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Variant: Embracing speculation as a marketing strategy for DeFi.

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Some of the most famous DeFi success stories have been achieved by promoting financial speculation to achieve rapid product-market fit. This speculative behavior serves a specific purpose, which is to provide the initial spark of liquidity for the protoco

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

Original Author: Derek Walkush

Original Translation: Kaori, BlockBeats

Regarding the question of whether new encryption products can quickly attract initial user groups by encouraging financial speculation, it has become a hot topic in the consumer social field. The recent Friend.tech project is an example. The project uses a new speculative asset, namely social "keys", to quickly attract a large number of enthusiastic users.

However, in the DeFi industry, this issue is no longer a matter of debate: some of the most famous DeFi success stories have been achieved by promoting financial speculation to achieve rapid product-market fit (PMF). And as the DeFi industry matures, this situation is likely to continue.

This speculative behavior has a specific purpose: to provide initial liquidity sparks for the protocol to function properly.

Newcomers to the DeFi industry should focus on providing a user experience that welcomes speculators (if you build it, they will come).

As builders know well, DeFi protocols are very difficult to launch; most people are unwilling to try with their own money. Due to user concerns about the risks of new smart contracts, projects often struggle to attract enough liquidity in the early stages, creating a significant cold start problem.

Therefore, the new agreement requires a striking product that gives users the opportunity to obtain potential returns attractive enough to draw them in.

DeFi does not represent simple incremental technological advances in existing categories; instead, it is a new type of financial infrastructure built around a brand new category of digital assets. These are all new protocols, not just new financial technology applications, and they require active participants to be found in a brand new financial market.

For most emerging edge technology applications, the initial users are almost always people who are deeply involved in specific industry communities (in the case of DeFi, it is the crypto natives), so they try new applications until the application evolves (or disappears), and the initial group turns to shinier, more profitable new toys.

Think of the early days of the internet's homebrew computer club, the core Ethereum community of the first batch of smart contracts, and other emerging technologies. Once a certain critical mass is reached and the Lindy effect takes hold, technology always surpasses its initial, more experimental guiding stage.

Translator's note: The Lindy effect refers to the expected lifespan of something that does not naturally decay, such as a technology or an idea, being directly proportional to the amount of time it has already existed. That is, for every additional period of time it survives, its remaining expected lifespan will increase slightly. 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 the opportunity for high-risk returns: the incentive to pay for the potential huge rise (and fall) of adventurous behavior. Cryptocurrency projects can use a variety of strategies to meet speculative demand, including airdrops, liquidity mining, high leverage, and many projects have achieved varying degrees of success. This speculative behavior can mainly be divided into two aspects: brand new financial products and innovative token incentive mechanisms.

DeFi's two biggest success stories leveraged speculation as their advantage from the beginning, and subsequently became one of the largest protocols in the cryptocurrency industry.

1. Uniswap: One of the earliest decentralized exchange platforms and currently the most well-known. The platform supports permissionless listing (compared to more strict centralized exchange platforms) and involves a long tail of tokens. These small market cap, highly active trading altcoins can increase by 10-100 times in just a few days or even hours. This feature has quickly attracted a lot of speculative activity to Uniswap.

Nowadays, Uniswap has far surpassed this position and become the largest decentralized trading platform in the industry, with accumulated ETH/USD liquidity depth comparable to larger centralized trading platforms, and even attracting institutional users.

2、Compound: One of the earliest decentralized lending protocols. It achieves product-market fit by providing permissionless and composable leverage.

The success of Compound is largely driven by its innovative liquidity mining: in just a few weeks after the project was launched, its total locked value (TVL) increased by about 6 times. Now, it has become the second largest mainnet lending protocol (based on TVL), and has received a rating from Standard & Poor's, with a large number of institutional investors also making deposits.

Obviously, there is a potential failure mode here: the builder must have a clear long-term vision of the protocol and show signs of PMF (Product-Market Fit) early on. The danger valley that the project may fall into is becoming something similar to a zombie token farm.

This is a balancing act, as successfully accumulating speculators can sometimes create the appearance of sustained PMF where there is none. Achieving sustained PMF in this way requires combining speculative behavior with brand new financial products that have clear demand, such as the long-tail spot exchange, permissionless leverage, and professional NFT trading mentioned above.

These financial products were creative and relatively unexplored when launched, and had the essence of encryption - not just mimicking or marginal improvements. Identifying true PMF is extremely difficult, but maintaining high transaction volume while reducing token incentives or other guiding mechanisms is usually a good sign.

Many people inside and outside the cryptocurrency industry like to say that this industry must get rid of gambling and speculation, and get rid of the image of a casino. My response is that this is how most financial markets were initially formed: since the earliest records of financial markets, frenzy and bubbles have always existed, and they have provided early liquidity for them to truly play a role and develop 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 the financial market in his 1688 book "Confusion de Confusiones": the author described the early stock market as a "gambling hell" with "two types of speculators". In fact, speculators were the first components needed to establish a new market.

We can expect that the DeFi market will also follow a similar pattern, far surpassing this initial launch phase. Speculation is just a repetition of historical laws, and it is also an effective starting point for these new protocols to develop into mainstream financial markets.