The Hottest Trend in DeFi: What is Real Yield?
Decentralized finance (DeFi) has emerged as a booming industry that showcases some of the innovative and compelling potential of the cryptocurrency market. DeFi has locked tens of billions of dollars worth of crypto assets and is facing a new trend set to disrupt the market, real returns.
The popularity of “yield farming,” a tactic that leverages crypto assets and helps users maximize their profits, is a factor contributing to DeFi’s continued growth. It allows crypto investors to maximize their earnings across different DeFi platforms.
However, investors noted that the massive inflation stimulus offered by many projects drives down the price of their tokens without bringing any long-term benefits. The current bear market and colossal crash of stablecoin showed the downsides of the current DeFi ecosystem.
Recently, more and more people are paying attention to protocols that reward stakeholders based on revenue generated, or so-called “real yield”. In the article we will take a close look at what a real return is.
What is real return and how is it generated?
“Real revenue” results from the generation of “real” revenue, as opposed to revenue generated through token issuance. This means the more revenue a crypto project generates, the more returns are paid to users and vice versa.
Typically, high-yield tokens generate revenue from high token issuance, which causes inflation and lowers token prices. Real revenue is derived from capturing a percentage of actual sales. This offers a potential solution for high-issuance tokens.
Projects that qualify as Real Yield do not require inflationary issuance to remain relevant over time. The growth of crypto projects focused on real income depends on their ability to attract 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 to date has been to offer an attractive Annual Percentage Rate (APR) to increase the number of user funds deposited (Total Value Locked or TVL).
The problem is that this aggressive emissions model is unsustainable and projects have short lifespans. There is a limit to how long projects can deliver fake returns before they are forced to reconsider sustainability issues.
Relying on “fake yield,” or in other words, token issuance, is a practice that has proven extremely lucrative in 2020 and 2021. The returns were largely fueled by the projects’ native tokens, which would be distributed at implausible rates.
Heavy token issuance bolsters TVL by incentivizing liquidity. However, once removed, the true value of many chains becomes questionable. As the crypto market began to show weakness, their tokens fell to all-time lows as numerous projects lacked effective underlying value accumulation mechanisms.
As long as a token’s price continues to rise, it supports its APR. However, in most scenarios, the price stops rising and reverses. DeFi users typically jump back and forth between projects, depositing assets for the tokenized rewards and racing the clock to get rid of them before everyone else does.
The project is then forced to issue more tokens to maintain its yields and sustain its ecosystem. However, this further devalues the token, discouraging further investors and accelerating the collapse of the ecosystem.
This is how you determine the actual rate of return
A real yield project makes more money from revenue than token issuance and operational expenses. As with any sustainable business model, the project should earn more than it spends. To determine which projects are yielding a real return, you should do your research. In crypto projects, all sales information is on-chain, making it accessible.
Here are the steps you should take to determine actual yield:
1. Use online tools
Token Terminal is an excellent tool for checking the total revenue and other metrics of the crypto project. Another helpful tool is Messari, which helps to view the token emissions.
2. Check the total revenue of the crypto project
From the Token Terminal home page, select Metrics, then Log Revenue and find the log you want to analyze.
3. Check token emissions.
On the Messari homepage, select the desired token, navigate to the profile, select “Token Economy” and “Delivery Plan”. Calculate the number of tokens issued in the same period you decided while determining the total revenue of the project. You should only focus on incentive-based token issuance.
For example, the amount of tokens released in August is 135 million and in early June it was 132 million, which means that the token issuance was about 3 million in a three-month period.
If you can’t find this data on the Messari platform, there are other places you can look for the data, including CoinGecko, Dune Analytics, or the project’s documentation on Tokenomics.
4. Calculate the actual yield of the crypto project.
A simple calculation can show whether the project is sustainable and can bring real returns. The total cost of token issuance can be calculated by multiplying the number of tokens issued by the token price and subtracting this number from the total revenue.
Tokens issued x token price = total cost of token issuance
Revenue – total cost of token issuance = real revenue
It is important to remember that this method is not entirely accurate as it does not include operational costs. However, there is still a good overall picture of how the crypto project is shaping up.
5. Numbers aren’t everything.
If, after the calculations, the project shows potential, another important thing to keep in mind is its marketability. People must really want to use the protocol, regardless of the state of the market or the rewards offered through tokens.
In addition, the project should use reliable cryptocurrencies for withdrawals such as BTC, ETH or stablecoins. Avoid projects depositing unknown, highly volatile and inflationary altcoins.
Which projects offer real returns in DeFi?
As already mentioned, every crypto project could be checked if it generates a real return. 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 impact trades. Trading is supported by a multi-asset pool that earns liquidity provider 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 consists of two tokens: GMX – the utility and governance token and GLP – the liquidity provider token. According to Token Terminal, GMX’s total revenue over the last 90 days was around $15 million in fees generated from swaps and leveraged trading.
When staking GMX, 30% of earnings are paid out to GMX stakers, while GLP holders get the other 70%. These fees are paid in ETH.
2. Synthesis
Synthetix is a decentralized finance protocol that provides on-chain exposure to a variety of crypto and non-crypto assets. The protocol is based on the (ETH) blockchain and offers users access to highly liquid synthetic assets as well as access to real-world assets on the blockchain, such as precious metals, crypto and fiat.
The platform ecosystem is powered by the SNX token. The company’s revenue for the past 90 days was $21.3 million. Synthetix released 2.3 million reward tokens. Multiplied by the current price of $3.03, the total token issuance is $6.9 million. This leaves the company with revenues of US$14.4 million. The company shares up to 100% of the revenue with the players.
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