Be it DeFi 2.0 or ultrasonic money, crypto loves its narratives.
The latest is Real Yield, which, like DeFi trends before it, is being touted in both substantive and vague ways.
Real yield is a fraction of a protocol’s earnings denominated in a mainstream asset such as ETH or USDC that holders of a protocol’s governance tokens can access by staking or blocking them. If that sounds like a dividend, you’re not far off.
For many DeFi users holding governance tokens 80% or more below all-time highs, cash flow into ETH or stablecoins is a welcome change.
The concept of real yield contrasts with the ponzi-like APYs of 2021, when people barely turned a blind eye to four-figure yields. These returns were largely fueled by the projects’ native tokens, which would be distributed at unsustainable rates to attract user deposits.
DeFi users hopped from project to project, depositing assets for the tokenized rewards and attempting to dispose of them before everyone else did. This is what is known as yield farming, and this practice has proven extremely lucrative in 2020 and 2021.
Now influencers are praising projects for their actual revenue – Redacted Cartel, Umami Finance, Gains Network, GMX, and Synthetix, among others, are being praised for passing earnings on to their users.
marketing ploy
However, as the concept gains traction, some worry that “true yield” will become a signaling metric rather than one that demonstrates a protocol’s financial health.
0xSami, the co-founder of Redacted Cartel, which is actually one of the true yield protocols, is one such skeptic. He published an article titled Wolf in Sheep’s Clothing on Aug. 7, in which he underscored the dangers of projects optimized for real yield.
“I think just like TVL (Total Value Locked) is a flawed metric, we shouldn’t be using ETH APY as a real metric,” he told The Defiant. TVL comprises the total value of assets locked in a protocol’s smart contracts. The metric is great for signaling the size of a log, but it can be easily played with by offering oversized token incentives for user deposits. Nor does TVL address how efficiently the capital is deployed.
For 0xSami, even if the APY is in the reasonably reasonable low double digits, optimizing for real returns has two main risks. One is that projects can still issue tokens to attract revenue-generating capital. Projects can then announce their real return denominated in ETH or USDC, although users access this return by staking a fast-inflating governance token.
Delaying token issuance while requiring users to lock tokens can be a particularly insidious combination. In this scenario, projects can point to a low emissions-to-revenues ratio as evidence of a protocol’s viability.
Then, say six months later, emissions can skyrocket. This devalues users’ still-locked tokens, perhaps much more than the so-called real yield users have earned, leaving them back in the governance token bag.
Alex O’Donnell, CEO of Umami Labs, the company behind Umami Finance, generally agrees with 0xSami’s concerns. Still, Umami borrows from the true yield narrative, references it in her documentation, and uses the hashtag on her Twitter profile.
Not just a meme
O’Donnell stressed to The Defiant that while token issuance isn’t necessarily a bad thing, issuing it to directly stimulate financial activity and then labeling some of that activity as “real revenue” goes against the movement.
“True yield isn’t just a meme, it’s something that exists in isolation,” said Umami’s CEO. This is reminiscent of TVL, which is not useless but far from a silver bullet for evaluating DeFi protocols.
Umami generates income for UMAMI depositors by taking a portion of the income from the protocol’s USDC vault, a income-generating strategy that uses both GMX, a perpetual exchange, and Tracer, another derivatives platform.
“Once something is positioned as desirable, everyone wants to say they have it, and the definition runs the risk of being watered down,” O’Donnell said.
Invest in growth
0xSami’s second real-world yield concern is that as the metric’s momentum increases, projects will be forced to optimize for the metric to attract and retain users. This will likely come at a time when the project should be building its treasury.
“Keeping the money internally to retain talent and fund new development will serve your community better in the long run,” he wrote in his post.
Early-stage growth companies typically pay their shareholders little to no dividends, instead choosing to reinvest that capital to grow their business. With crypto projects still in their infancy, it’s easy to argue that the bulk of the revenue should flow toward growth.
Again, O’Donnell generally agrees, although he thinks some emphasis on real returns is needed in the current environment.
Restoring Confidence in DeFi
“The DeFi ecosystem is still in a place where it’s trying to gain user trust, and there are many good reasons why users don’t have complete trust,” he said. Explosions like Terra and Celsius have certainly damaged DeFi’s reputation.
“In this context, it’s really critical to show users through your actions that you will deliver on the promise that if they hold your token, they will receive a share of the value you create,” O’Donnell continued .
Last week, on the Frax Finance-centric podcast Flywheelpod, Umami’s CEO announced that protocol for an account with Circle, USDC’s supplier, had been approved as part of its effort to create products aimed at institutions. This may allow umami to onboard users directly through fiat accounts rather than having to go through an exchange.
In theory, if Umami is able to onboard institutional capital, the fees generated by those deposits will flow to UMAMI players, which would be a significant source of “real returns.”
Whenever a new metric emerges that can be used as an effective marketing tool, efforts must be made to optimize it. As the true yield narrative unfolds, 0xSami hopes to contextualize it properly.
“It’s about bypassing the fog and the mirrors before scams and the carpet trade reappear,” he said.
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