Fat Protocols Are Getting Squeezed

The “Piggy-in-the-Middle” Dilemma and How to Solve It

Introduction

Decentralised protocols are transforming finance and computing by enabling trustless, autonomous coordination at scale. Unlike traditional platforms that rely on intermediaries, they enforce rules transparently through smart contracts, ensuring security, composability, and censorship resistance. As demand grows for systems that are open, efficient, and resistant to control by single entities, these protocols are becoming essential for everything from financial markets to digital identity and governance.

In 2024, decentralized protocols facilitated over $2 trillion in transaction volume, yet most failed to capture even a fraction of the value they created. Uniswap alone processed $1.3 billion in fees across five chains, yet the protocol and its token holders saw zero direct revenue or cash flow. Instead, 100% of the value flowed to liquidity providers, Ethereum validators, MEV (Maximal Extractable Value) bots, and Layer 2 (L2) sequencers. Without a direct value capture mechanism, Uniswap token holders are left relying on speculative price appreciation of the $UNI token rather than sustainable economic returns, a challenge further compounded by regulatory uncertainty, which has restricted protocols from distributing revenue to token holders.

This value capture problem stems from how economics play out across the Web3 stack. Straightforward economics exist at the extremes: the base layers thrive on gas fees and MEV, while applications monetise through familiar Web2-like revenue streams such as front-end fees and affiliate programs. Protocols, however, often find themselves squeezed/overlooked in the middle of the stack/sandwich, lacking clear mechanisms to capture and sustain value.

The lesson is becoming increasingly clear: The most lucrative crypto monetisation opportunities are at the stack’s two extreme ends — the application interface or the settlement layer. Pump.fun’s ~$600m revenue since launch underscores the lesson: owning the critical point of user interaction drives sustainable growth. Uniswap’s Unichain will allow Uniswap Labs (and likely tokenholders) to capture a fraction of the $368m settlement fees and ~$100m of MEV they generated in 2024. Sustainable protocol monetisation requires moving away from the middle of the stack.

While the monetisation challenges facing protocols are significant, the future remains promising. The Protocol Playbook — a structured framework comprising Initial Launch, Product Defensibility, Monetization, and Cross Synergies of Product — provides a clear pathway for protocols to overcome the “piggy in the middle” dilemma. By progressing through each stage, founders can effectively align incentives, establish compelling value propositions, and build a foundation for enduring success.

Protocol Playbook Napkin

Protocols can overcome the “piggy in the middle” challenge by progressing through the Protocol Playbook, a structured four-stage framework:

The Initial Launch has critical elements that can set a project up for success. Defensibility gives protocols breathing room to choose their escape direction (up or down the stack). The monetisation of the Business Model stage lets protocols leverage their strengths and moats to move up or down the stack strategically. With Product Cross Synergies, protocols expand their business line to secure their escape and prevent re-entering the squeeze.

Protocol Playbook Napkin

1. Launch: Find Your Market Gap

The objective is to identify a clear market gap and launch with a unique value proposition: Protocol Market Fit (PMF). Pinpoint unmet user needs or inefficiencies in existing solutions and build an effective protocol that delivers immediate value.

• Aave: Pioneered decentralised lending, enabling users to earn yield or borrow against their assets without intermediaries.
• Uniswap: Launched an automated market maker (AMM) model, making decentralised trading seamless and permissionless.
• SAFE: introduced multi-signature wallets, a secure environment for self-custody of crypto assets.

These examples are lifted from the 2017–2018 era of crypto, when 0–1 innovation across the board flourished. Today, founders need a strong understanding of their competition. The crypto trading market has matured significantly since Uniswap launched the AMM in 2018. Today, trading is dominated by CeFi venues and brokers such as Robinhood or Revolut. DeFi protocols' main competition may come from CeFi CLOBs such as Binance, which has an established user base and viral marketing strategies.

These traditional finance brokers rely heavily on partnerships, viral campaigns, and brand visibility, indicating that DeFi projects might benefit from similar efforts above and beyond the standard referrals and points programs.

2. Defensibility: Build Moats

Protocols must establish a competitive edge to survive in the early stage. Michael Porter’s work [1] and the 7 Powers framework [2] identify defences: scale economies, switching costs, cornered resources, counterpositioning, branding, network effects, and process.

• Scale Economies: Deep liquidity pools improve trading efficiency and UX (e.g., Uniswap AMMs).
• Switching Costs: Make it costly or inconvenient for users to leave (e.g., Safe’s multi-sig wallets with high coordination requirements).
• Cornered Resources: Control unique assets or user interfaces (e.g., Uniswap Labs owning its front end).
• Branding: Cultivate trust and recognition as an industry leader (e.g., Aave as the “blue chip” of DeFi).
• Network effects: DeFi’s “money legos” where different financial protocols can be combined to create more complex financial strategies (e.g. Uni LP tokens used as collateral in Aave protocol)
• Cornered Resource: Control unique protocol-native assets and attract top-tier talent that cannot be easily replicated (e.g., Lido’s stETH as the dominant liquid staking token or Uniswap’s defensibility against Sushiswap)

3. Monetisation: Capture Value

At this stage, the goal is to transition from growth to sustainable revenue generation without alienating users. Monetisation strategies vary:

• Charging protocol fees (e.g., Aave’s interest model).
• Monetising front-ends further up the stack (e.g., Uniswap Labs’ front-end fees, referrals).
• Moving down the stack to capture MEV or transaction opportunities (e.g., Unichain’s L2 approach, AAVE’s MEV capture)
• Traditional SaaS model

The key is to introduce fees of a level and type that support sustainable revenue growth, as loyal users outnumber those who migrate to cheaper alternatives.

4. Cross Synergies of Products: Expand the Ecosystem

At scale, the goal is to create complementary product lines that amplify value across the ecosystem. Teams can build vertically integrated solutions that reduce value leakage or explore secondary and tertiary product lines to drive cross synergies. We are in the early innings of seeing how this plays out, and few crypto companies are at this stage today; some include:

• Aave + GHO: Aave earns interest revenue when users borrow the GHO stablecoin.
• Uniswap + Unichain: Captures settlement fees and MEV while enhancing liquidity and trading efficiency.
• SAFE + Cowswap: Native integration with Cowswap offers built-in MEV protection and enhanced efficiency
• Pump.fun + Pumpswap: Recently, Pump.fun launched its Solana DEX Pumpswap to create a “frictionless environment” for memecoin trading

Navigating the Playbook

Each stage of the Protocol Playbook builds on the previous one, providing protocols with multiple escape routes from the “squeeze.” Transitioning between stages is difficult. Premature monetisation risks alienating users, while weak defensibility can stifle growth. Protocols should measure success with clear KPIs: TVL and integrations (Stage 2), revenue and retention (Stage 3), and product synergies (Stage 4).

Stage 1: Initial Launch

Launching a successful protocol begins with identifying and addressing a clear market gap with a compelling value proposition. At this stage, the focus isn’t on perfection but on achieving product-market fit within a well-defined niche. A protocol doesn’t need to disrupt an entire industry overnight; it can start with a clean insertion point, solving a narrow but pressing problem for a small, engaged market.

As Chris Dixon famously wrote, “The next big thing will start out looking like a toy.” Many groundbreaking innovations initially seem trivial or niche before scaling into transformative platforms. Early adopters play a crucial role in this process, providing feedback, driving network effects, and evangelising the protocol to a broader audience.

The launch stage is about finding a foothold, identifying a specific problem, solving it effectively, and fostering a strong early community. While a successful launch doesn’t guarantee long-term dominance, it lays the critical foundation for navigating the following stages of the Protocol Playbook.

Stage 2: Protocol Defensibility

Defensibility is the fuel for a protocol’s long-term success. Without it, growth or sustainable revenue becomes nearly impossible. Defensibility creates moats — barriers that protect your protocol from being disrupted or bypassed. The key strategies in this piece adapt the 7 Powers framework of competitive advantage to Web3.

Scale Economies: Deepen Liquidity and Utility

Scale economies are cost advantages that arise when a business produces more of a good or service, reducing the per-unit cost. Protocols’ value often scales with their user base and liquidity depth. AMMs are an obvious example: more capital in an AMM means lower slippage for takers and a better experience for traders.

Protocols can quickly build scale economies with attractive liquidity incentive programs, but they are difficult to sustain if achieved through pure token inflation. Aerodrome recently successfully leveraged popular veToken models and rebasing mechanisms to build liquidity. Over the last year, they rapidly became the largest DEX on Base, overtaking Uniswap. Their TVL skyrocketed over $1bn and represented ~80% of overall Base TVL at their peak.

Switching Costs: Make It Hard to Leave

Switching costs are the costs a consumer incurs due to changing brands, suppliers, or products. Wallets, e.g. Safe{Wallet}, generally have high switching costs. SAFE wallets currently store over $100Bn in TVL and have processed $228m in volume. Moving to a new wallet can involve repeating setups/configurations, securely transferring private keys, high coordination requirements across signers and security risks of transferring funds.

Cornered Resource: Leverage Composability and Talent

Cornered resource refers to exclusive control over an asset or capability that cannot easily be replicated. In Ethereum, two of the strongest cornered resources are composability and talent, both of which create lasting competitive advantages.

Ethereum’s composability allows protocols to seamlessly integrate with others, forming a deeply interconnected ecosystem that rewards incumbents. A new fork may copy code, but it cannot replicate the liquidity, integrations, and network effects that established protocols enjoy. Lido’s stETH, for example, is embedded across lending markets, DEXs, and derivatives protocols, making it the default liquid staking token. Even if a competitor offered better staking yields, replacing stETH across DeFi would be nearly impossible because it is already used as collateral in Aave, Curve, Maker, and hundreds of other applications.

The second major cornered resource is talent. The best protocol teams do more than ship code — they pioneer new mechanisms, optimize security, and attract world-class contributors. This was evident in Uniswap vs. Sushiswap: Sushiswap successfully forked Uniswap’s code but could not replicate its continuous innovation. As Uniswap introduced V3’s concentrated liquidity, deeper integrations, and more efficient execution, Sushiswap struggled to differentiate itself. Code can be copied, but expertise, research, and ecosystem-wide adoption cannot.

Branding: Cultivate Trust and Recognition

Branding power relates to the ability to command a premium price or customer loyalty due to reputation or perceived quality. For products where the tech is replicable (e.g., launching tokens), branding is a core part of becoming the place to go to do that. Countless memecoin launchpads have emerged in response to the attractive revenues captured by pump.fun, yet it remains the top choice for launching memecoins.

Network Economies: Create a Self-Sustaining Ecosystem

The value of a product or service increases as more people use it. Aave, a decentralised lending protocol, exhibits strong network effects. As more users deposit assets into Aave’s liquidity pools, borrowers can access more funds at competitive rates, attracting more lenders and creating a virtuous cycle.

Process: Build Operational Excellence

Superior processes enable a protocol to execute more effectively and efficiently than competitors. Once a protocol has decentralised, a robust governance community can help steer parameter decisions and adapt to market changes by bringing in the best delegates and service providers to steward the DAO. Aave has remained resilient through choppy markets with a strong community of delegates managing risk parameters. Aave DAO is one of the only DAOs with an onchain risk mitigation through their proactive Safety Module and an isolation mode providing real-time governance-based risk controls. None of these features of the DAO would be possible without the strong variety of delegates specialising in everything from risk management to oracle design and deep DeFi engineering expertise.

Counter Positioning: Innovate Where Competitors Can’t Follow

Counter-positioning is a strategy that disrupts incumbents by offering something they cannot adopt without harming their core operations. For protocols, this usually means leveraging the flexibility of decentralised models to outmanoeuvre centralised competitors. We’re seeing this play out with the growing DEX to CEX spot trade volume as popular memecoins struggle to get listed promptly on major exchanges.

DEX:CEX Spot Trade Volume (%)

Addressing Defensibility Challenges

Defensibility is a necessary but insufficient condition for success. Protocols falter for various reasons, the most common being reliance too heavily on short-term incentives, which can be unsustainable.

Whilst short-term incentives help the initial growth of engaged users completing the core action of a protocol, they struggle to retain users when switched off and create self-perpetuating, virtuous loops in the product. Sarah Tavel outlines an excellent framework for user engagement here.

While measuring defensibility is specific to each protocol and product, identifying your protocol’s strengths and building on these is a good place to start. Some useful KPIs and metrics to track are TVL growth, integrations, and retained usage post-incentives.

Once a protocol establishes defensibility, it must be ready to transition to monetisation.

Stage 3: Value Extraction

Once a protocol has established defensibility, the next challenge is sustainable monetisation, fueling the protocol engine to grow. Extracting too much value too soon risks driving users to competitors while waiting too long can leave potential revenue untapped. Some monetisation options include:

1. Charging fees on your protocol, e.g. AAVE’s liquidation fees (live), Uniswap protocol fees (not switched on)
2. Monetising your front-end, e.g. CoinGecko<>GMX affiliate partnership, Uniswap Labs’ $178m in front-end fees
3. Move further down the stack, build out L2 and take a cut of MEV & transactions. e.g. Unichain, Lens Chain, ENS’ Namechain, Safenet
4. Launching a token and spending a treasury
5. Traditional SaaS business model

Protocol Fees: Capture Value from Core Activities

Charging fees directly on protocol usage — such as transaction, borrowing, or liquidation fees — is a straightforward way to generate revenue. Protocols should begin with modest fees and direct this revenue to the protocol treasury to fund growth, governance, and ecosystem initiatives.

Aave effectively demonstrates this model, earning revenue through interest fees and liquidation bonuses, with a portion allocated to a DAO-owned collector contract. Using treasury reserves as safety buffers, Aave ensures that fees contribute to the protocol’s long-term sustainability rather than simply extracting value.

However, implementing protocol fees requires careful calibration. Overcharging risks driving users to competitors, as seen when Uniswap’s 5bps fee tiers faced competition from Aerodrome’s lower fees on Base. UNI’s fully diluted valuation (FDV) doubled between October and December 2024, mainly due to macro events. While volatile price action does not seem to be a problem during positive price movements, in a downturn, tokenholders remain unable to capture value for the activity that continues to thrive on the protocol.

Regulative uncertainty, particularly in the U.S., has also constrained fee design. However, recent developments in pro-crypto regulation may unlock new opportunities for DAOs to more effectively direct value to tokenholders, especially through the recent DUNA structure for DAOs.

Front-end Monetisation: Own the User Interaction

For protocols that own dominant front-ends, there are several monetisation opportunities:

• Affiliate partnerships: If you drive traffic to external services, earn fees for successful transactions, e.g., Layer3, Daylight, CoinGecko
• Advertising: Introduce ads targeted to the crypto-native audience
• Transaction fees: If most user traffic flows through your front end, transaction fees can be lucrative

Above all, capturing traffic through the front end gives projects insights into how end-users use your protocol. This could inform future product development and front-end features that may produce more monetisation opportunities.

If a protocol doesn’t own the dominant front end, creating its own can help developers and users interact with your protocol seamlessly and improve product design by capturing user traffic and session data. WalletConnect’s AppKit is a strong example, offering developers pre-built integrations while capturing insights about protocol usage.

Capturing MEV and Base Layer Opportunities

Many protocols lose significant value to base layers and middleware. Solutions include:

• Building Layer 2s or rollups to capture MEV and transaction fees (e.g., Unichain)
• Develop innovative mechanisms such as MEV redistribution to align with users (e.g. Chainlink’s Smart Value Recapture integration with AAVE)

Token Launch

Many crypto projects rely on a simple but unsustainable monetisation model: launching a token, allocating a portion to a DAO treasury, and spending those reserves to incentivise ecosystem growth. Protocols with no real revenue capture often use this approach, but it has significant drawbacks. Selling a DAO’s native token to fund operations puts downward pressure on its price, and when sustained purely through token inflation, it quickly becomes unsustainable.

Traditional SaaS model

The traditional SaaS business model is rarely a good fit for crypto companies and is, therefore, not often discussed. While SaaS offers predictable revenue through subscription pricing, most crypto protocols operate in a niche market where building a paying user base is challenging.

Additionally, the crypto market is highly volatile, with periods of intense activity and high transaction volumes. A SaaS model, which typically charges per user or per unit of time, fails to capture the full value during these surges. Instead of benefiting from peak demand, companies would be locked into fixed pricing, leaving significant revenue on the table compared to models that scale with usage.

Addressing Monetisation Challenges

Protocols should begin with modest fees to test user tolerance, expand based on feedback, and ensure that monetisation strategies benefit both the protocol and its users. Communicate how fees are used to avoid backlash, whether for treasury growth or ecosystem incentives. KPIs to remember include revenue growth, user retention, and treasury utilisation.

Stage 4: Cross Synergies of Product

The final stage of the protocol playbook involves expanding beyond a single product line to build a thriving ecosystem, hitting escape velocity. By creating complementary products that work together seamlessly, protocols can unlock synergies where the whole becomes greater than the sum of its parts. Cross-product synergies enhance user experience, boost adoption, and create new revenue streams by aligning incentives across the ecosystem.

Strategies include vertical integration, horizontal expansion and building economies of scope to cross-promote and bundle products. Few protocols have reached this pinnacle of protocol evolution, but we’re seeing more protocols build out product lines:

AAVE + GHO: AAVE earns interest revenue on borrowed GHO; GHO provides enhanced capital efficiency for AAVE

• Aave collects interest whenever users borrow GHO. Since GHO is minted directly against collateral provided by users on Aave, the protocol earns consistent fees.
• GHO allows users to mint stablecoins against their collateral without selling their assets, retaining their exposure while accessing liquidity.

SAFE + Cowswap: Native integration with Cowswap offers built-in MEV protection and enhanced efficiency

• CoW Protocol powers native Swaps in Safe{Wallet} (amongst other integrations) and benefits from increased transaction volume and visibility.
• CowSwap reduces front-running risks and offers built-in MEV protection.
• The integration allows for batched execution and minimises the risk of errors or expirations often associated with smart account transactions.

Uniswap + Unichain: enhanced revenue capture, improved token utility and expected optimised liquidity

• Unichain allows Uniswap to capture settlement fees and MEV.
• UNI token expands from a governance token to governance + utility as UNI will be used for staking.
• By centralising liquidity on Unichain, Uniswap can enhance trading efficiency, minimise slippage, and improve pricing within its ecosystem.

Pump.fun + Pumpswap: Recently, Pump.fun launched its Solana DEX Pumpswap to create a “frictionless environment” for memecoin trading

• Previously memecoins launched on Pump.fun needed to migrate into the Solana DEX Raydium after bootstrapping liquidity
• Pumpswap has amassed $3bn in cumulative volume since launch on March 19th and generated over $5m in fees for the protocol

While these additional product lines are relatively new, we’re excited to see how they evolve and how protocols reward users who engage with multiple products. At this stage, metrics to monitor include ecosystem adoption, user retention, and value contribution.

Conclusion

Protocols today stand at a crossroads. While many struggle to capture value amid the “squeeze” of the Web3 stack, there has never been a better time to rethink how protocols are built and sustained. By navigating the Protocol Playbook, from identifying market gaps at launch to building defensibility, introducing sustainable monetisation, and creating synergies across products, founders can chart a clear path to long-term success.

The key lesson is this: protocols that capture value at either end of the stack — owning infrastructure (e.g., Layer 2 solutions) or the user interface (e.g., dominant dApps) — are best positioned to thrive. But lasting success doesn’t come from simply imitating existing models. Instead, it requires thoughtful experimentation, aligning incentives with stakeholders, and a deep understanding of how value flows through the ecosystem.

As we outlined in our 2017 investment thesis, Web3 is fundamentally a shift from value extraction to value distribution. Cryptonetworks enable new ownership models where users, developers, and token holders collectively govern and benefit from the value they create. However, for this vision to materialize, protocols must evolve beyond speculative assets and into real economic utility, durable business models, and governance structures that incentivize long-term participation.

The evolution of projects like Uniswap, Aave, and SAFE demonstrates that no one-size-fits-all approach exists. Each protocol’s journey is unique, shaped by its vision, community, and ability to execute at every stage of the playbook. However, the principles outlined here provide a framework for founders to assess their progress, identify gaps, and make strategic decisions.

The next wave of successful protocols will not just distribute value efficiently but will also ensure that value is retained and reinvested into their ecosystems.

The future belongs to protocols that adapt, innovate, and capture value in ways that weren’t possible before. The next category-defining protocols won’t just navigate the playbook — they will rewrite it.

Join the Conversation

Whether you’re a founder, builder, or investor, we’d love to hear from you. If you’re working on a protocol or have feedback on this framework, let’s connect — we are always looking to collaborate with those shaping the future of Web3.

Credit to Richard Muirhead (Founder & Managing Partner, Fabric Ventures) for close feedback and the rest of the Fabric team for review and comments.

Many thanks to Stani Kulechov (founder AAVE & Avara), Lane Rettig (AI x governance at NEAR Foundation,) Katryna Hanush (MD of BD & Partnerships at Wintermute), Erin Koen (Governance Lead at Uniswap Foundation), Nathan VDH (Head of BD and Governance Design at Aragon), Lisa JY Tan (Economics of Token Engineering), Laura Cunningham (Founder of Ava) for review, feedback and conversations inspiring this piece.