFi initially leveraged speculation to their advantage, subsequently becoming some of the largest protocols in the crypto space.

1. Uniswap: One of the earliest decentralized trading platforms and currently the most well-known. The platform supports permissionless token listings (compared to more restrictive centralized exchanges), involving long-tail tokens. These small-cap, highly active altcoins can experience price increases of 10-100 times within just a few days or even hours. This functionality allowed Uniswap to rapidly attract a significant amount of speculative activity.

Today, Uniswap has far surpassed this status, becoming the largest decentralized trading platform in the industry, with accumulated ETH/USD liquidity depth comparable to larger centralized exchanges, even attracting institutional users.

2. Compound: One of the earliest decentralized lending protocols. It achieved product-market fit by offering permissionless, composable leverage.

Compound's success was largely driven by its innovative liquidity mining: within just a few weeks of the project's launch, its total value locked (TVL) grew by approximately six times. It has now become the second-largest mainnet lending protocol (by TVL) and has received a rating from S&P, with a significant number of institutional investors making deposits.

Clearly, there exists a potential failure mode here: builders must have a clear long-term vision for the protocol itself and demonstrate signs of PMF (product-market fit) early on. The danger zone that projects can fall into is becoming something akin to a zombie token farm.

This is a balancing act, as successfully attracting speculators can sometimes create the appearance of sustained PMF in the absence of ongoing PMF. Achieving sustained PMF through this method requires combining speculative behavior with entirely new financial products that have clear demand (such as the long-tail spot swaps, permissionless leverage, and specialized NFT trading mentioned in the examples above).

These financial products are creative at launch, relatively unexplored, and possess an intrinsic crypto nature—not mere mimetics or marginal improvements. True PMF is extremely difficult to identify, but maintaining high trading volumes while reducing token incentives or other guiding mechanisms is a good sign.

Many people, both within and outside the crypto industry, like to say that the industry must move away from gambling and speculative games, shedding its casino image. My response is that this is how most financial markets were initially formed: since the earliest records of financial markets, fervor and bubbles have existed, providing early liquidity that allowed them to function and evolve into today's mainstream asset markets.

Even in one of the earliest records of the Western European stock market, Joseph de la Vega described the frenzied nature of financial markets in his 1688 work, "Confusion de Confusiones": the author characterized early stock markets as a "gambling hell," populated by "two types of speculators." In fact, speculators are the first essential components needed to establish new markets.

We can expect the DeFi market to follow a similar pattern, far surpassing this initial launch phase. Speculation is merely a repetition of historical patterns and serves as an effective starting point for these new protocols to develop into mainstream financial markets.