Source: Dewhales Research Despite billions of dollars in liquidity flowing between protocols every day, the lack of measurement of value creation is threatening the sustainability of DeFi. In 2020, DeFi users would deposit tokens into a protocol, earn a yield, and that was it. Today, the same user might execute complex strategies across five different blockchains, interacting with dozens of protocols in a matter of minutes, while the protocols struggle to track what's actually happening. Why is this a problem? Because protocols can no longer distinguish between users creating real value and those simply gaming the system for a quick reward. When a user's activity spans multiple chains and protocols, existing infrastructure fails to connect the dots. Ultimately, protocols reward mercenary users who extract value and then leave, while completely ignoring their most valuable contributors. It's this complexity of DeFi that is undermining the very systems designed to sustain it. Why is the problem only now becoming apparent? Two major market shifts have thrust the attribution issue into the spotlight. The first is scale. DeFi's total value locked (TVL) has grown from $1 billion to over $100 billion, meaning the amount of money wasted due to attribution failures is orders of magnitude greater than in DeFi's early days. Losses that were acceptable in 2020 are now a substantial risk to protocol sustainability. Secondly, there's competition. With the proliferation of DeFi protocols and rising user acquisition costs, the ability to identify and retain valuable users has become a competitive advantage. Protocols that can distinguish between genuine contributors and mercenary users will outperform competitors who still rely on crude metrics like TVL or trading volume. The infrastructure supporting this competitive advantage is finally maturing, making attribution a crucial moment in separating winners from losers. The infrastructure for tracking user activity and distributing rewards has become DeFi's most critical bottleneck. When protocols fail to properly attribute user actions across chains and activities, they make poor decisions when allocating incentives. Bots and value extractors can easily game fragmented reward systems, inflating metrics while contributing nothing to the long-term health of the protocol. Without a clear understanding of who is truly creating value, protocols waste millions of dollars in growth, which then evaporates when rewards cease. The risks of incentive failure are well-documented. Protocols like Alchemix and Compound have experienced this firsthand. Alchemix's aggressive token rewards attracted mercenary capital, resulting in a dramatic surge in liquidity during the incentive period, which proved short-lived. As shown in the chart below, when the token release rate slowed, TVL plummeted, reversing much of its earlier gains. Compound's COMP distribution also reveals a similar dynamic. The majority of distributed COMP tokens were immediately sold by speculative miners rather than held. Governance participation was limited to a small group of recipients, and rewards primarily went to short-term speculators rather than contributors to governance and protocol health. This diluted the quality of governance and increased volatility in the ecosystem. These failures reveal a deeper problem: protocols are unable to distinguish between value creators and value extractors because they lack visibility into user behavior. Alchemix and Compound were unable to recognize that the users they rewarded the most were actually mercenaries who cycled the same funds across different protocols to maximize returns and immediately exited when rewards dwindled. Today’s challenges are much more complex. A high-level user might provide liquidity on Uniswap v3, hedge on Arbitrum, perform yield farming via a bridge to Optimism, and leverage lending protocols, but the current infrastructure treats these actions as unrelated, isolated actions rather than a coherent value creation strategy. This attribution crisis has given rise to a new class of infrastructure specifically designed to address these blind spots. Merkl: An attribution and reward distribution system that tracks liquidity provider behavior beyond simple deposit events. It can measure rewards based on factors such as liquidity depth and utilization. For example, on Uniswap v3, liquidity is provided near active price ranges. Merkl handles the indexing and data normalization required for these cross-chain computations, enabling DeFi protocols to encode more nuanced reward rules directly on-chain. Layer 3: A coordination layer for on-chain actions. Initially focused on user onboarding, it now provides attribution for multi-step workflows across protocols (e.g., staking → providing liquidity → bridging → lending). By recording proof of completed actions at the wallet level, it more accurately captures user intent and engagement than raw transaction volume alone. Galxe: An infrastructure for identity-linked rewards. It issues and verifies credentials derived from on-chain actions, off-chain data, or specific protocol requirements. Rewards can be weighted based on persistent identity or reputation, making the system more resistant to Sybil attacks than attribution methods based on wallet activity. These platforms all aim to solve the attribution challenge but serve different use cases. Merkl excels at tracking liquidity depth and capital efficiency for DEXs and lending protocols. Layer 3 focuses on multi-step user journeys across protocols. Galxe rewards long-term community participation through persistent identity, rather than wallet-level activity. While these approaches have their merits, fundamental gaps in cross-chain attribution remain.
Current Gaps and Bottlenecks
Despite these advances, fundamental infrastructure issues remain. Each blockchain uses a different data format and event structure, making it nearly impossible to correlate a user's cross-chain behavior without custom integration for each protocol combination.
Cross-chain Data Fragmentation Each blockchain is an independent data silo with distinct data schemas, event structures, and transaction finality rules. Indexing Ethereum events is fundamentally different from parsing Solana's runtime or reading state from a Rollup like Arbitrum or Optimism. In practice, this means that protocols that want to understand user behavior across multiple environments must either: Build custom indexers for each chain and protocol integration, which is costly and cumbersome to maintain, or Rely on incomplete coverage and heuristics, which lead to significant blind spots when analyzing complex strategies. There is currently no standardized framework for inter-chain visibility across diverse blockchain architectures, a fundamental gap that means “holistic attribution” remains elusive. Most current reward systems rely on crude signals such as raw transaction volume, wallet age, or transaction value thresholds. These metrics are easily manipulated, as funds can be recycled, wallets can be registered in bulk, and transaction spam can be disguised as real activity. Sophisticated players have exploited these blind spots, reaping rewards by simulating high-engagement behavior while contributing minimal economic utility. As noted above, a deeper framework for considering context is currently lacking. For example, is liquidity provided to stabilize the market during periods of volatility, or only during periods of easy arbitrage? Are users bridging funds and deploying them in long-term strategies? Today's tools are unable to parse such nuances. These technical limitations create specific operational challenges. Attempting to address attribution internally by running multi-chain indexers, archiving on-chain data, and maintaining cross-protocol correlations would be prohibitively resource-intensive. Real-time analysis requires synchronizing across chains with varying transaction finality rates. This is not only technically challenging but also economically infeasible for most protocols without dedicated infrastructure partners. As a result, attribution is often delayed, incomplete, or completely inaccurate.
Next Generation Evolution: Smarter Incentives and Better Filters
The next generation of DeFi infrastructure must address three key challenges:
Dynamically adjust reward parameters as user behavior changes
Provide an institutional-grade audit trail capable of tracking complex strategies across protocols and timeframes
Maintain clear attribution even when users execute multi-layer operations involving dozens of contracts
Current reward systems are inherently static. A liquidity mining program sets a fixed annualized percentage yield (APY) regardless of market conditions or ecosystem health. Future infrastructure will need to respond to evolving behavior in real time. As advanced users discover new arbitrage loops or institutional players deploy systematic strategies, reward parameters should automatically adjust to maintain a balance between growth and sustainability. Retail users may tolerate coarse attribution today, but institutions demand precise accounting of which actions generated returns. As hedge funds and financial managers allocate a larger portion of their portfolios to DeFi, they demand the same standards of attribution as in traditional finance. This means comprehensive audit trails that can track every component of complex strategies, real-time risk monitoring across protocols, and detailed reporting to meet regulatory compliance requirements. Ultimately, the infrastructure must maintain clear attribution, preserving the causal chain even when users execute multiple layers of actions involving dozens of smart contracts and through complex sequences such as lending, swapping through aggregators, providing liquidity, and hedging positions. As strategies become increasingly complex, maintaining a clear causal trace is critical to ensuring accurate value attribution. This creates a recursive cycle: advanced users demand better infrastructure, which enables more complex strategies, which in turn attracts more sophisticated participants. The result is DeFi evolving toward traditional finance-level operational maturity while retaining its open, programmable advantages. Conclusion: Infrastructure is the Real Growth Frontier While new protocols and applications dominate the headlines, the true determinants of DeFi's long-term success lie in the unseen infrastructure responsible for connecting, tracking, and rewarding user behavior within the ecosystem. The current attribution crisis is more than just a technical issue; it directly threatens the sustainability of DeFi, as protocols waste millions of dollars on ineffective incentives while their most valuable users go unrecognized. Protocols that correctly attribute value creation, align incentives based on evolving user patterns, and filter signal from noise will build sustainable competitive advantages that compound over time. Until protocols can seamlessly connect user behavior across different blockchain architectures, they will continue to make incentive decisions based on incomplete data.
As DeFi power users continue to evolve, infrastructure must evolve with them. It shouldn't be seen as an afterthought, but as the foundation for enabling the next phase of decentralized finance. The winners of DeFi's next chapter won't necessarily be the protocols with the flashiest applications, but rather the protocols with the smartest infrastructure to understand and reward the complex behaviors that create lasting value.
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