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The Hottest Trend In DeFi: What Is Real Yield?

Published 08/27/2022, 11:00 PM
Updated 08/27/2022, 11:32 PM
The Hottest Trend In DeFi: What Is Real Yield?

Decentralized finance (DeFi) has grown into a booming industry that showcases some of the innovative and compelling potential of the cryptocurrency market. DeFi has tens of billions of dollars worth of crypto assets locked up, and is facing a new trend that has the proposition to disrupt the market, a real yield.

The popularity of “yield farming,” a tactic that makes use of crypto assets and aids users in maximizing their profits, is one factor contributing to DeFi continued growth. It enables crypto investors to maximize their earnings across various DeFi platforms.

However, investors noticed that the massive inflationary incentives offered by many projects are lowering the price of their tokens without delivering long-term benefits. The current bear market, and the colossal crash of Terra stablecoin, showed the drawbacks of the current DeFi ecosystem.

Recently, a growing number of people have begun to pay attention to protocols that reward stakeholders based on the revenue made, or so-called “real yield.” In the article, we will look closely at what a real yield is.

What Is Real Yield and How Is It Generated?

“Real yield” is derived from the generation of “real” revenue, in contrast to the revenue obtained via token emissions. This means that the more revenue a crypto project generates, the more yield is paid to users and vice versa.

Typically, yield-bearing tokens derive revenue from high token emissions, which cause inflation and reduce token prices. Real yield is derived from capturing a percentage of actual revenue. This provides a potential solution to tokens with high emissions.

Projects that qualify as “Real Yield” don’t require inflationary emissions to remain relevant over time. The growth of crypto projects focusing on real yield depends on their ability to accrue new users and increase revenue generation over time to reward token holders.

Real Yield Is a Game Changer in Traditional DeFi

Real yield is a game changer in a traditional DeFi scene, where the most common form of user acquisition so far was offering an attractive annual percentage rate (APR) to boost the number of user funds deposited (total value locked or TVL).

The problem is, that this aggressive emissions model is not sustainable, and projects have short lifespans. There is a limit to how long projects can provide fake yield before they are obliged to rethink the sustainability issues.

Relying on “fake yield,” or in other words, token emissions, is a practice that proved highly lucrative in 2020 and 2021. The returns were broadly fueled by projects’ native tokens, which would be distributed at implausible rates.

Heavy token emissions are padding TVL by incentivizing liquidity. However, once removed, the real value of many chains becomes questionable. Once the crypto market started to show weakness, their tokens went to all-time lows, as numerous projects lacked effective underlying value accumulation mechanisms.

As long as a token’s price continues rising, it supports its APR. However, in most scenarios, the price stops rising and reverses. DeFi users normally jump between projects, depositing assets for the token rewards, and racing the clock to get rid of them before everyone else does.

The project is then forced to emit more tokens to hold up its yields and retain its ecosystem. However, this further devalues the token, scaring off more investors and accelerating the collapse of the ecosystem.

How to Determine Real Yield

A real yield project earns more money from revenue than token emission and operational costs. Like in any sustainable business model, the project should earn more than it spends. To determine which projects make a real yield, you should research. In crypto projects, the entire revenue information is on-chain, which makes it accessible.

Here are the steps you should take in order to determine the real yield:

1. Use online tools

Token Terminal is an excellent tool to check the total revenue and other metrics of the crypto project. Another helpful tool is Messari, which helps to show the token emissions.

2. Check total revenue of the crypto project

On the Token Terminal homepage, select “Metrics,” then “Protocol Revenue,” and search the protocol you’d like to analyze.

3. Check token emissions.

On the Messari homepage, pick the wanted token, navigate to profile, select “token economics,” and “supply schedule.” Calculate the number of tokens emitted in the same timeframe as you picked while determining the total revenue of the project. You should focus on incentive-based token emissions only.

For example, the amount of tokens released on August is 135 million and at the beginning of June it was 132 million, it means that token emission in the timeframe of three months was around 3 million.

If you can’t find this data on the Messari platform, there are other places to look for the data including CoinGecko, Dune Analytics, or the project’s documentation on tokenomics.

4. Calculate the real yield of the crypto project.

A simple calculation can show whether the project is sustainable and can provide real yield. Total token emission cost can be calculated by multiplying the number of tokens emitted and the token price and subtracting this number from the total revenue.

Tokens emitted x token price = total token emission cost

Revenue – total token emission cost = real yield

It is important to bear in mind, that this method is not perfectly accurate, as the operational expenses are not included. However, it still gives a good overall picture of how the crypto project is doing.

5. Figures are not everything.

If after the calculations, the project is showing potential, another important thing to keep in mind is market fit. People must genuinely want to utilize the protocol, regardless of the state of the market or the rewards offered by tokens.

Furthermore, the project should use reliable cryptocurrencies for payouts, such as BTC, ETH, or stablecoins. Avoid projects that pay in unknown, highly volatile, and inflationary altcoins.

What Projects Provide Real Yield in DeFi?

As mentioned previously, any crypto project could be checked if they are generating real yield. Let’s take a closer look at two real yield projects.

1. GMX

GMX is a decentralized perpetual exchange that supports low swap fees and zero price impact trades. Trading is supported by a multi-asset pool that earns liquidity providers fees from market making, swap fees, leverage trading, and asset rebalancing. It offers up to 30x leverage on spot crypto trading pairs like BTC, ETH, and AVAX.

The protocol is comprised of two tokens: GMX – the utility and governance token, and GLP – the liquidity provider token. According to Token Terminal, the total revenue of GMX in the past 90 days was around $15 million of fees generated through swaps and leverage trading.

When staking GMX, 30% of the revenue is paid to GMX stakers, while GLP holders get the other 70%. These fees are paid out in ETH.

2. Synthetix

Synthetix is a decentralized finance protocol that provides on-chain exposure to a wide variety of crypto and non-crypto assets. The protocol is based on the Ethereum (ETH) blockchain and offers users access to highly liquid synthetic assets, as well as exposure to real-world assets on the blockchain, such as precious metals, crypto, and fiat.

The platform’s ecosystem is powered by the SNX token. In the past 90 days, the company’s revenue was $21.3 million. Synthetix released 2.3 million in reward tokens. Multiplied by the current price of $3.03, the total token emissions are $6.9 million. This leaves the company with $14.4 million in yield. The company shares up to 100% of the revenue with the stakers.

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