Technology resolves efficiency; risk management determines survival.

 

DeFi Aggregation Protocols: Business and Bottom Lines Beyond Technology

Over the past two years, the number of DeFi cross-chain aggregation and swap protocols has grown exponentially. Project teams tout "cross-chain liquidity," "optimal routing," and "seamless swaps," but those that truly endure in this sector are often not the ones with the most dazzling technology, but those that understand operations and risk control.

The core of such protocols is essentially "matching and settlement"—merely in a decentralized form. Whenever user assets are involved in flows, matching, swapping, or bridging, it fundamentally touches upon financial logic. Technology can resolve efficiency issues, but compliance determines whether a project can survive in the long term.

Recently, I have received numerous inquiries from DeFi projects:

Some seek code security audits, fearing total loss to hackers;

Some inquire about trademark registration, worried about brand impersonation;

Some are raising funds and need to design structures and contracts;

Some want to know whether licenses are required and how to structure their entities;

Others are preparing to establish DAO foundations and issue governance tokens...

While these questions appear scattered, they all revolve around a single theme: "We want to scale, but we want to mitigate risks."

 

Business Models and Profit Paths for DeFi Cross-Chain Aggregation and Swap Protocols

The revenue logic of DeFi projects ultimately revolves around liquidity and trust. In light of current market conditions, it can be broadly categorized into seven mainstream pathways:

1. Fee-Based Model: A Fundamental and Stable Revenue Stream

The most direct approach is charging transaction fees. For each cross-chain swap completed by a user, the platform automatically deducts a fee ranging from 0.1% to 0.3%. This model is straightforward, generates clear cash flow, and is currently the most widely accepted profit mechanism. However, note that if the protocol involves fiat currency conversions, stablecoin settlements, or centralized clearing processes, it may be regarded as providing payment services or foreign exchange services in certain jurisdictions (such as Hong Kong, the European Union, and Singapore), thereby requiring the applicable Payment Services Act (PSA), Crypto-Asset Service Provider (CASP), or Virtual Asset Service Provider (VASP) licenses.

2. Liquidity Incentives and Profit Sharing: The “Semi-Financial” Mechanics of DeFi

This approach attracts liquidity providers (LPs) to pools through token incentives and distributes dividends from transaction fees. While such mechanisms enable rapid platform growth, if the incentive structure relies excessively on token prices,

it may be deemed by regulators to involve an “implied promise of returns,” thus falling within the scope of securities offerings. Therefore, the framing of incentive models must be carefully managed: characterizing them as “utility rewards” is acceptable, whereas portraying them as “investment yields” requires extreme caution.

3. Cross-Chain Bridge and Routing Service Fees: High Technical Barriers and Elevated Risks

Cross-chain bridges represent a critical vulnerability in DeFi. If a protocol can integrate multi-chain liquidity and provide routing or bridging services to other platforms, it can charge service fees for each “path matching” transaction. This is the profit model with the highest technical barrier. However, it also carries the greatest risk. Over the past year, several cross-chain bridges have suffered hacks resulting in losses exceeding hundreds of millions of dollars. From a compliance perspective, this also involves issues related to “cross-border capital flows.” In jurisdictions such as the European Union, Singapore, and the United Arab Emirates, if asset custody or settlement is involved, crypto licenses or equivalent permits are almost invariably required.

4. Token Issuance and Governance Economics: A Double-Edged Sword for Fundraising and Incentives

Many protocols intend to “issue tokens” from the outset. While this is not inherently problematic, once a token possesses fundraising characteristics, its classification is not solely at the issuer’s discretion. If you promise dividends, buybacks, or price-based returns, it will be treated under securities law principles. A prudent approach includes:

  • Establishing the issuing entity in the Cayman Islands or the British Virgin Islands (BVI);
  • Using Simple Agreements for Future Tokens (SAFT) or subscription agreements to distinguish between “fundraising” and “governance rights”;
  • Clarify the functional utility of tokens within the ecosystem, rather than positioning them as instruments for investment returns.

This area represents one of the most sensitive regulatory domains, particularly for projects planning initial public offerings or fundraising activities.

5. Technology Licensing and B2B Services: An Asset-Light, Low-Risk Revenue Pathway

Once the protocol has been validated and liquidity has stabilized, projects may pivot to business-to-business (B2B) models by providing software development kits (SDKs), application programming interfaces (APIs), or white-label services that enable other projects to integrate their aggregation functionalities. This constitutes a typical “light-compliance” model—essentially involving software licensing and technical services without handling funds or custodizing assets, thereby offering low risk and high gross margins. However, if you participate in asset clearing or custody during the provision of such services, you may still be classified as a “Virtual Asset Service Provider (VASP).”

6. Aggregated Yields and Derivatives Layers: Advanced Strategies Requiring Caution

Certain aggregation protocols further integrate lending, staking, and arbitrage pools to create composite yield or leveraged yield structures. While such designs may enhance yields, they are generally regarded as investment products or derivatives in most jurisdictions. If you intend to pursue this direction, you should establish a compliance framework for asset management or derivatives licensing in advance.

7. Brand and Ecosystem Expansion: The “Slow Variables” of Long-Term Value

Some mature projects monetize through brand expansion—launching NFT series, developing cross-chain payment plugins, establishing DAO governance ecosystems, or even integrating with real-world assets (RWA). While this may not generate immediate profits, it serves as a source of brand moats and long-term capital value. The prerequisite is that your brand must be protectable; therefore, trademark registration and strategies for ensuring brand independence should be implemented at an early stage.

 

From Code to Law: Key Compliance Considerations for DeFi Projects

The following points represent the most frequently overlooked yet critical aspects I have encountered while advising DeFi project teams recently:

(1) Code Security Audits

The security of smart contracts is the lifeline of DeFi projects. Regardless of technological innovation, any vulnerability in the contract may lead to catastrophic losses from a single exploit. Over the past year, multiple projects, including Euler, Nomad, and Multichain, suffered asset losses amounting to tens of millions due to smart contract vulnerabilities. From a compliance perspective, although most jurisdictions do not currently mandate code audits, whether a project has undergone third-party security audits has become a significant criterion for assessing credibility during fundraising, exchange listings, or license applications.

Practical Recommendations:

  • Obtain at least one formal audit report issued by a recognized auditing firm (such as CertiK, SlowMist, PeckShield, or Trail of Bits);
  • Publicly disclose the audit findings and the status of vulnerability remediation in project documentation or the whitepaper;
  • Conduct a re-audit for significant updates (such as contract migration or protocol upgrades).

(2) Trademark and Intellectual Property Protection

Many project teams assume that “DeFi is open source” and consequently neglect brand protection. However, the reality is that while code may be open source, brands cannot be left unprotected. As DeFi protocols move toward commercialization, they often encounter issues such as logo counterfeiting, domain name cybersquatting, and unauthorized imitation of their brands. This risk becomes particularly acute when the project secures investment or establishes exchange partnerships, making brand infringement a significant potential liability.

Practical Recommendations:

  • Register trademarks for the project name and logos in advance (it is advisable to file applications simultaneously in key markets such as Hong Kong, Singapore, the European Union, and the United States);
  • Register and protect official domain names to prevent phishing websites;
  • Execute copyright assignment or licensing agreements with external technical service providers and design teams to ensure that core assets are owned by the project entity.

(3) Financing Structure and Legal Documentation

Financing marks the starting point for the scaling of DeFi projects and is also the stage most susceptible to regulatory constraints. Whether through equity financing, token financing, or a hybrid model, it is essential to clarify from a structural perspective: the pathway through which funds enter, and the rights or interests exchanged in return. Common documents include Simple Agreement for Future Tokens (SAFT) agreements, investment agreements, shareholders’ agreements, term sheets, and token allocation schedules. These documents serve not only as proof of financing but also as the basis for future DAO governance and investor rights.

Practical Recommendations:

  • Clearly delineate the layers between "token financing" and "equity financing" during the fundraising stage to avoid overlapping rights;
  • When disclosing fundraising materials externally, avoid using terms such as "investment returns" or "expected yields" to prevent triggering the characterization of a securities offering.

(4) Licensing and Compliance Obligations

Currently, most pure DeFi projects can still operate without licenses. However, if any of the following circumstances exist, it is advisable to consider obtaining licenses:

  • Providing exchange services between crypto assets and fiat currencies (requiring payment or foreign exchange licenses);
  • Custodying or intermediating user funds (requiring Virtual Asset Service Provider (VASP) authorization);
  • Directly marketing investment products to users within specific jurisdictions.

Under the European Markets in Crypto-Assets Regulation (MiCA), Singapore Payment Services Act (PSA), and Dubai Virtual Assets Regulatory Authority (VARA) frameworks, these activities are almost invariably subject to regulatory oversight.

(5) DAO and Foundation Structures

Although a Decentralized Autonomous Organization (DAO) appears decentralized, there must be a legal "entity" capable of entering into contracts, paying taxes, and responding to lawsuits on its behalf. This is the significance of establishing a foundation—not merely as a nominal placeholder, but to anchor governance in the legal world.

Common structures:

  • Cayman Foundation Company:The most common legal vehicle for DAOs, offering flexibility, having no shareholders, and allowing for the establishment of a board of directors;
  • BVI or Panama Foundations:Suitable for projects with lighter governance structures and widely distributed members;
  • Swiss Verein or Wyoming DAO LLC:Place greater emphasis on compliance disclosure and legal recognition.

(6) Token Issuance and Ecosystem Governance

Token issuance is undoubtedly critical in DeFi projects. However, as regulations continue to evolve, project teams must have a clearer understanding of the nature of tokens and their issuance methods. To avoid tokens being classified as securities, project teams should focus on the following points during issuance:

  • Utility Tokens and Investment Returns

The functionality of tokens must be clearly defined at the time of issuance, and no investment returns may be promised. If the appreciation in a token’s value depends on the project’s commercial performance or promised returns, the token may be deemed a “security.” Project teams should ensure that tokens are utility tokens, such as tools for platform payments or governance, rather than investment instruments.

  • Compliant Public Offerings

In certain jurisdictions, public fundraising or public token offerings (such as through airdrops, ICOs, or other forms) must ensure non-violation of securities laws. If a token issuance is deemed a securities offering (i.e., offering investment returns to public investors), the project must comply with securities law requirements by undertaking appropriate registration or securing exemptions.

 

Mankun Law Firm’s DeFi Legal Services Matrix

The legal support we provide to DeFi projects is typically structured across four levels:

1. Compliance Planning and Licensing Strategy

  • Global VASP/Payment License Analysis
  • Offshore Structure Design (Cayman, BVI, Panama, Singapore)
  • Cross-Border Tax and Legal Liability Firewalls

2. Financing and Legal Documentation

  • Investment and Financing Structure Design
  • Drafting and Review of SAFT, SAFE, and Token Agreements
  • Customization of DAO Foundation Governance Rules

3. Intellectual Property and Brand Protection

  • Trademark Registration and Logo Protection
  • Cooperation Agreements and Brand Licensing

4. Risk Prevention and Control and Operational Compliance

  • Compliant Archiving of Audit Reports
  • Formulation of AML/KYC Policies
  • Smart Contract Security Statements and Disclaimers

Conclusion: The Next Phase of DeFi Is “Decentralized Compliance”

The greatest misconception about DeFi in recent years has been that “no regulation equals safety.” In fact, the opposite is true: the absence of regulation merely means that no one can come to your rescue when things go wrong.Regulatory oversight will inevitably arrive, but projects often fail not due to sudden policy shifts, but because they cross legal boundaries themselves. When many protocols are shut down, investigated, or liquidated, the issue is not technical inadequacy, but rather:

  • Who is the actual operator of the protocol?
  • Whose funds are they, ultimately?
  • Are the contracts and the token whitepaper logically consistent?
  • Is DAO “self-governance” merely an excuse?

In the coming years, the DeFi projects that truly endure will not necessarily be the most “decentralized,” but will invariably be those built by teams that are proficient in both smart contract development and the implementation of compliance logic.