As a DeFi-focused hedge fund, MEV Capital has become familiar with moving funds on-chain to achieve higher returns, a strategy known as yield farming.
But in recent months, the company has added a new trick to its arsenal: accumulating points or rewards for interacting with a protocol, which can lead to payouts in a future token on behalf of customers.
In particular, MEV Capital uses these points to gain access to EigenLayer and a number of other Ethereum restaking projects that offer off-chain points to on-chain users. That hedge funds like MEV Capital are now purchasing equity stakes for clients is a testament to the renewed animal spirit in the crypto space and the excitement surrounding its resumption.
Everything points to a reallocation
EigenLayer is a restaking protocol that allows the staked Ether securing the Ethereum blockchain to be re-staked or used to secure other Ethereum-based blockchains and services. Liquid Restaking Tokens (LRTs), such as eETH from ether.fi or similar offerings from KelpDAO and Renzo, create a tokenized version of Restaked Ether that can be used in DeFi applications.
Read more: Ether.fi Announces $23 Million Series A Round as Interest in Re-staking Grows
EigenLayer currently rewards users with points for restoring their Ether, and several LRT protocols have point systems for users of the tokens.
Pendle Finance, a DeFi platform that offers tokenized versions of an asset's APY, called yield tokens, has become popular for earning points.
Through Pendle and its yield tokens, points farmers can use an LRT to simultaneously earn EigenLayer points and points from the LRT protocols. These yield tokens provide investors with leveraged exposure to EigenLayer and LRT points as they essentially purchase the rights to the points earned from holders of Pendle's main tokens.
Points were a very effective tool for bringing assets into the redeployment sector. According to DeFiLlama, EigenLayer's total value lock (TVL) was approximately $250 million as of December 18th. That number is now over $9 billion.
Uncertain returns
Some funds are sitting out the points fever, but there is still money to be made on the sidelines.
Valentin Mihov, co-founder of DeFi investment fund Finexify, told Blockworks that the fund used Pendle to generate increased Ether returns through point speculation.
Pendle's fixed income products have a higher APR when the market's implied return or future return estimate increases.
Mihov said that while the higher APY resulting from the points is “pretty nice,” his company believes points farming is too risky because the future value of the notes is still largely unclear.
In some cases, points farming can be quite lucrative. For example, when Solana-based liquid stake protocol Jito conducted a points-based airdrop in December, a researcher noticed that the movement of $40 worth of tokens on-chain gave a user $10,000 worth of JTO tokens could have brought in.
As a result, points are traded in anticipation of future airdrops. About $2.7 million worth of EigenLayer points changed hands on the Whales Market website, at an average price of about $0.18. A Messari researcher tried to come up with an estimate and estimated the value of the LRT points at about $0.14 each.
Point breeding is “more art than science”
Because points are off-chain, it can be unclear how they are converted into token allocations – sometimes to the detriment of larger investors.
A partner at a crypto-native investment firm told Blockworks that points are intended to increase community interest in crypto projects, so the tokenomic structure typically favors smaller allocations.
“The way the points are usually converted [is] so farmers with larger points are typically rewarded less than farmers with smaller amounts, so it's not worth risking the capital in a native protocol for a very low payout,” they said.
Chase Mayeux, managing partner of investment firm Coral, said calculating point returns is more “art than science.” Coral is accruing points on EigenLayer and a number of other DeFi protocols, Mayeux said.
“There are secondary markets for points (Whale Market/Pendle), but ultimately we are looking to collect either tokens or points for protocols that we believe will increase in price. In general, you will only know whether your theories were correct months or years later,” Mayeux said in a Telegram message.
The clients of these investment firms may not understand the ins and outs of points farming, but the upside potential of points still tends to be attractive. General partner of MEV Capital
Laurent Bourquin described the conclusion of a hypothetical conversation with a customer about points farming:
“'Are we making more money? Yes No?'
'Yes.'
Boom, then it’s good.”
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