key takeaways
- In recent months, DeFi has been captured by a new narrative centered around protocols that generate “real yields”.
- Rather than incentivize stakeholders with weak token emissions, the Actual Yield protocol pays token holders with revenue generated from fees.
- As many DeFi tokens are underperforming due to the old strategy of obtaining liquidity, projects are now improving their token designs towards a more sustainable model.
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As the era of high-risk, high-reward returns in decentralized finance is over, a new trend of projects offering smaller but more sustainable returns has begun to replace it.
What is DeFi’s “Real Yield” Trend?
Anyone even remotely involved with crypto has noticed that the market moves in cycles. So-called “bullish” periods typically follow bitcoin halving events and – towards their end – are often marked by excessive project valuations as new market entrants pile up in hype and promises. The sharp price jumps that characterize a bull market are usually followed by even sharper declines and a longer “bearish” period, which only the strongest fundamentals survive.
In addition, each cycle is usually surrounded by different narratives—traditional stories intended to describe the current market structure or speculate on the next. While DeFi’s first simmering occurred in 2018 with the emergence of projects like Dharma, MakerDAO, and Compound, space really took off after the “DeFi Summer” of 2020. mix Launched COMP Token to reward users for providing liquidity.
The DeFi summer started a period of yield farming frenzy, in which several projects imitated Compound by launching tokens to provide produce to users. In the most extreme examples, liquidity providers were offered artificial APYs that briefly topped figures of five, six or seven. This liquidity sourcing model helped bootstrap the nascent industry, but it also proved unstable in the long run. As users began to disappear, the liquidity in DeFi was exhausted and most DeFi tokens significantly underperformed ETH during the 2021 bull run.
This initial liquidity mining model is flawed because it is based on excessive emissions of the protocol’s native tokens rather than organic protocol profit sharing. For the protocol, sourcing liquidity is critical. However, adopting this approach is incredibly expensive, with some projections Estimated average cost of approximately $1.25 for every $1 of secured liquidity. Meanwhile, for liquidity providers and stakeholders, offering a nominal high return protocol is misleading because the actual return—measured as the nominal return minus inflation—is non-existent.
After ending many narratives since the DeFi summer, the crypto industry is now converging towards a new one. As with most others before it, it’s covered by a new buzzword: real yield. The term refers to protocols that encourage token ownership and liquidity mining by sharing profits generated from fees. Real yield protocols typically return real value to stakeholders by distributing fees in USDC, ETH, self-issued tokens that have been taken off the market through buybacks, or other tokens that they have not issued themselves. .
whereas The list of protocols behind the trend continues to grow, with five standing out from the bunch as torchbearers of the emerging “real yield” narrative.
GMX (GMX)
gmx is a decentralized space and permanent exchange that has rallied near its all-time high price in recent weeks despite the ongoing bear market for its native Governance token (GMX was above $62 in January; it peaked at $57 on September 5th). Gone). Since its launch in late 2021, GMX has rapidly accumulated deep liquidity and has seen its trading volume increase. Aside from the obvious product market fit, a large part of its success can be attributed to its unique revenue-sharing model.
The project has two native tokens: GLP and GMX. GLP represents an index of assets available for trading on the platform, while GMX is the core governance and revenue-sharing token of the project. 70% of the exchange’s trading fees are paid as ETH to liquidity providers or GLP token holders arbitrum and AVAX on Avalanche, and the remaining 30% goes to GMX Stackers. This currently offers a 14% APR for betting GMX and 28% for holding GLP, not accounting for the increased yield offered for vesting.
This yield-liquidity, secured through organic profit sharing rather than weak token emissions, has proven attractive to providers and governance token holders. As a result, GMX has generated the highest liquidity on Arbitrum (over $304 million in on-chain net closing value) and one of the highest staking rates for its governance tokens in the asset class, staking approximately 86.15% of its total supply. But it’s on. ,
Synthetics (SNX)
synthetics It is a decentralized protocol for trading synthetic assets and derivatives. It is one of the oldest protocols in DeFi, achieving early success in the Ethereum ecosystem after modifying its Tokenomics model to provide real yields to SNX holders. According to token terminal Data, the protocol generates approximately $82 million in annual revenue, with the entire amount going to SNX Stackers. With a price of SNX around $3 and a fully diluted market capitalization of approximately $870 million, the coin has a price-to-earnings ratio of 10.47x.
The current APR for staking SNX is approximately 53%, with the yield partly coming from inflation staking rewards in native tokens and partly from exchange trading fees in the form of SUSD stablecoins. Since some of the liquidity mining rewards come from inflation token emissions, Synthetix is not a pure real yield protocol. Nevertheless, it is one of DeFi’s top revenue-generating protocols that offers the highest compounded returns for single-sided bets on the market.
Dopex (DPX)
dopex Arbitrum is a decentralized options exchange that allows users to buy or sell options contracts and earn real returns passively. Its flagship product is its Single Staking Options Vault, which provides deep liquidity for option buyers and automatic, passive income for option sellers. In addition to SSOV, Dopex also allows users to place bets on the direction of interest rates in DeFi through interest rate options and the volatility of certain assets through so-called Atlantic straddles.
While all Dopex products allow users to earn real yields by taking some directional risk, the protocol also generates real revenue through fees, which it redirects to stakeholders. 70% of fees go back to liquidity providers, 5% to delegates, 5% to buy and burn the protocol’s discount token rDPX, and 15% to DPX single-party governance stakeholders.
Like Synthetix, some of the staking returns for DPX come from weak token emissions, which means that the liquidity mining model is mixed. Dopex currently offers around 22% APY for staking veDPX – a “vote-escrow” DPX that is locked for four years.
Modified Cartel (BTRFLY)
modified cartel is a meta-governance protocol that acquires tokens from other DeFi projects in order to reduce the impact of governance and provide liquidity-related services to other DeFi protocols. It currently generates revenue from three sources: Treasury, which holds various yield-generating governance tokens; Pyrex, a product that makes Liquid wrappers that allow for auto-compounding and tokenization of future vote events; and a marketplace for Hidden Hands, governance incentives or “bribes”.
To earn a portion of Redacted Cartel’s revenue, users must “revenue-lock” the protocol’s BTRLFLY tokens for 16 weeks in order to receive rlBTRFLY. They then receive 50% of Hidden Hand’s revenue, 40% of Pyrex and between 15% and 42.5% of Treasury. The actual return is paid out in ETH every two weeks. In the previous yield distribution, the protocol paid $6.60 worth of ETH per rlBTRFLY, which comes from its actual revenue.
Gain Network (GNS)
profit network The decentralized protocol behind the perpetual and leveraged trading platform gTrade is. In addition to crypto assets, GTrade lets users trade synthetic assets such as stocks and forex currencies. Many consider it to be GMX’s strongest competitor.
The protocol allows stakeholders to earn real returns arising from trading platform fees in a number of ways. For example, users can stake GNS or provide single-party DAI liquidity to earn rewards generated from fees. Overall, 40% of fees from market orders and 15% from limit orders are allocated to GNS single-party stakeholders, who currently earn a compound annual yield of around 4% paid in the DAI stablecoin. On the other hand, liquidity providers in unilateral DAI Vault and GNS/DAI liquidity pools earn real returns of around 6% and 18% APY.
final thoughts
While the “real yield” may have generated a buzz, it is worth noting that this liquidity sourcing model is not perfect. For one, the protocol has to be profitable to offer something to its stakeholders, so it doesn’t do much for new projects with few users. Protocols still in the bootstrapping phase must resort to inflationary liquidity mining to compete and attract sufficient liquidity and trading volume. Furthermore, if the protocol must delegate its revenue to liquidity providers or token holders, it means they have less funding for research and development. This can hurt some projects in the long run.
Real returns or not, time and time again, history has shown that when markets turn bearish and liquidity dries up, only the protocols with the strongest fundamentals and the best product-market fit survive. While the trend of “real yield” has caught on recently, its survivors should flourish in the future as DeFi grows.
Disclosure: At the time of writing, the author holds ETH, rlBTRFLY, and several other cryptocurrencies.