Decentralized finance has begun to adopt a new term: “real yield.” This refers to DeFi projects whose survival is based solely on the distribution of actual revenue, rather than incentivizing stakeholder by giving out tokens that are dilutionary-free.
Where is this true yield? Are “fees”, at this stage, a sustainable model of growth?
It all depends on who you ask.
Our natural starting point is the DeFi ponzinomics issue.
Ponzi farming
DeFi was first introduced as a concept in 2018. In 2020, DeFi’s “DeFi Summer” saw market participants — DeGens – jump into DeFi to get mind-blowing returns of 1,000% per year for using or staking a protocol. Many attribute the explosion in interest in DeFi’s concept to Compound’s launch of the COMP token, which rewards users for liquidity.
These liquidity mining models, however, were flawed as they were based more on the emission of native tokens than sharing organic profits.
Unsustainable growth was the result of liquidity mining, and token prices fell when yields declined. It was a Ponzi scheme to deplete DAO treasuries in order to supply reward programs or just mint more tokens for new members. Some refer to it as “yield-farming”, while others prefer to call it “ponzinomics”.
Yield farming was the reason behind “DeFi Summer.” Source: Cointelegraph
Many sophisticated investors fell in love with staking, which is the process of locking up tokens to earn rewards. One VC said they had staked tokens in 2020-2021 to pay for their lifestyle, even though it was akin a Ponzi scheme that was about to collapse.
Unsustainable yields presented dangers in the middle of 2022 when much of crypto and the DeFi ecosystem were destroyed in a matter of days. Terra’s DeFi ecosystem was destroyed by the contagion effects. Do Kwon is being sought by South Korean authorities. He is currently under a “red notice” from Interpol. However, he claims he is not on the run. Terra’s high-profile hedge fund Three Arrows Capital (3AC), heavily invested in Terra, was closed down in June 2022.
It is a fact that returns based on marketing dollars are false. It’s just like the Dotcom boom period of paying customers for products,” Karl Jacob, cofounder of Homecoin.finance said. Bacon Protocol is a stablecoin that has been backed by US real estate.
How is it possible to get a 20% yield? These returns can only be explained by marketing spend or digging into assets. This is what constitutes a Ponzi scheme. High yield is a sign that an investor is taking on a lot of risk.
Henrik Andersson is chief investment officer at Apollo Capital. He notes that the Terra yield wasn’t actually derived from token emissions. He says that Terra is not a Ponzi scheme, even though it wasn’t sustainable. It was simply’marketing money’.
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When the term “real yield” was first used to describe the real return of a loan, it’s easy for us to be skeptical. Ben Giove , a bankless analyst, recently wrote that “DeFi isn’t dead.” Real organic yields exist,” explained, that there are “opportunities to risk-tolerant DeFi users generate yield at market-rates through protocols like GMX and Hop, Maple, Goldfinch, and other such options. These protocols are likely to be able sustain higher returns in the future, as the bulk of their yield is not from token emissions.
“Real yield” is a hashtag reaction of Terra LUNA’s collapse. However, that implies people are more agreeable on what it isn’t than what it actually is. Mark Lurie, founder and CEO of Shipyard Software, says that Clipper.exchange, a DEX geared towards retail, is a result.
“I’ve been on a real yield train for about a year and half, and I’m glad somebody is paying attention.” He said that there are several possible definitions of sustainable returns on capital.
“An example if real yield is interest on loans like Compound Finance.” Another example are “fees on transactions and returned capital providers — e.g. gas fees in proof of stake layer 1s, trading fee in DEX protocols.”
Real yield is all about sustainable returns on capital. Source: Pexels
Manufactured stories
Jack Chong is creating Frigg.eco in order to finance renewable energy projects. He says that there are many manufactured narratives in crypto. He posits that real yield is one.
Chong, a Hong Kong native and Oxford graduate, says that real yield is defined by the crypto corner you are in. There are two versions. Real yield can be defined as a protocol with cash flow. It’s a digital native cash flow that is denominated either in ETH, crypto or other currencies.
It’s also a business model that generates revenue.
The exact phrase of many Twitter threads is that real yield comes from staking for cash flow. Chong says that the distinction is what gives rise to that yield. “A lot of crypto ecosystems can be self-reflexive.” Chong refers to digital money that circulates and creates gains for investors, but not from any actual revenue like Terra.
He continues, “Linguistically real yield doesn’t have to be based on trading protocols.” “The other meaning of yield from real assets” is another. An example would be a rental return on a tokenized piece real estate such as a fractionalized space in a city that is divided among investors.
Chong founded a biotech company and studied Arabic in Jordan. He has a mission: to use crypto for productive purposes. Chong believes that any North Star in any financial system should aim to make a profit and deploy capital. He points out that the whole “real yield” story in TradFi is common sense.
Real yield is, of course, linguistically demeaning of all that has gone before it as “fake” yield.
Real yield: Interest and fees
Real yield may include borrowing and lending models that have higher risk. This means higher interest rates for borrowers, and consequently higher yields for lenders. This is the Maple Protocol, an under-collateralized lending platform that produces real yield.
Maple allows institutions such as market makers and VCs to obtain under-collateralized loans through isolated lending pools. The risk of creditworthiness is assessed by a “pool delegate”. Maple has originated loans totaling $1.8 billion to date. recently launched a $300 million lending pool for Bitcoin mining companies.
The obvious, but profitable business model of interest from loans (or usury), is the loan industry. Most banks make money by lending.
Offering tokenholders a share of revenue from fees that are imposed on platform users is one of the best sources of real yield. This means that there is a product or service that generates revenue.
Jacob, an OG dating back from Web1, argues proof-of-work staking returns for Ethereum now include real yield.
“ETH could be considered a true yield. Eth1 was the most popular cryptocurrency. Most money went to miners. Proof-of-work or mining transactions were used to verify their validity. Miners were getting real yield. Stakers can now earn real yield from network transactions. Transactions are common and many people get paid. ETH stakers earn money for every transaction.
Transactional revenue, in other words is a reward to ecosystem building.
Others are following the real yield trend, or emphasizing this part of their protocol.
Synthetix, a decentralized protocol that allows trading of synthetic assets and derivatives, is highly successful. The tokens are synthetic assets that represent investment positions.
Although it’s difficult to explain, the gist is that users will stake the native token SX to create the stablecoin, SUSD. This stablecoin underpins all other tokens on the platform. The token emissions of Stakers can sometimes exceed 100% APY and traders get a cut from the SUSD fees they pay to use the platform.
Revenue for various protocols. Source: Token Terminal
This year, SUSD revenue went through a major boom after 1inch and Curve discovered that Synthetix’s synthetic assets could be used for slippage trading between BTC and ETH.
Synthetix is currently considering a proposal from founder Kain Warwick, to end inflationary rewards and to move to rewarding stakers based solely on trading fees.
This is the definition of real yield. It will be interesting for investors to determine if the real revenue they generate is sufficient to encourage them to take part in this complex and risky platform.
How can this be possible in a bear-market?
Other risks and permanent loss
Cross-blockchain liquidity may also be an area where fees could be earned. Liquidity providers are at risk of being exposed to volatility in the price of the asset they provide liquidity. When the value of your deposited assets changes since you first deposited them, this is called impermanent loss. This is a loss of dollar value that occurs at withdrawal, compared to when it was deposited. Your headline real yield or rewards from staking liquidity could be offset by withdrawal losses.
Lurie says:
Ponzi yields can be described as the unsustainable granting speculative tokens. If the economic model behind protocol transaction fees is not sustainable, yields can be fake. SushiSwap’s liquidity providers make money from transactions but lose more due to ‘impermanent losses’, which is a sign that they are losing money.
Lurie says that income is more important than expenses. Magazine is told by Lurie that the biggest problem with DeFi is that it’s difficult to measure actual gains due to the concept of impermanent losses. He says this is the most important trick in DeFi.
“Protocols that cannot be sustained in the long-term make them profitable by rebranding fees revenue as ‘yield’, and principal loss as ‘impermanent losses.
They advertise revenue, which can only be positive, while claiming losses are “impermanent” or difficult to measure. Real yield should be defined as profits for capital providers. Concentrating on revenue without expenses is another form of the Ponzi principle.
Traditional investors love real yield
Current market conditions and investment cycles have led to real yield. Chong points out that real yield closely mirrors TradFi and has much to do with market participants’ cycles.
Hedge funds were speculative vultures during the DeFi summer. Goldman Sachs and other institutional investors are now looking for new directions in crypto to survive the bear markets. JP Morgan, Morgan Stanley and Citigroup are also closely following crypto developments and are writing their own reports.
Apollo’s Andersson explains that real yield is the result of protocols that generate revenue through on-chain cash flows. This is in contrast to equities, which were subject to historical uncertainty.
Real yield is defined by him as “on-chain derivatives protocols with profit and earnings multiples that make sense, but without incentives like liquidity mining.”
Real yield is a popular choice for traditional investors because it allows them to use traditional metrics such as price-to-earnings (P/E) and discounted cashflow (DCF), to determine whether a token’s value and worth it.
Traditional investors like DeFi projects and tokens with revenue. Source: Pexels
The P/E ratio measures the stock price (or token) divided by the company’s earnings per share over a specified period, such as the past 12 months. DCF is a common valuation method that uses future cash flows to estimate the investment’s value.
Blockchain revenue transparency also allows for continuous updates to decisions through protocols such as Token Terminal or Crypto Fees. Andersson says that crypto doesn’t require you to wait for quarterly statements like stocks. He suggests that revenue can be reduced or divided by the newly-minted token for incentive to generate better numbers. Real yield is revenue that does not incentivize volume as in the case of Uniswap or GMX.
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Andersson warns investors that income and revenue in crypto can look very similar to traditional companies, because the cost base is very different. This makes crypto protocols’ yields attractive by comparison. However, cost bases and margins in crypto can be higher because tokens are often distributed at the beginning of a project’s launch. He asks:
The question is “What is the revenue of the protocol compared to the value minted tokens?”
Is the real yield trend likely to continue?
DeFi is beginning to behave like a business and has a real yield trend. It is also growing in popularity.
David Angliss, Apollo Capital VC analyst, says that one way to validate a DeFi protocol’s use case is to determine if it’s been ‘forked’ by other founders who want to leverage the original code or design.
“In this instance, protocols like Mycelium.xyz, Gains Network and MadMeX all replicate GMX by offering real yields for stakers in form of fees earned via swaps or trading on a decentralized derivatives platform.”
