From protocol to platform: How can DeFi projects avoid the “commoditization trap”?

Author: DefiIgnas; Translator: zhouzhou, BlockBeats

Editor's Note: This article takes the challenges faced by Ethereum and the innovation of Fluid v2 as an example. Fluid combines lending with AMM liquidity to create a platform that is suitable for large users and supports developers. Fluid's v2 version enhances capital efficiency and provides developers with opportunities to build new products by introducing features such as range orders, lending liquidity strategies, and dynamic fees.

The following is the original content (the original content has been reorganized for easier reading and understanding):

The next major leap in DeFi is the evolution of protocols to platforms.

Like Apple's App Store, protocols are no longer single-purpose tools, but the foundation for other applications to be built.

Notice a trend in DeFi: wallets now use DEX aggregators in the background instead of relying on front-end applications.

As the DeFi ecosystem becomes increasingly complex, the growing popularity of Vault strategies also shows that people are looking to get the highest returns across multiple DeFi protocols.

But there is a catch: protocols risk becoming commoditized infrastructure, while user-facing applications reap most of the benefits.

For example:

• Uniswap Labs earns front-end fees while swap fees for LPs are trending down, leaving $UNI holders with nothing.

• Metamask charges 0.875% because it holds users.

• Compound Finance is becoming a front-end for Morpho Vault.

Many view Ethereum as merely an infrastructure that is challenged by L2 and Solana because they offer lower transaction fees.

Over time, ETH’s gas fees will be abstracted and users will be able to use Ethereum without holding any ETH.

This risk is part of the "Fat App Theory", but don't rush to bury the "Fat Protocol Theory".

Ethereum is a development platform, and its valuation has changed. Now its valuation is based on the fees it generates, rather than its potential as a platform and ETH's role as a value storage asset.

As Layer 2 solutions are closely connected to L1 and the ETH destruction mechanism is restored, the narrative of ETH may change rapidly.

Interestingly, Aave has performed well as a user-facing application, especially for large users, while also serving as a liquidity center for DeFi.

Or Pumpdotfun, which has mastered the end user and is now expanding vertically by developing its own DEX; while Raydium is doing the opposite by launching a token launch platform.

Another example is the launch of Uniswap v4, with the "Hooks" feature, similar to "plugins" or "extensions".

These "Hooks" brought the App Store to the iPhone. Just like Apple no longer needs to develop its own iPhone apps, developers can build apps on top of Uniswap.

Token launch platform @flaunchgg is a good example, using Uniswap v4's Hooks and Aave to provide liquidity.

Uniswap v4's hooks are great because they allow developers to build applications on top of the protocol.

Although growth has been slow (Uniswap launched a liquidity mining campaign to promote hooks), Messari expects the adoption of hook applications to accelerate.

I believe that protocols that successfully evolve from pure infrastructure to platforms will have a significant premium. This transformation will help avoid the commoditization trap that Ethereum has fallen into.

Another example is the just-released Fluid DEX v2: it allows developers to build for the protocol.

Fluid v2 transforms it from a lending protocol with DEX functionality to an open platform that allows third-party developers to build for the protocol.

Even though DEX abstracts end users, Fluid v1 DEX still challenges Uniswap by virtue of its integration by top DEX aggregators.

In v2, Fluid merges lending with AMM liquidity, creating a protocol that is both a front end for large investors and a developer platform.

You will get:

• Range orders earn yield by default (no idle liquidity).

• Lending and providing liquidity strategy (a DeFi first).

• Provide developers with features such as Hooks + dynamic fees, perpetual contracts, etc.

Fluid will launch a permissionless DEX and lending market, and developers can build new products on Fluid.

As @DeFi_Made_Here wrote, this is a fixed income market.

The key is that value flows back to the protocol: every hook, cross-collateral position, or perpetual contract application built on Fluid shares fees with the ecosystem.

I believe that the capital efficiency of v2 DEXs and Fluid will help avoid the commoditization trap: like Aave, it is a front end for big players;

like Uniswap v4, it is a developer platform. By integrating lending and AMM logic at the protocol level and improving capital efficiency, it becomes the best platform for strategies such as debt-driven LP.

Protocols do not need to choose between infrastructure and applications. With $FLUID, they can have the characteristics of both.