TL;DR
Real crypto yield as a metric compares a project’s offered yield to its revenue. If the returns on staking are higher in real terms than the interest provided, the issuance is dilutive. This means that their yield is not sustainable or, in colloquial terms, “real”. The real return isn’t necessarily better than dilutive emissions, which are often used for marketing purposes. However, this indicator can serve as a useful tool to assess a project’s long-term earnings prospects.
introduction
The substantial APYs often offered in the Decentralized Finance (DeFi) world are certainly interesting for many investors. However, if you’ve ever had a 100% or even 1000% return on a staking opportunity, it’s fair to ask if it’s too good to be true. A popular method of assessing promised returns is to calculate actual returns on a project. This simple, quick, and relatively effective calculation can help you assess at a glance the feasibility of a project’s promises and how “real” its returns actually are.
What is DeFi yield farming?
yield farming allows users to earn cryptocurrency Rewards for imprisoning their wealth high yield pools. There are various ways to farm, including Liquidity Pools, Mark out, and loan logs. What they all have in common is that they generate a return for the user in exchange for betting that user’s money. It is common for yield farmers to use protocols that maximize their yields, known as yield optimizers. Yield farmers will also move their funds and look for the best yields available in the market.
As DeFi became more popular, many protocols started offering higher bonuses as an incentive for stakers. However, this often led to unnaturally high and unsustainable values APYs, some even over 1000%. Once these APYs fell as a result of the project’s dwindling treasuries, token prices often plummeted as users rushed to sell the farmed tokens. It turned out that the demand for such tokens was fueled by issuance rather than utility.
With high APYs plentiful in the DeFi space, how does one assess the true value of projects and their potential to generate interest? One way is to look at a project’s crypto real-world returns.
Real and Sustainable Yield vs. Dilutive Emissions
When we refer to returns as “real”, we mean their sustainability. If the project’s earnings cover the amount of tokens distributed to stakers, its own funds will not be deducted. In theory, the project could maintain real APY indefinitely if revenues stay the same.
However, it’s also common to see dilutive emissions — a scenario in which a project allocates APY in a way that is unsustainable over the long term, most commonly by depleting its treasury. Should the project’s revenue not increase, it will be impossible to maintain the same APY level. Such an APY is often distributed in the project’s native token, since a large supply of it is readily available.
Stakers could also grow these tokens and sell them on the open market, lowering their price. This can lead to a vicious circle where more native tokens have to be spent to offer the same APY, depleting the treasury even faster.
Note that while “real yield” is preferably issued in blue-chip tokens, a project that distributes its native token could also do so in a sustainable manner.
What is Crypto Real Return as a Metric?
The crypto real revenue metric is a quick way to evaluate a project’s offered revenue relative to its revenue. This allows you to see how much of the project’s rewards are dilutive or primarily backed by token issuance and not funded by revenue. Let’s look at a simple example.
Over a month, Project X distributed 10,000 of its tokens at an average price of $10, bringing the total issuance value to $100,000. During the same period, the project has generated $50,000 in revenue. With only $50,000 in revenue but $100,000 in emissions being paid out, there is a real revenue shortfall of $50,000. Therefore, it is clear that the APY on offer is highly dependent on dilutive issuance rather than real growth. Our simple example here doesn’t take into account operating costs, but it’s still a reasonable rough estimate to use when evaluating yield.
You may have noticed that real returns are conceptually similar to dividends in the stock market. A company that pays dividends to shareholders that aren’t backed by corresponding earnings would obviously not be sustainable. For Blockchain Projects, the income comes mainly from fees for a service offered. In case of a Automated Market Maker (AMM)this could be a liquidity pool transaction fee, while a yield optimizer can share its performance fee with its stockholders Governance Token.
How do you ensure your DeFi yield is legit?
First, you need to find a reputable project that offers a trusted and used service. This gives you the best starting point for generating sustainable income. Next, look at the earning potential of the project and how exactly you are involved. You may need to provide liquidity to a protocol or pool its governance token. Locking native tokens is also a common mechanism.
For many yield seekers, yield payout in blue chip tokens is preferable as such assets are perceived as lower volatility. Once you’ve found a project and understood its mechanism, remember to check the actual yield of the project using the formula above. Let’s take a look at a revenue model that has real revenue baked into its tokenomics – and how to verify it with our metric.
An automated market maker protocol provides returns in two ways. First, to the holders of its governance token, ABC, and second, to the holders of XYZ, its Liquidity Provider Token. By design, ten percent of the platform revenue is kept for the treasury, and the rest is split 50/50 between the holders of the two tokens in their respective reward pools and paid out BNB.
According to your calculations, the project will bring in $200,000 a month. According to the project’s tokenomics, $90,000 BNB will be distributed to stakers in the ABC reward pool and $90,000 to stakers in the XYZ reward pool. We can calculate the actual yield as follows:
$200,000 – ($90,000 x 2) = $20,000
Our calculation shows that there is a $20,000 surplus and the revenue model is sustainable. The tokenomic model of revenue distribution guarantees that emissions will never exceed revenue. Choosing a DeFi project with a sustainable distribution model is great for earning real returns without having to work with the numbers yourself.
Does DeFi get better by relying on real returns?
In short, not necessarily. Emissions have worked successfully in some projects in the past to attract users. Typically, these projects gradually reduce their emissions and switch to more sustainable models. It would be wrong to say that the pursuit of real returns is objectively better and that reliance on emissions is totally untenable. But in the long run, there is only room for revenue-generating models of DeFi projects with real use cases.
Final Thoughts
With lessons learned from previous DeFi cycles, it would be beneficial for space if more protocols successfully implemented features that drive adoption and sustainable revenue generation. When it comes to emissions, the message is also clear: users would do well to understand them for what they are and their role in expanding the user base of projects and potentially achieving sustainability.
Further reading
Learn Crypto Trading, Yield Farms, Income strategies and more at CrytoAnswers
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