Over recent months, DeFi has been captured by a new narrative centered around protocols that generate “real yield.”
Instead of incentivizing stakeholders with dilutionary token emissions, real yield protocols pay token holders with revenues generated from fees.
As older tactics of sourcing liquidity have caused many DeFi tokens to underperform, projects are now revamping their tokenomics designs toward more sustainable models.
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As the era of high-risk, high-reward yields in decentralized finance has all but come to an end, a new trend of projects offering smaller but more sustainable yields has started to replace it.
What Is DeFi’s “Real Yield” Trend?
Anyone remotely involved with crypto has noticed that the market moves in cycles. So-called “bullish” periods typically follow Bitcoin halving events and—toward their end—are often marked by exorbitant project valuations as new market entrants rush to pile into the hype and promises. The sharp price surges that characterize bull markets are typically followed by even quicker plunges and prolonged “bearish” periods that only projects with the most robust fundamentals survive.
Moreover, every cycle is typically enveloped by different narratives—prevalent stories that aim to describe the current market structure or speculate on the next. While the first simmering of DeFi arrived in 2018 with the emergence of projects like Dharma, MakerDAO, and Compound, the space really took off during the “DeFi summer” of 2020 after Compound launched the COMP token to reward users for providing liquidity.
DeFi summer kicked off a period of yield farming mania that saw numerous projects mimicking Compound by launching tokens to offer yields to users. In the most extreme instances, liquidity providers were offered artificial APYs that briefly topped five, six, or even seven figures. This liquidity sourcing model helped bootstrap the nascent industry but also proved unsustainable in the long run. Liquidity dried up across DeFi as users started to disappear and most DeFi tokens significantly underperformed ETH throughout the 2021 bull run.
This early liquidity mining model is flawed because it is based on excessive emissions of the protocols’ native tokens rather than sharing organic protocol profits. For protocols, sourcing liquidity is key. However, taking this approach is incredibly expensive, with some projections estimating an average cost of around $1.25 for every $1 of liquidity secured. For liquidity providers and stakers, meanwhile, the nominally high yields protocols offer are misleading because the real yield—measured as nominal yield minus inflation—is non-existent.
After exhausting several narratives since DeFi summer, the crypto industry is now converging toward a new one. As with most others before it, it’s enveloped by a new buzzword: real yield. The term refers to protocols that incentivize token ownership and liquidity mining by sharing profits generated from fees. Real yield protocols generally return real value to stakeholders by distributing fees in USDC, ETH, their own issued tokens that have been taken off the market through buybacks, or other tokens that they haven’t issued themselves.
While the list of protocols behind the trend is growing, five have stood out from the bunch as torchbearers of the emerging “real yield” narrative.
GMX is a decentralized spot and perpetual exchange that has made rounds in recent weeks after its native governance token neared its all-time high price despite the ongoing bear market (GMX topped $62 in January; it hit $57 on September 5). Since launching in late 2021, GMX has quickly accrued deep liquidity and seen its trading volumes soar. Besides the apparent 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 the available assets for trading on the platform, while GMX is the project’s native governance and revenue-sharing token. 70% of the exchange’s trading fees are paid to liquidity providers or GLP token holders in the form of ETH on Arbitrum and AVAX on Avalanche, and the remaining 30% goes to GMX stakers. It currently offers 14% APR for staking GMX and 28% for holding GLP, not accounting for boosted yield offered for vesting.
This yield—secured through organic profit sharing rather than dilutionary token emissions—has proven attractive for liquidity providers and governance token holders. As a result, GMX has accrued the most liquidity on Arbitrum (over $304 million in total value locked on the chain) and has one of the highest staking rates for its governance token in the asset class, with around 86.15% of its total supply staked.
Synthetix is a decentralized protocol for trading synthetic assets and derivatives. It’s one of the oldest protocols in DeFi, finding early success in the Ethereum ecosystem after it revamped its tokenomics model to provide real yields to SNX holders. According to Token Terminal data, the protocol generates an annualized revenue of around $82 million, and the full sum goes to SNX stakers. With SNX’s price of around $3 and a fully-diluted market capitalization of around $870 million, the token’s price-to-earnings ratio stands at 10.47x.
The current APR for staking SNX stands at around 53%, with the yield partly coming from inflationary staking rewards in the native token and partly from exchange trading fees in the form of sUSD stablecoins. Because some liquidity mining rewards come from inflationary token emissions, Synthetix is not a pure real yield protocol. Still, it is one of DeFi’s top revenue-generating protocols offering one of the highest mixed yields for single-sided staking on the market.
Dopex is a decentralized options exchange on Arbitrum that lets users buy or sell options contracts and passively earn real yields. Its flagship product is its Single Staking Option Vaults, which provide deep liquidity for option buyers and automated, passive income for option sellers. Besides the SSOVs, Dopex also allows users to bet on the direction of interest rates in DeFi through Interest Rates Options and bet on the volatility of certain assets through so-called Atlantic Straddles.
While all Dopex products allow users to earn real yields by taking on some directional risk, the protocol also generates real revenue through fees, which it redirects to stakeholders. 70% of the fees go back to the liquidity providers, 5% to delegates, 5% to purchasing and burning the protocol’s rebate token rDPX, and 15% to DPX single-sided governance stakers.
Like with Synthetix, some of the staking yields for DPX come from dilutionary token emissions, meaning the liquidity mining model is mixed. Dopex currently offers around 22% APY for staking veDPX—a “vote-escrowed” DPX that stays locked for four years.
Redacted Cartel (BTRFLY)
Redacted Cartel is a meta-governance protocol that acquires the tokens of other DeFi projects to wield governance influence and provide liquidity-related services to other DeFi protocols. It currently generates revenue from three sources: the treasury, which consists of different yield-generating governance tokens; Pirex, a product that creates liquid wrappers that allow for auto-compounding and the tokenization of future vote events; and Hidden Hand, a marketplace for governance incentives or “bribes.”
To earn a portion of Redacted Cartel’s revenue, users need to “revenue-lock” the protocol’s BTRLFLY token for 16 weeks to receive rlBTRFLY. They then receive a portion of 50% of Hidden Hand’s revenue, 40% of Pirex’s, and between 15% and 42.5% of the treasury’s. The real yield is paid out in ETH every two weeks. In the last yield distribution, the protocol paid out $6.60 worth of ETH per rlBTRFLY, which comes from its real revenue.
Gains Network (GNS)
Gains Network is the decentralized protocol behind the perpetual and leveraged trading platform gTrade. Besides crypto assets, gTrade lets users trade synthetic assets like stocks and foreign exchange currencies. Many consider it the strongest competitor to GMX.
The protocol allows stakeholders to earn real yields generated from the trading platform fees in multiple ways. For example, users can stake GNS or provide single-sided DAI liquidity to earn yields generated from fees. In total, 40% of the fees from market orders and 15% from limit orders are allocated to GNS single-sided stakers, which currently earn a compounded annual yield of around 4% paid out in the DAI stablecoin. On the other hand, liquidity providers in the single-sided DAI vault and the GNS/DAI liquidity pools earn real yields of about 6% and 18% APY.
While “real yield” may have generated a buzz, it’s worth noting that this liquidity sourcing model isn’t perfect. For one, protocols need to be profitable to give something to their stakeholders, so it doesn’t do much for new projects with few users. Protocols in the bootstrapping phase must still resort to inflationary liquidity mining to compete and attract sufficient liquidity and trading volumes. Furthermore, if protocols must hand out their revenues to liquidity providers or token holders, that means they have less funding for research and development. This could likely hurt some projects in the long run.
Real yields or not, time and time again, history has shown that when the markets take a downturn and liquidity dries up, only the protocols with the strongest fundamentals and best product-market fit survive. While the “real yield” trend has only recently caught on, its survivors should flourish as DeFi grows in the future.
Disclosure: At the time of writing, the author owned ETH, rlBTRFLY, and several other cryptocurrencies.
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