Ethereum challengers are dangling token rewards to attract big-name DeFi projects — and it’s working

The phrase “if you build it, they will come” doesn’t appear to resonate with the architects of the foremost challengers to Ethereum’s dominance over decentralized finance.

Their mindset is more: build it, offer developers hundreds of millions of dollars to use it, and then they will come.

Ethereum has to date ruled the roost as DeFi developers’ blockchain network of choice, despite high transaction costs — known as “gas fees” — and speed. But DeFi has become a booming business this year, and now challenger projects like Algorand, Avalanche, Celo, and Hedera are throwing money at developers to entice them to build on their blockchains.

In all, seven different blockchain organizations have launched incentivization schemes in the past few weeks to try to lure major DeFi organizations and developers. 

These initiatives take the form of pools of “liquidity mining” rewards denominated in the native token of each blockchain. These rewards serve as incentives for DeFi protocol token holders — including the protocol developers themselves — to stake those tokens on the new blockchain, making it possible for users to begin trading in them.

Convincing popular DeFi projects to launch on new blockchains isn’t just about money; there are also considerable technical challenges. But the early returns suggest the incentive schemes are paying off.

Big money for big names

Hundreds of millions of dollars in rewards have been made available through these incentive schemes. The first came on August 18, when Avalanche set aside $180 million in AVAX. But as the price of AVAX rises and falls, so too has the size of its fund in fiat terms.

So perhaps it makes more sense to put it in token terms: Hedera put aside 10.7 billion in HTS, Avalanche 10 million in AVAX, Fantom 370 million in FTM, Algorand 150 million in ALGO and Terra 5 million in Luna. Harmony and Celo did not specify whether their funds would be denominated in dollars or tokens.

The chart below shows the size of each of these incentive programs as of September 16 (factoring in price changes in each blockchain’s native token).

It’s not just any DeFi developers these blockchains are after. They want the big names.

There’s currently over $81 billion in total value locked (TVL) — a measure of the value of all the assets staked — across the entire DeFi space, according to DeFi Pulse. But trading volume remains concentrated in a relatively small number of blue-chip protocols — the likes of Aave, Uniswap, and Compound. Aave accounts for more than 15% of the overall staked value. 

And these protocols are growing rapidly. Uniswap, for example, now has more than two million users — roughly double what it had at the start of the year, according to The Block Research.

Challenger blockchains are anxious to share in that growth. 

Avalanche, in announcing its incentive program, made great play of the fact that Aave and Curve were set to take advantage by kicking off projects on the platform. Rene Reinsberg, co-founder of Celo, says that some of the “biggest names in DeFi, including SushiSwap, Aave, Curve and 0x” will be going live on the blockchain in the coming weeks and months. Algorand’s head of partnerships Ryan Terribilini says its incentive scheme aims to attract blue-chip DeFi projects and have them launch a version of their native token on Algorand.

Bridging the gap

Naturally, each blockchain has its own unique selling points.

Celo touts its mobile-first model; Avalanche believes its smart contracts are the fastest in the world; and Algorand’s head of global marketing Stephen Duignan highlights the network’s transaction finality, cost savings, scale, and the fact that it cannot be forked.

In all these draws, there is an implicit criticism of Ethereum.

“There’s definitely frustration in the blue-chip DeFi projects that have been built upon Ethereum around fees and costs,” says Duignan.

That suggests they could be convinced to try another blockchain. For that to happen, however, tokens must cross the divide from one blockchain (typically Ethereum) to another. Enter blockchain “bridges.” 

Developers on the Avalanche blockchain created one such bridge in February of this year — connecting the platform to the Ethereum ecosystem. But Emin Gün Sirer, director at the Avalanche Foundation, said in August that the bridge was expensive to use and offered a poor user experience whenever the Ethereum network was congested. Avalanche built an upgraded bridge before rolling out its incentive scheme in August.

“A lot of this was predicated on the bridge. We were waiting for a bridge technology that was easy to use and cheap for bringing assets over,” said Gün Sirer at the time.

Avalanche’s rivals have taken a different approach by using part of their incentive scheme funds to stimulate the creation of these bridges.

Algorand, for example, supports some blockchain bridge projects already — but Terribilini says “progress on those has not been as fast as we like, and we are also seeking a bridge that’s more fit for purpose for DeFi use cases.” Indeed, the first grant made through Algorand’s incentive program has gone to a token bridge — and the organization is looking to support as many as five similar projects.

Celo launched a tool called Optics last week to make it easier to transfer tokens between blockchains with minimal gas fees. “There’s a lot of interest in that from the community and we expect adoption to increase significantly as a result,” says Reinsberg.

The results are in

Early signs suggest the bridges and incentive schemes are working.

A spokesperson for Fantom says the TVL on the network has grown from $565 million on August 29, the day before its incentive scheme announcement, to $1.22 billion as of September 17, citing data from DeFi Llama. The number of unique addresses on the platform has grown from 420,000 to 715,000, while transactions are up from an average of 250,000 a day to more than one million.

A similarly seismic impact has been recorded elsewhere. Celo’s Reinsberg said TVL had doubled since the platform’s incentive scheme went live, from roughly $400 million to around $800 million.

On Avalanche, TVL is up from $312 million on August 18 to $2.6 billion on September 14, again according to DeFi Llama. Daily transactions rose from 43,243 on August 18 to 220,222 on September 12.

This surge in activity has been reflected in the price of the native tokens of the upstart blockchains. Avalanche is a prime example: AVAX recently hit all-time highs of over $70, according to CoinMarketCap. In fact, CELO (Celo), FTM (Fantom), ALGO (Algorand), HBAR (Hedera), LUNA (Terra) and ONE (Harmoney) have all hit all-time price highs over the past few weeks.

The chart below compares TVL change over time on Avalanche and Fantom normalized by token price. Fantom’s program is still fairly new, meaning the data will need time to mature, but the comparison demonstrates the early success of Avalanche’s first-to-market scheme.

The big question is whether the early momentum can be sustained. Once the reward funds dry up, will DeFi developers find that the grass is indeed greener on the other side?

“[Incentive schemes] are incredibly effective in our view in bringing people over, having them interact with the services, and getting a feel for what it’s like to use this chain. And once people are used to the highest finality, the fastest chain, it’s really hard to go back,” says Gün Sirer. 

“I was initially worried that funds that move like this might actually be too hot: they’d flow out just as easily as they flowed in. But it turns out that it’s quite sticky.”