DeFi unit economics: LTV, CAC, and payback

Traditional businesses track unit economics to ensure each customer generates more value than they cost to acquire. DeFi protocols can apply the same framework: how much does it cost to acquire a user through incentives, and how much fee revenue does that user generate over their lifetime?

Adapting unit economics to DeFi

In traditional SaaS, CAC includes marketing spend, sales costs, and onboarding expenses. LTV is subscription revenue over the customer lifetime. The ratio should exceed 3:1 for a healthy business—each customer should generate at least 3x what they cost to acquire.

DeFi protocols have different mechanics but the same underlying logic. CAC is primarily token emissions and liquidity incentives used to attract users. LTV is the fees that user generates through trading, borrowing, or other protocol activity. The framework translates directly.

Measuring CAC in protocols

Protocol CAC equals incentive spending divided by new users acquired during a period. If a protocol distributes $1M in token incentives and gains 1,000 active users, CAC is $1,000 per user. This calculation should use the dollar value of tokens at distribution, not at some future price.

The challenge is defining "user." Wallet addresses can be gamed. A better approach uses value-weighted users: divide incentive spending by new TVL or new volume, then normalize to per-user metrics based on average position sizes. This captures that a user depositing $100K matters more than one depositing $100.

Calculating user LTV

LTV equals average fee revenue per user multiplied by average user lifetime. If a user generates $10/month in fees and stays active for 6 months, LTV is $60. The protocol retains some portion of this (the take rate), so protocol LTV might be $6-15 depending on the fee split with liquidity providers.

Measuring lifetime requires cohort analysis. Track users who joined in a specific period and measure their activity over time. Most DeFi users have short lifetimes—weeks to months—especially when attracted by incentives. Organic users typically have longer lifetimes and higher LTV.

Why most protocols fail the test

Most DeFi protocols have negative unit economics: they spend more acquiring users than those users ever generate in fees. The math is brutal. If CAC is $1,000 per user and annual fee revenue per user is $50, payback requires 20 years—far longer than any user stays.

This happens because incentive programs attract mercenary capital that leaves when rewards end. The users aren't retained, so LTV is near zero. The protocol paid for temporary activity, not lasting engagement. Sustainable protocols either have much lower CAC (organic growth) or much higher LTV (sticky users with high activity).

A simple test: if removing 80% of emissions would drop activity by 80%, unit economics are fundamentally broken. The activity only exists because of subsidies. Sustainable protocols show activity persisting after incentives taper.

Related Concepts

• Payback period for token incentives: Detailed analysis of incentive ROI
• Real users vs subsidized activity: Distinguishing organic from incentivized usage
• Emissions vs revenue: Why incentives are expenses, not growth