Résumé
Decentralized finance (DeFi) protocols offer decentralized financial services through smart contracts and charge fees for these services. When a DeFi project's revenue increases, it attracts more users and liquidity.
Introduction
Choosing between different DeFi protocols can take a lot of time and effort. Many seem similar, so how do we know which one is best for generating passive income from our cryptocurrencies? An essential step is to understand a platform's revenue and the share it shares with its users. You can then use this information to make an informed decision about where to invest your assets.
How DeFi protocols work
Decentralized finance (DeFi) protocols offer a range of financial services that operate via smart contracts. For example, a DeFi protocol could offer decentralized trading services, lending, and liquidity pools, all executed via smart contracts on a blockchain. All you need to access and use these services is a wallet and some cryptocurrency to cover transaction fees.
The financial services offered by DeFi have almost no limits. You can access exchange services, money markets, derivatives and savings products in the DeFi universe. All these services are permissionless and unmediated in nature.
How do DeFi protocols generate revenue?
The operating costs of DeFi services are linked to the computing power necessary to execute smart contracts. Users generally cover this amount with the gas fees they pay. However, there are also other additional costs for services such as development and maintenance. DeFi protocols charge fees for their services to cover these costs and to generate profits.
Decentralized exchanges (DEX)
Users who swap tokens on a DEX must pay fees to use its services. For example, a transaction may result in a 0.3% fee going towards the DEX operator's cash or liquidity reserves.
Loan protocols
Users who borrow using a lending protocol must pay borrowing fees. Part of this amount will be used to pay the liquidity provider (other users who provided capital), while the rest will go to the protocol.
Why is income important?
Beyond covering the costs of a protocol, improved revenue and profits can also benefit stakers. DeFi projects often maintain a revenue sharing model through the holding of governance tokens. They can also use the revenue to increase APRs for stakers or liquidity providers on their platforms.
For DEXs, higher revenues can attract more users and, in turn, improve liquidity. Yield aggregators can also increase APY if they benefit from combining funds staked by users to pay “bribes” as network validators.
In summary, we can describe the revenue of a project in a circular way:
Popular projects attract liquidity, which attracts more users and forms a virtuous circle.
Increasing trading volume and liquidity helps reduce slippage and accelerate execution.
More users improve legitimate trading volume, which translates into increased revenue.
Revenues are shared with users who have staked funds, which increases liquidity.
This cycle also attracts users who want to get started in yield farming. People who want to invest their money can increase their chances of maximizing their earnings with compound interest. The more successful a project is, the more liquidity there is and, therefore, the more yield farmers it attracts. This process generates additional revenue that can be used to improve a protocol's offering.
How to know the amount of revenue generated by DeFi protocols?
DeFi operates on blockchain, which means that almost all transaction information, depending on the blockchain used, is verifiable. A blockchain explorer is a tool easily accessible to everyone, but that doesn't mean we can always understand the extent of a protocol's revenue. There are a number of blockchain data aggregators that make it simple so you can better understand each protocol's revenue.
By searching on Google and looking at reliable sources, you should be able to find DeFi protocol metrics, earnings, and revenue statistics. These numbers can help you make more informed investment decisions.
Conclusion
Revenue is an essential indicator to study, whether it is the actual performance of a project or its fundamentals. You can only invest wisely if you understand how a protocol generates and shares its revenue. You can delve deeper into the subject by diving into DeFi 2.0, yield farming and classic financial topics on Binance Academy.
More information
What is yield farming in decentralized finance (DeFi)?| Binance Academy
What is DeFi 2.0 and why is it important? | Binance Academy
Introduction to DeFi | Binance Academy
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