What Kind of Trend Does Defi’s “Real Yield” Show?
Everyone who has even a passing interest in cryptocurrencies is aware that the market goes in cycles. The so-called “bullish” periods often follow Bitcoin halving occurrences and, toward the end of their duration, are sometimes characterized by excessive project values as new market participants rush to pour into the excitement and promises. The rapid price increases that are characteristic of bull markets are frequently followed by even more rapid price declines and extended “bearish” periods. During these periods, only projects with the most robust fundamentals are able to endure.
In addition, each cycle is often surrounded by a variety of narratives, which are widespread stories that attempt to characterize the existing structure of the market or speculate on the upcoming one. The first stirrings of decentralized finance began in 2018, with the launch of projects such as Dharma, MakerDAO, and Compound. However, the sector didn’t really get off the ground until the “DeFi summer” of 2020, when Compound launched the COMP token as a way to reward users for providing liquidity. This caused the sector to explode.
The DeFi summer was the beginning of a period of yield farming craze, during which numerous projects attempted to imitate Compound by issuing tokens to offer yields to users. This mania was started by the DeFi summer. In the most severe cases, fictitious annual percentage yields (APYs) that briefly surpassed five, six, or even seven figures were provided to liquidity providers. This technique for acquiring liquidity was helpful in getting the fledgling sector off the ground, but it turned out to be unsustainable in the long run. Because customers began to leave the platform, liquidity dried up across DeFi, and the majority of DeFi coins underperformed ETH by a significant margin over the whole 2021 bull run.
This early liquidity mining approach is faulty due to the fact that it is dependent on excessive emissions of the native tokens of the protocols, rather than sharing organic profits generated by the protocols themselves. The acquisition of liquidity is an essential component of protocols. On the other hand, utilizing this strategy results in astronomically high costs, with some forecasts indicating an average cost of almost $1.25 for each $1 that is secured as liquidity. The ostensibly high rates that protocols offer are misleading for liquidity suppliers and stakers, however, due to the fact that the actual yield, which is calculated by subtracting the nominal yield from the inflation rate, does not exist.
After running out of steam on a number of different narratives during DeFi summer, the cryptocurrency industry is finally beginning to converge on a new one. Real yield is the current buzzword, as was the case with the majority of others that came before it. The phrase refers to protocols that share revenues gained from fees in order to encourage token ownership and liquidity mining. These protocols can also be thought of as incentive mechanisms. Real yield protocols typically return real value to stakeholders by way of fee distributions in USDC, ETH, their own issued tokens that have been removed from the market through buybacks, or other tokens that they haven’t issued themselves. Real yield protocols can also distribute fees in tokens that haven’t been issued by them.
While the number of protocols that are responsible for the trend continues to expand, five of them have emerged as the most prominent torchbearers of the rising “real yield” narrative.
GMX is a decentralized spot and perpetual exchange that has been making headlines in recent weeks after the price of its native governance token came within striking distance of its all-time high despite the continuation of the bear market (GMX reached a high of $62 in January and reached a low of $57 on September 5). Since its introduction in the latter half of 2021, GMX has experienced a meteoric rise in both the depth and volume of its trading markets. In addition to an apparent fit between the product and the market, a significant portion of its success can be credited to its one-of-a-kind revenue-sharing model.
GLP and GMX are the two tokens that are native to the project. GLP is an index of the assets that are available for trading on the platform, while GMX is the native governance and revenue-sharing token for the project. GLP is abbreviated as GLPX. 70% of the trading fees collected by the exchange are distributed to the liquidity providers or holders of GLP tokens in the form of ETH on Arbitrum and AVAX on Avalanche. The remaining 30% of the trading fees are distributed to GMX stakers. It now offers an annual percentage rate (APR) of 14% for staking GMX and 28% for holding GLP; this does not take into account the increased yield that is offered for vesting.
This yield, which is guaranteed through organic profit sharing rather than dilutionary token emissions, has proven to be appealing to holders of governance tokens and liquidity providers. As a direct consequence of this, GMX has amassed the most liquidity on Arbitrum (with more than 304 million dollars’ worth of total value locked on the chain), and it also has one of the highest staking rates for its governance token in the asset class, with approximately 86.15% of its total supply staked.
The Synthetix (SNX)
A decentralized system for trading synthetic assets and derivatives, Synthetix was developed by Synthetix. It is one of the earliest protocols in DeFi, and it found early success in the Ethereum ecosystem after it redesigned its tokenomics model to deliver real yields to SNX holders. Currently, it is one of the most widely used protocols in DeFi. According to the data provided by Token Terminal, the protocol generates an annually revenue of approximately $82 million, and the entirety of this value is distributed to SNX stakeholders. The price of one SNX token is approximately three dollars, and its fully diluted market capitalization is approximately eight hundred and seventy million dollars; hence, the token’s price-to-earnings ratio is 10.47 times.
The annual percentage rate (APR) for staking SNX is currently somewhere around 53%. The yield is generated in part by inflationary staking rewards in the native token and in part by exchange trading fees in the form of sUSD stablecoins. As a result of the fact that some of the rewards for mining liquidity come from inflationary token emissions, Synthetix cannot be considered a pure real yield protocol. In spite of this, it is one of the top protocols for earning income for DeFi, and it offers one of the highest mixed yields for single-sided staking available on the market.
Dopex is a decentralized options exchange built on Arbitrum that gives users the ability to buy or sell options contracts while also earning real yields in a passive capacity. The Single Staking Option Vaults are the company’s flagship offering. These vaults offer high levels of liquidity for option buyers and an automatic, passive income for option sellers. In addition to the SSOVs, Dopex gives its users the opportunity to speculate on the movement of interest rates in DeFi through Interest Rates Options and to wager on the volatility of particular assets through so-called Atlantic Straddles. SSOVs are a type of single-stock option value.
Although all Dopex products enable users to earn real returns by taking on some directional risk, the protocol also creates real cash through fees, which it then redirects to stakeholders. This revenue can then be used to pay for other Dopex goods. 70% of the fees are given back to the liquidity providers, 5% are given to delegates, 5% are spent on purchasing and burning the protocol’s rebate token rDPX, and 15% are distributed to DPX single-sided governance stakers.
As is the case with Synthetix, a portion of the staking returns for DPX are derived through dilutionary token emissions, which indicates that the mining model for liquidity is complex. Dopex is now offering an annual percentage yield (APY) of approximately 22% for staking veDPX, which is a form of DPX that is “vote-escrowed” and remains locked for a period of four years.
Cartel with Redactions (BTRFLY)
Redacted Cartel is a meta-governance protocol that acquires the tokens of other DeFi projects in order to exert governance influence and provide liquidity-related services to other DeFi protocols. Cartel also acquires the tokens of other DeFi projects. Treasury, which holds various yield-generating governance tokens; Pirex, which builds liquid wrappers to enable auto-compounding and the tokenization of future voting events; and Hidden Hand, a marketplace for governance incentives or “bribes,” are the three main revenue streams at present.
Users are required to “revenue-lock” the BTRLFLY token of the protocol for a period of 16 weeks in order to receive rlBTRFLY. This allows users to earn a share of the revenue generated by Redacted Cartel. They will then receive a portion of between 15% and 42.5% of the treasury’s revenue, in addition to a share of 50% of Hidden Hand’s revenue and 40% of Pirex’s revenue. The true yield is distributed every two weeks in the form of ETH. As part of its most recent yield distribution, the protocol distributed $6.60 worth of ETH per rlBTRFLY, which was funded by the organization’s actual revenue.
Gains Network, Inc. (GNS)
gTrade, a trading platform that offers both perpetual and leveraged trading, is powered by the decentralized protocol known as Gains Network. Users of gTrade are able to trade not only cryptocurrencies but also synthetic assets like as stocks and currencies from other countries. Many people believe that it is the most formidable rival to GMX.
Stakeholders are given several opportunities to earn genuine yields, which are created from the fees charged by the trading platform thanks to the protocol. Users can earn returns produced from fees by, for instance, staking GNS or providing single-sided DAI liquidity. GNS single-sided stakers receive a total of 40% of the fees generated by market orders and 15% of the fees generated by limit orders. These stakers now receive a compounded yearly income of approximately 4%, which is paid out in DAI stablecoin. On the other hand, liquidity providers in the single-sided DAI vault and the GNS/DAI liquidity pools earn real yields of approximately 6% and 18% APY respectively. These returns are earned on the DAI tokens they hold.
A Few Parting Thoughts
Although the term “real yield” may have caused a stir, it is important to keep in mind that the model used to source liquidity is not without its flaws. To begin, in order to provide something of value to their stakeholders, protocols have to generate a profit; consequently, this does not help new projects that have a small user base. In order to compete and attract sufficient liquidity and trading volumes, protocols that are still in the bootstrapping phase are required to continue to engage in inflationary liquidity mining. In addition, if protocols are required to distribute a portion of their earnings to liquidity providers or token holders, this means that the protocols have less money available for research and development. It is possible that certain projects will suffer as a result of this in the long run.
Whether or not real yields are involved, history has demonstrated time and again that when the markets experience a downturn and liquidity dries up, the only protocols that survive are the ones that have the strongest foundations and the best product-market fit. Although the “real yield” movement has only just begun to gain traction, its survivors ought to thrive as DeFi continues to expand in the years to come.