Metrics··1 min read
Real users vs subsidized activity
How to distinguish genuine user demand from incentive-driven activity that collapses when emissions end.
Protocol metrics can look impressive while hiding a fundamental problem: the activity exists only because of subsidies. When incentives end, mercenary users leave, and the protocol discovers its "growth" was rented, not earned. Distinguishing real users from subsidized activity is essential for evaluating protocol health.
Key takeaways
- Usage metrics lie when activity is incentive-driven rather than need-driven
- Real users exhibit retention, repeat behavior, and willingness to pay without subsidies
- Subsidized activity collapses when token emissions taper, revealing the gap between apparent and real demand
- Detection requires comparing metrics across incentive periods and measuring cohort retention
- Practical screening eliminates protocols dependent on subsidy-funded wash trading or farming
Why the distinction matters
Real users represent sustainable demand. They use the protocol because it solves a problem worth paying for. Their activity persists regardless of token incentives. Real users are the foundation for long-term protocol economics.
Subsidized activity represents rented metrics. Users participate because incentives exceed costs, not because the protocol provides value. When subsidies end, these users leave instantly. Protocols mistaking subsidized activity for real demand make catastrophic planning errors.
The stakes are high. Protocols allocate resources based on perceived demand. If demand is artificial, those resources are wasted. Investors value protocols based on activity metrics. If metrics are subsidized, valuations are unfounded. Distinguishing real from fake activity enables better decisions.
Characteristics of real users
Retention without incentives: Real users continue using the protocol after incentive programs end. They may reduce activity (no longer farming) but maintain core usage. Their presence doesn't correlate perfectly with emission schedules.
Willingness to pay fees: Real users accept paying transaction fees and protocol fees because the service provides value. They don't require net-positive economics from incentives to justify participation.
Repeat behavior: Real users exhibit consistent usage patterns over time—regular trading, borrowing for specific purposes, providing liquidity in pools they understand. Their behavior is purposeful, not purely extractive.
Multiple interactions: Real users often use multiple protocol features, hold positions through market cycles, and demonstrate understanding of the protocol's value proposition beyond farming mechanics.
Signs of subsidized activity
Activity tracks emissions: When volume, TVL, or user counts move in lockstep with incentive announcements and distributions, activity is likely subsidized. Real demand doesn't spike precisely when emissions increase.
Immediate exodus on program end: If 80% of activity disappears when incentives conclude, that activity was subsidized. Real users don't all leave simultaneously when a farming program ends.
Circular transactions: Wash trading, self-referral loops, and other patterns that generate incentive claims without real economic activity indicate subsidized usage. Real users don't typically trade with themselves.
Unsustainable economics: If users earn more from incentives than they pay in fees, they're being subsidized. Real usage involves net payment to the protocol, not net extraction from it.
Practical detection methods
Compare periods: Look at metrics during high-incentive versus low-incentive periods. If activity correlates strongly with incentive levels, subsidization is present. Stable activity across incentive changes indicates real demand.
Cohort analysis: Track users acquired during incentive programs. Measure their retention and activity after incentives end. Real users show gradual decay; subsidized users show cliff-like departures.
Unit economics: Calculate whether average users generate positive value for the protocol after accounting for incentives paid. Protocols paying $2 per user in incentives to receive $1 in fees have subsidized economics.
Cross-protocol comparison: Compare activity levels to similar protocols with different incentive structures. If one protocol has 10x the activity but also 10x the emissions, the activity premium is likely subsidized.
See live data
Links open DefiLlama or other external sources.
Related Concepts
- DeFi unit economics: Framework for measuring user value
- Emissions vs revenue: Why incentives are expenses, not growth
- Liquidity mining: How incentive programs attract subsidized activity
- Payback period for incentives: When subsidized users become profitable
FAQ
Can subsidized users become real users?
Sometimes. The best outcome of incentive programs is converting some subsidized users into real users who stay after incentives end. This requires the protocol to provide genuine value beyond farming. Success rate is typically low—most mercenary users leave entirely.
Are all incentives bad?
No. Incentives serve legitimate purposes: bootstrapping liquidity, acquiring users to demonstrate value, competing for market share. The problem is mistaking subsidized activity for real demand. Well-designed programs acknowledge the subsidized nature and plan for transition.
How much real activity is 'enough'?
The protocol should be sustainable on real activity alone. If removing all incentives would make the protocol unviable, it's dependent on subsidies. A healthy protocol has enough real users to cover operating costs, with incentives used for growth rather than survival.
Cite this definition
Real users pay for services they value at market prices; subsidized activity exists only because incentives make participation profitable regardless of actual utility.
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