So you’ve made it this far. You’ve been on Binance Smart Chain (BSC). You’ve watched a few YouTube videos, joined a couple of Discord and Telegram groups and you found lots of people talking what seems like double-dutch about yield farming. You bridged assets to Polygon or Fantom. You’re enjoying the freedom of DeFi but remain rightly nervous about the risk of getting rugged. You’re absorbing a new world of jargon and concepts that have no real-world analogues.
In this series for beginners (it might be a series) I’m going to do what people who know stuff always say; I’m going to tell you what I wish someone had told me when I started moving cryptocurrency around on-chain in the bandit country that is Decentralised Finance (DeFi). Also — like all good storytellers, I’m going to start in the middle. I am by the way, not a good storyteller. After a career spanning 22 years in web and app development I have never written a single blog post, so if my mouse makes it to the publish button for this; you’re reading a first.
By far the single most popular topic I get asked about by newcomers to yield farming on Polygon is emissions. What are they?
“What does ‘emissions per block’ or ‘minted per block’ mean?”
“What do you mean supply-emission ratio?”
“What do you mean emission allocation and distribution?”
This is why I’m starting here; at part 4. I may well backtrack and cover more fundamentals, like a deep dive on exactly what a yield farm is. How to set up a wallet and send assets to it from an exchange. How and where to bridge from one chain to another. Let me know.
The topic of emissions is not limited to Polygon or yield farming. In fact, emissions are a fundamental part of cryptocurrency as a whole. It applies to any blockchain where you find mining or yield farms. Bitcoin, Ethereum, Binance Smart Chain (BSC), Polygon, Fantom, Harmony, Arbitrum, Solana to name a few. The majority of my assets are held on Polygon but it is not a prerequisite that yours are too — this topic is chain-agnostic. So let’s jump in.
I think it’s important to cover this quickly because I haven’t yet written the article that this question deserves. The answer will likely raise more questions than it answers so bear with me.
You’ve heard of Bitcoin mining. People use computers to mine Bitcoin, Ethereum and many other cryptocurrencies by solving a math problem to find/uncover “mine” new tokens. Miners are rewarded for their contribution to solving this math problem relative to the amount of effort their contribution represents in a large group of miners called a pool. This is called ‘Proof of Work’ (PoW), and you’ve probably read that it’s not so great from an environmental perspective. I don’t preach any bias one way or the other on this matter.
A little while ago, clever people started discussing an alternative to PoW called ‘Proof of Stake’ (PoS) that has the potential to be significantly faster than PoW and debatably less environmentally costly. People make a security deposit into a blockchain smart contract (pool), and new tokens are ‘minted’ (literally conjured into existence) and distributed to everyone relative to their share of the pool. Let’s look at an example of a small pool:
If John has $100, Sarah has $50 and Karen has $50 in a pool, the ‘Total Value Locked’ (TVL) for this pool is $200. John is going to receive 50% of the minted tokens (rewards), while Sarah and Karen receive 25% of the rewards each. (Karen thought she was going to get more so she asked to speak to the manager).
The newly minted tokens dollar value is taken from the current market cap. If we start with a supply of 10 tokens, each worth $10. The market cap is $100. If we mint another token, the supply is now 11 tokens but the market cap is still $100. The token price is therefore $9.09. This is called ‘inflationary tokenomics’. Yield farms try to balance the minting of new tokens with incentives for people to buy and hold the token, preventing the price from falling due to supply inflation. An inflationary token that finds this equilibrium with a relatively ‘stable’ price floor could be considered the holy grail of yield farming.
Yield farming is earning newly minted tokens by proof of stake consensus.
For now, that’s all you need to know. How and why this is a thing is beyond the scope of this article. Stay tuned and we will discuss it more another time.
Emissions refer to newly minted tokens. A smart contract for a yield farm ‘emits’ new tokens at a rate set by the developer (dev) of the smart contract. This is usually specified in the documentation for a yield farm and/or displayed on its homepage. You’ll see stats like 0.005 per block. Per block meaning how many new tokens are emitted on each newly confirmed block of the blockchain you’re on. In the case of Polygon, a new block is confirmed approximately every 2.3 seconds, so in this example, we can determine that there will be 1 new token minted every 7 minutes 40 seconds:
0.005 per block
1 / 0.005 = 200 blocks
200 x 2.3 = 460 seconds
460 seconds = 7 minutes 40 seconds.
Emissions are the new tokens minted per block by a smart contract.
Now you understand emissions, but don’t break out your Matrix Neo Knows Kung-Fu Gif just yet. The emission rate alone doesn’t really tell us anything useful when looking for a good yield farm. One of the first things I do is run another exercise to compare the emission rate to the pre-minted supply of the farm’s token before farming emissions start.
0.005 per block could be fine or it could be a dumpster fire waiting to happen. Let’s look at both scenarios.
Scenario one — bad.
PolyDumpsterFire mints 1 token and sets emissions to 0.005 per block. The current market cap for their token is $5,000. The supply is 1, so the token price is $5000. Market cap is the total supply multiplied by the token price.
The supply-emission ratio is 1:0.005.
When emissions begin, from our earlier example we know that 1 whole new token will be minted after just 7 minutes 40 seconds — doubling the supply to 2 tokens. Why is this bad?
Assuming no one in the pools harvested their rewards and sold them, and no one else buys or sells any PolyDumpsterFire in the meantime, the supply has doubled. The market cap is still $5000 but now there are 2 tokens each worth $2500. The token price dropped 50% in less than eight minutes without anyone buying or selling a thing. The emission rate is creating negative price pressure that is too intense for anyone to respond to. PolyDumpsterFire is going to burn harder than a fire in a dumpster.
Scenario two — good.
PolyMoneyPrinter pre-mints 1000 tokens and sets emissions to 0.005 per block. The current market cap for their token is $5000. The supply is 1000, so their token price is $5.
The supply-emission ratio is 1000:0.005, or if we refactor that for 1 token; 1:0.000005. This is a new ratio so let’s find out how long it will take to double the supply.
The same emission rate of 0.005 per block applies but the supply is 1000.
1000 / 0.005 = 200,000 blocks.
200,000 x 2.3 seconds per block = 460,000 seconds.
460k seconds = just shy of 5 days 8 hours.
So the supply is going to take over 5 days to double. If this farm gets everything else right, it has a really good chance at longer-term survival. The price pressure created by emissions is 1000x lower than PolyDumpsterFire. It seems like an enormous difference and these numbers are for illustrative purposes only, but I have seen real extremes that go far beyond these ratios in both directions.
Go find some good and bad yield farms and run through this exercise yourself and see what numbers you come up with. Doubling supply isn’t necessarily a critical metric but it’s a good anchor for comparison.
The supply-emission ratio tells us how much negative price pressure the farm will put on its own token by minting new tokens, and is a good indicator of a yield farm’s potential lifespan.
Stay with me. We’re getting to the good part.
Almost all yield farms have a choice of farms and pools that you can stake assets in. Farms are generally liquidity pairs and pools are most often single-staked assets. Another common question I bump into a lot is ‘what does the number in the top right of the pool mean?’ you’ll see different numbers here. 5x, 35x, 100x, 250x. This is called a multiplier. Just like the emission rate, a multiplier on its own doesn’t tell us anything — but it is hiding secrets. Devs are free to choose whatever base number they like to make everything look more impressive. 100x could be the same as 10x or 1x.
The most important relationship to understand here is native vs non-native. The native token is that of the farm. Let’s revisit PolyMoneyPrinter. Their native token is called $PRINTER.
Non-native tokens are everything else you can stake there. $ETH, $WBTC, $MATIC, $USDT, $USDC, $DAI, $MAI, $LINK et al.
Non-native pools and farms almost always attract a 4% deposit fee. Sometimes a bit less. That’s the only reason they’re present — to raise cash flow for the farm developers. We can also take a more optimistic view from the developers perspective — attracting larger non-native investors who might not normally get involved with yield farms is positive. Such investors are more likely to build native liquidity with their rewards which helps support the token price. The deposit fee is supposed to be used for activities that create positive price pressure on the native token. It is most often the case that the deposit fee goes into a wallet controlled by the dev and is used for such activities manually at their discretion. Most devs will be looking for their own return on investment (ROI) from deposit fees, and hopefully, they do something sporting with some of it that could include token buy-backs or the creation of dividend vaults to create some incentive for people to buy and hold the native token.
Here’s the secret sauce. If you add up the multipliers of all the native farms and pools and separately add up the multipliers of all the non-native farms and pools you’re on your way to working out how much of the emissions are going to native, and how much is going to non-native pools.
Native farms and pools for $PRINTER could look something like:
PRINTER/USDC (250x)
PRINTER/WMATIC (250x)
PRINTER (150x)
So our native multiplier total is 650.
Non-native pools could look like:
USDC (50x)
USDT (50x)
WMATIC (50x)
WETH (50x)
WBTC (50x)
QUICK (50x)
LINK (50x)
Our non-native multiplier total is 350. Add them together and we get an overall total of 1000.
Some more simple math will tell us that 65% of emissions go to native pools, and 35% go to non-native pools. Just work out what percentage the native total is of the overall total. This is critically important for successful farms — but why?
It stands to reason that if more of the yield farm emissions go to native token holders, there is a real incentive to both buy and hold the native token and provide liquidity because the yield farming rewards are much better than the rewards going to non-native pools. I used 65% as an example here because generally speaking, the majority of decent yield farms set their native emission allocation somewhere around 65%, sometimes higher, rarely less than 60%.
‘Burner farms’ like PolyDumpsterFire might present the opposite of this. 35% native and 65% non-native, because the dev is only interested in displaying insanely high APRs to non-native stakers who will blindly pay a 4% fee in the hope of great returns, but the token price is going to zero so fast even deposit recovery can become a concern.
Find some examples and run through this exercise and record your findings. You’ll see patterns and similarities develop between certain calibres of farms and you’ll be able to spot the bad eggs from a mile away.
The math of these fundamentals is incredibly useful and insightful. You can politely and confidently ask devs questions in their Telegram groups for clarification where you see things that don’t look right. However, there are many other moving parts that can make or break a yield farm. These facts don’t mean you’re going to get it right every time, I still enter yield farms that fail, but understanding the above gives me a good advantage. For now, at least, you’re on your way to mastering emissions and you can vet any new farm on any blockchain and be the person in your Telegram that seems to know what they’re talking about.
Now you can have that Gif, you earned it. You do know Kung-Fu.
Thanks for reading and joining me for this. I’d love to hear your helpful feedback and if you enjoyed the article and found it helpful — what might you like me to focus on next time?
Be safe, and only invest what you honestly can afford to lose.
Thanks to Luan Dang, n3m0, Echo, B-Matic and everyone in the Batcave, Boba and OF. You know who you are. x
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