Last month, Vitalik Buterin's response to a post addressing rumors that some people within the Ethereum Foundation weren’t supportive of DeFi brought a significant debate. The discussion centered around the sustainability of DeFi protocols, particularly those that rely heavily on token issuance-based incentives. @llamaonthebrink questioned whether Vitalik shared a similar vision for DeFi, to which he responded directly. You can read his reply below:

In this article, we’ll explore the topic of incentive programs and highlight Zaros’ commitment to delivering real yield, along with the strategy for making it happen.

Let’s get started!

Are incentives worth it?

Vitalik’s response initiated a widespread conversation around the concept of “sustainable yield.” Many projects rely on token issuance incentives without achieving a true product-market fit. These incentives often attract "mercenary capital"—short-term investors who leave as soon as the rewards dry up.

While incentives are essential for attracting users and building a community, it’s crucial to ask: where do they come from? Is the protocol generating sustainable revenue from transaction fees? Is the trading volume organic, or is it merely driven by rewards? These are fundamental questions investors should consider before getting involved with any protocol. Unfortunately, in many cases, the answers expose the unsustainable nature of these models.

The projects that truly stand a chance of long-term survival are the ones that can generate real, sustainable yield. For a project to consistently reward its stakers, it needs to offer real utility—and that’s where the real challenge lies. A good example are the DEXs:

If new DEXs keep popping up without offering anything new, why would users choose them over a CEX, which is much easier to use? Unless a DEX delivers real value to users, it simply won’t attract them. And if people don’t use it, it won’t generate any yield. It 's basic logic!

Perp DEXs: saturated product?

Perp DEXs may seem commonplace—and to an extent, they are. Numerous perpetual DEXs in the market promote themselves as innovative or superior to their competitors. However, many fail to introduce meaningful advancements and often fall short of addressing the very issues they claim to solve.

DEXs continue to lag behind CEXs in terms of both trading volume and user adoption. The true competition lies not among perpetual DEXs, but between decentralized protocols and their centralized counterparts.

On-chain perpetual futures are among the few decentralized solutions that have achieved product-market fit. This is a highly profitable market, with perpetual futures alone averaging a monthly trading volume of $1.2 trillion, according to The Block Data. While DEXs account for only 4.2% of this total volume, it marks significant growth—from just 2.1% in January 2023, they have doubled their share in less than two years.

As perps are currently doing great, DEXs are far from where they could be. We won’t see a massive migration from centralized players until we can provide the same UX (or even a better one) than them.

The FTX collapse highlighted the risks of centralization, and over time, more users will recognize the benefits of migrating to DEXs. That said, the user experience on DEXs still has a long way to go compared to CEXs. While there’s been progress, like account abstraction to simplify onboarding for “web2” users, it’s not quite there yet.

At Zaros, we’re just getting started. The mission is to build a perp DEX that matches the user experience of CEXs and is capable of capturing a share of CEXs’ volume and becoming the leading derivatives protocol on Monad & Arbitrum. For more on our vision for Zaros on Monad, check out this article: Why are we launching on Monad?

Despite still being in testnet, we crossed the mark of 13,000 users, and we’re building a strong community ahead of Zaros’ launch on Monad. There's still a long road, but the opportunity to grow and lead is within reach as we continue refining the product.

How does Zaros deliver real yield?

At Zaros, the primary objective is to build a profitable environment for liquidity providers (LPs). We recognize that LPs are the backbone of any DeFi protocol, and that’s why we’re committed to deliver them a fair yield.

Zaros fee distribution is allocated as follows:

• 70% is directed to ZLP Vaults, rewarding liquidity providers (LPs) for market-making on Zaros. This significantly exceeds the average distribution offered by other protocols.

• 15% is allocated to veZRS lockers, incentivizing long-term token holding.

• 10% is reserved for the DAO treasury, empowering the DAO with resources to support Zaros' ongoing development.

• The remaining 5% is dedicated to the buyback and burn of ZRS tokens, reducing the overall token supply.

Thanks to the composability of DeFi, we’re able to accept yield-bearing assets such as LSTs and LRTs in the ZLP vaults. Zaros allows LPs to earn sustainable returns from two key sources: the yield generated by LSTs/LRTs and the platform’s trading fees. This approach combines two of the most profitable sectors in crypto within a single protocol.

To learn more about how we’re integrating derivatives with LSTs/LRTs, explore this article: A Match Made in Heaven: How Derivatives and LSTs/LRTs Can Boost Each Other

We are also planning to expand the possibilities of growth by introducing additional yield-bearing assets, such as stablecoins and synthetic dollars, to further enhance opportunities for liquidity providers (LPs) to maximize their returns.

In addition to creating a profitable environment for the LPs, we are committed to delivering a seamless trading experience and building the best Perp DEX on the market. The goal is to attract significant trading volume from both CEXs and other DEXs users. To achieve this, we plan to integrate top-tier innovations into Zaros, including:

• One-click transactions: Authenticate only the first transaction of each session with your email or Apple ID for a streamlined process.

• Cross margin: Use all your account’s collateral to back multiple positions, improving capital efficiency.

• Multi-asset margin: Deposit over 15 different tokens as margin collateral, expanding your trading possibilities.

• Crypto, FX, and Commodities: Trade a wide range of perpetual markets with up to 100x leverage, covering diverse asset classes.

Final notes

Protocols must carefully design their incentive programs, balancing rewards with real innovation and user experience improvements to thrive in the DeFi ecosystem. Without this balance, they risk falling prey to "mercenary capital"—liquidity providers & users who will leave the protocol as soon as the incentives dry up.

For incentive programs to succeed, they must be aimed at the right target audience and accompanied by features and innovations that set them apart from the competition. This ensures that incentive programs become a powerful tool for attracting and retaining long-term users.

At Zaros, we’re dedicated to delivering a seamless UX for perp trading, aiming to capture a share of the CEX market while paving the way for a decentralized future. Zaros’ focus isn’t just on incentives but on creating a platform that stands the test of time, bringing lasting value to traders and liquidity providers alike.

About Zaros

Zaros is the first LRTFi perpetuals DEX powered by a CEX-like UX coming to Arbitrum & Monad. It enables boosting ETH staking & restaking yield by delegating liquidity to the protocol's ZLP Vaults, while traders on the other side may leverage up to 100x across crypto, FX, and commodities perpetuals.

The recent funding round saw participation from prominent venture funds, including SNZ Holdings, Seven Capital, Cogitent Ventures, and DCI Capital. Angel investors such as Antony Sassano, Fernando Martinelli, Kieran Warwick, Andy Chen, and Kevin Lu also contributed, underscoring the strong confidence in Zaros' potential.