New Public Chains Use Incentives to Buy TVL, Why Can't They Retain Funds? A Guide to Protocol Deployment

Berachain's peak TVL dropped to 1%: Where should the protocol be deployed?

Written by: @definikos

Compiled by: AididiaoJP, Foresight News

I often get asked: Which chain should the protocol be deployed on to grow? I have experience on both sides of this question. One side is the chain foundation, which I joined when that chain had not yet launched its testnet and mainnet; the other side is the largest protocol on another chain, which once peaked at a TVL of $2.4 billion. I have designed incentive programs for many years, long before they became popular. My answer is to first discuss those chains that spent the most money trying to become the answer and what happened to them later.

Berachain peaked at a TVL of $3.3 billion in March 2025, but by October 2026, it had dropped to just $34 million, about 1% of its peak. Sonic fell from $1.14 billion to $19 million. Plasma raised over $4 billion on its first day of launch in September 2025, peaked at $6.36 billion two weeks later, and now only has $571 million left, with 85% in one Aave market.

These chains were not hacked, nor were they shut down, and they did not lack users at launch. They all followed the same script: a large incentive budget, paying protocols and depositors with new tokens, hoping that the activities attracted by the incentives would turn into lasting activities. Capital only stays when the incentives cover the cost of "coming here," and then it moves on to the next chain running the same script.

The new wave of public chains—Robinhood Chain, Circle's Arc, Stripe's Tempo—are betting on channels, not incentives. I understand this logic, and it is more interesting than the previous round. But the underlying question remains: Do you really need your own chain? Let's first break down this new chain script from the perspective of the protocol team.

How the Machine Operates

A new chain starts with only three things: block space that no one needs, tokens that are not in circulation, and a treasury valued in those tokens. The goal of a cold start is to turn the treasury into a demand for block space.

The operational sequence is the same everywhere:

• The foundation releases a portion of the token supply for ecosystem incentives, points, or pre-deposit activities;
• Major protocols (Aave, Morpho, Uniswap, Pendle, Fluid, and a few strategy managers) ideally deploy, usually with grants or guaranteed incentive budgets;
• Depositors bring stablecoins and ETH across chains to earn incentives above the base interest rate;
• Forks of the same batch of protocols go live, competing for the same incentive flow;
• Tokens go live, incentives turn into liquidity, and those who receive them start selling.

Incentives buy deposits. Deposits only generate base returns when there are borrowers, traders, and fee payers. On a new chain, most of this demand is the incentives themselves: borrowers cycle the same batch of assets to mint more tokens; LPs trade tokens against stablecoins; on-chain trading volume is the incentives being harvested and sold. Without tokens, very little exists in this cycle.

Pre-deposit activities sharpen the issue. Berachain's Boyco raised about $3.1 billion before the mainnet launch. When the chain did not even exist, putting money in could only be for distribution; once the distribution payment was completed, the reason for staying ended.

How is TVL Priced?

A dollar of capital is willing to stay on a new chain under the condition that, after deducting additional risks, it earns more here than it would on Ethereum.

Let r_home be the yield of the same asset on Ethereum (the Aave Core USDC deposit rate on October 20 was 3.79%), r_local be the organic rate on the new chain, i be the incentive APR, and p be the risk premium required by depositors for bridges, chains, and exits. The condition for capital to stay is:

r_local + i ≥ r_home + p

Thus, the incentive that the chain must pay is:

i* = r_home − r_local + p

On the new chain, r_local is low because borrowing demand is thin; p is high because bridges, sequencers, and exit liquidity are all new.

Holding $1 billion in stablecoins costs about 4.8% × $1 billion = $48 million a year, paid in chain tokens. For Plasma's current market cap of $358.5 million, this is equivalent to selling about 13% of the token value into the market each year just to keep deposits in place.

This is the core mechanism: incentives are the rent paid with tokens. Once the rent is paid, the token price drops, the dollar value of i decreases, the inequality flips, and capital leaves. Plasma demonstrated this in eight weeks: XPL peaked above $1.50, and by late November 2025, it was about $0.20, with stablecoins leaving alongside the devaluation of rewards.

The bigger question is what the rent bought. Let R be the proportion of TVL that remains after incentives stop. The cost of retaining one dollar, paying a year of incentives, is:

i* / R

When R=10%, the cost to retain one dollar is $0.48; when R=1%—close to the ratio of Berachain's current TVL to its peak—the cost is $4.80. A chain paying 4.8% annually retains 99% of mercenary capital, equivalent to paying nearly five times the price for the capital that remains.

Who Bears the Loss?

When incentives stop, no one defaults. The losses quietly fall on four groups of people.

Token holders bear the first burden. Those who received incentives did not intend to hold them; the incentive tokens become selling pressure, and the token price determines the purchasing power of the next round of incentives. Most foundation treasuries are also in tokens, and their payment capacity shrinks along with the token price.

Late-stage depositors bear the second layer. Those who entered the market later in the activity earned the least incentives but bear the full risk of bridges and exits; their principal is precisely the liquidity that early depositors withdrew.

LPs of on-chain native trading pairs bear the third layer. The pools of tokens against stablecoins absorb the sell-off, and LPs are ultimately forced to hold depreciating assets, with fees not enough to cover the losses.

Native builders bear the fourth layer. Many protocols that only launched on the new chain relied on grants for their forks, with users following the incentives, and their own tokens falling faster than the chain's tokens.

Major protocols hardly lose. Aave, Morpho, and Uniswap deploy the same code, eating incentive flows while the main market remains elsewhere. Of the remaining $571 million in Plasma, Aave V3 alone holds $486 million.

Exit and Liquidity

Mercenary capital crosses the chain bridge, and the bridge of the new chain is the exit queue. Official rollup bridges have withdrawal delays, third-party bridges and OFT routes have limits, and liquidity in native DEXs is thin except for stablecoins and ETH, most of which are also incentives put in. Once the activity ends, everyone rushes to the same exit, paying with slippage and queuing costs.

The on-chain lending market feels the impact first. As depositors withdraw, utilization spikes, interest rate models push up borrowing rates, and cyclical borrowers sell off collateral that was initially put in just to mint tokens. For the ecosystem, this is a visible signal that the cold start has ended: the dashboard shows interest rates soaring and TVL loss occurring in the same week, and the next round of incentives must be larger to turn the situation around.

Dependencies and Governance

New chains have one more layer of dependency than Ethereum or Solana: sequencers, usually operated by a single team or foundation; official bridges and their upgrade keys; chain tokens, if gas or staking relies on them; the foundation's incentive treasury and unlock schedule; native stablecoins and their issuers, often partners with their own protocols.

On newer enterprise chains, the operator is a single company. Robinhood operates Robinhood Chain, retaining about 90% of network fees and subsidizing wallet exchange fees until December 31. This brings channels but also means the chain's economy is determined by a company's marketing budget. Fee subsidies are just renamed incentive methods.

Comparing with Ethereum and Solana

The test is simple: what can protocols or users get on this new chain that they cannot get on Ethereum or Solana?

Base is a fair counterexample because it first brought channels in: Coinbase's users, funding channels, and brand. But its TVL is still concentrated in protocols that exist on every chain: Morpho alone accounts for 72% of Base's TVL, and Morpho, Aave, Uniswap, and Aerodrome together account for 95%, three of which exist on every major chain.

Robinhood Chain has a similar shape: its TVL peaked at $1.15 billion, with 80% in Morpho and Uniswap; daily transaction counts dropped 42% from mid-September to early October, with memecoins accounting for 79% of DEX trading volume in July. Some can profit from this, but it is a short-term game, and users will turn to the next venue.

Hyperliquid is a different case. The product is good, with real revenue, and the existence of the chain serves it. But the largest position on the chain is staking HYPE, with Kinetiq alone holding $945 million, accounting for part of the $2.49 billion; much of the on-chain lending is collateralized with HYPE and its derivatives. The ecosystem is largely some form of HYPE, being reused, cycled, or collateralized. When HYPE rises, it supports growth; when HYPE stops, it also stops growing. Exchanges do not need the ecosystem to succeed, and it is unclear whether the ecosystem can succeed without the exchange's token.

From a game theory perspective, the new chain can offer protocols and users, besides the incentives themselves, what they can also get on Ethereum or Solana. There are no new scenarios in the previous table; they are all the same batch of protocols or their forks, redeployed in places with incentives. Moving to another chain, what can be expected is just incentives and speculation, and neither lasts long. The reason for issuing a new chain is mostly commercial: to have fee flows, to have tokens and valuations, to control users, and to align with VC's valuation games. These are real motivations for companies, but not reasons for capital and users to stay.

How Should Protocol Teams Calculate?

For protocol teams, deploying on a new chain is a business decision with engineering bills. The expected value of a year of deployment is roughly:

EV = G + f × TVL × t − C

G is the grant or guaranteed incentive budget, f is the protocol's take rate on TVL, t is the TVL retention time, and C is the deployment and operational costs.

For example: a lending protocol with a reserve ratio of 10%, borrowing rate of 4%, and utilization of 75%:

f = 10% × 4% × 75% = 0.3%/year

The activity brings in $100 million, lasting six months, with 5% staying for another six months. Annual revenue:

$100 million × 0.3% × 0.5 + $5 million × 0.3% × 0.5 ≈ $157,500

If the grant is $500,000, and the costs for deployment review, oracles, monitoring, operations, and liquidity seeds are $600,000:

EV = $500,000 + $157,500 − $600,000 ≈ $57,500

Deployment roughly breaks even, with results almost entirely from grants. The protocol essentially sells its brand and liquidity to the chain at a price; as long as it is priced as a business, there is no problem.

What really needs attention is the costs not included in C. Each additional chain means an additional set of oracles, a hypothetical bridge, and a layer of governance to monitor; bad debts on small chains still count against the protocol. Liquidity spread across ten chains, each shallower, makes the protocol worse on the chain where users actually are. Empty deployments after activities not only stop making money but also become maintenance liabilities until someone decides to shut down.

The winners in this game are protocols already deployed on every chain: they can receive grants while keeping risks very low. New protocols that only launch on new chains are exactly the opposite: users rely on the incentives of this chain, and when the incentives go, the market goes too.

How Should Ecosystem Designers Design Incentives?

Incentives cannot be treated as products. Their task is to buy time, to start something that can keep people around after the incentives stop; no one can pay forever. Signing large private agreements with specific protocols or funds does not change this: it is still the same rent, paid to fewer people, and the conditions are usually better than for retail investors; when incentives decline, it still hurts the chain and the tokens.

In this framework, effective incentive design does three things.

First, pay for demand, not for deposits: subsidize borrowing, trading volume, and fees that would exist without tokens, rather than just rewarding TVL that comes for the incentives.

Second, pay protocols that can bring "something that other chains do not have," rather than just changing the address of the same lending market.

Third, plan for a decline from day one, writing retention targets R before the first release, so the team knows whether the budget buys a user base or just a number on the dashboard.

For most new chains, the honest version is: the economic account is weak, and the business account is strong. If the company behind the chain can take enough from fee flows and tokens, it can long-term subsidize activities. That is a marketing budget, and how long it lasts is up to the company.

So, Where to Deploy?

Protocols should deploy where users and demand have already gathered. For most protocols, this means the Ethereum mainnet, Solana, and one or two L2s where users are genuinely trading and lending. The liquidity depth there is more valuable than showing up on every chain.

It is only worth deploying when a new chain can bring one of the following two things: either users that have not yet been on-chain, which Base achieved through Coinbase; or use cases that cannot run elsewhere, as Hyperliquid's chain does for its own product.

In other cases, they should be treated as "temporary subsidies." If the subsidies can cover deployment costs and new risks, then deploy; plan how to exit before deploying; do not treat the TVL during the activity as real growth.

Unless broader adoption occurs, or chain abstraction and cross-chain aggregation make users no longer care about which chain is underlying, the narrative of new chains is difficult to sustain long-term. Even when that day comes, what drives it will be commercial considerations, not economic logic.