Flywheel
Definition
A DeFi flywheel is a self-reinforcing cycle where each component of a protocol's design amplifies the others, creating a virtuous loop of growth. Typically: more liquidity → better trades → more fees → more token value → more locking → more governance power → directed emissions → more liquidity. When a flywheel spins well, the protocol grows organically; when it breaks, it can reverse into a death spiral.
Example
Velodrome's flywheel: traders generate fees → veVELO holders earn fees by voting → more VELO gets locked → emissions attract more liquidity → more traders → more fees.
Risks to Consider
- Death spiral when flywheel reverses
- Dependency on continuous growth
- External shock vulnerability
Common Questions
What breaks a flywheel?
A flywheel can break when any component weakens: a market crash reduces fees, emissions become unsustainable, governance power concentrates, or a competitor offers better incentives. The same reinforcing dynamics that drive growth can accelerate decline.
