Decentralised Finance (DeFi) began with an ambitious goal to democratise access to financial services, remove the need for middlemen, and offer a transparent alternative to traditional finance (TradFi). More than ten years since its early rise, DeFi has certainly come a long way in terms of innovation. From automated market makers to decentralised lending and yield farming, the ecosystem has developed rapidly.

But despite all this progress, DeFi is still struggling with one major weakness: liquidity. More specifically, it suffers from rented liquidity, an unsustainable model where capital flows in and out rapidly, leaving protocols vulnerable to market downturns. Without a fix, DeFi risks being stuck as a niche experiment rather than a serious alternative to the current financial system.

A growing number of industry voices are now turning their attention to chain-owned liquidity (CoL) and protocol-owned liquidity (PoL) as the next step in DeFi’s evolution, a model that puts liquidity control directly in the hands of the protocol or chain.

The Problem with Mercenary Capital

DeFi protocols rely heavily on liquidity providers (LPs) to fund their trading pools. To attract them, projects often offer token rewards through liquidity mining campaigns. While this can create short-term volume and hype, it comes with a serious drawback, most LPs aren’t committed to the long-term success of the protocol. They’re often only there for the quick yield.

These so-called “mercenary” liquidity providers quickly exit when returns drop or more attractive opportunities appear elsewhere. The data supports this: nearly 42% of LPs leave within 24 hours of joining a new pool, and 70% are gone by day three. Once these yield farmers exit, protocols are left with shallow liquidity, high slippage, and a damaged user experience.

Imagine if the New York Stock Exchange suddenly had no buyers or sellers every time the market dipped. It would be seen as broken and that’s exactly the position many DeFi platforms find themselves in during bear markets.

This revolving door of capital makes DeFi unreliable and unstable. It’s not just a temporary inconvenience; it’s an existential threat that undermines the long-term credibility of decentralised finance as a whole.

The Case for Protocol-Owned and Chain-Owned Liquidity

To break free from this unstable model, DeFi needs a new approach. That’s where Protocol-Owned Liquidity (PoL) and Chain-Owned Liquidity (CoL) come into play.

Instead of relying on outside investors to provide liquidity, protocols can own and manage their own liquidity reserves. By using funds from their treasuries, they can deposit directly into decentralised exchanges (DEXs) and maintain healthy trading pools without the need to constantly offer high incentives to external LPs.

A good example of this in action is Bancor, which offers single-sided liquidity pools backed by protocol-owned tokens. These pools create more stability and reduce the risks for individual users. Curve is another protocol that uses PoL to reinforce its stablecoin pools, helping to keep slippage low even during periods of high volatility.

CoL takes this concept a step further. Instead of individual protocols managing their own liquidity, entire blockchains can invest in and own liquidity pools across their ecosystems. This gives them greater control over the health and usability of the applications built on their chain and helps reduce the ecosystem’s reliance on fickle, short-term investors.

Why CoL Matters for the Future of DeFi

Chain-Owned Liquidity is not just about surviving market dips. It’s about creating a more resilient and mature financial system. With CoL in place, DeFi protocols can:

• Ensure deeper, more stable liquidity across trading pairs
• Reduce slippage and trading inefficiencies
• Make decentralised markets more appealing to long-term users
• Align liquidity with the protocol’s goals and values
• Protect against market manipulation and sudden capital flight

Moreover, CoL provides an opportunity to rethink treasury management altogether. Instead of hoarding native tokens or using them only for incentives, chains can strategically deploy their resources to secure the foundations of their ecosystems. This helps protect against the cascading failures that occur when liquidity disappears.

One of the biggest lessons from past market crashes, such as the collapse of Terra and UST is that liquidity fragility can bring down even the most promising projects. CoL provides a way to reduce those risks by building liquidity infrastructure that is durable, internal, and mission-aligned.

Building Trust and Attracting Real Adoption

For DeFi to live up to its potential and serve the world’s 1.4 billion unbanked, it needs to become safer, more stable, and more user-friendly. That can’t happen if liquidity constantly vanishes during downturns. Investors need to trust that they’ll be able to enter and exit positions without chaos or huge slippage.

By owning liquidity, protocols and chains show long-term commitment. This can bring in a different class of investor, one that’s interested not just in short-term profits, but in the mission and vision of decentralised finance. It also gives developers more confidence to build, knowing that their apps will have access to consistent, reliable liquidity.

Of course, CoL and PoL are not magic solutions. Implementing them takes time, resources, and strong leadership. Chains will need to update their treasury policies, improve governance mechanisms, and ensure transparency to avoid mismanagement or over-centralisation. But if done right, the rewards are significant.

The Road Ahead: From Hype to Stability

DeFi has already proven its ability to innovate. But innovation without stability isn’t enough. Without solving the liquidity crisis, DeFi will remain a playground for speculators rather than a real alternative to TradFi.

Chain-Owned Liquidity offers a path forward. By reducing dependence on mercenary capital and building liquidity into the system itself, DeFi can become more robust, more reliable, and more inviting to the mainstream.