“Real Yield” is what is currently expected to revive Defi, and it may also become a trend in the crypto market in 2023.
The brutal bear market in 2022 has robbed a large number of crypto projects and created many new coins. To ride out the volatility, long-time believers in decentralized finance (DeFi) are looking for something: "real yield" as a hidden gem and hoping it can become a sustainable trend. No matter how turbulent the market is.
So what exactly is Real Yield in Defi? Does it really have potential? How to find real yield projects? Let’s discuss Real Yield in the following article.
What is Real Yield? Top “Standard” Items with the Most#RealYield
What is Real Yield in Defi?
In traditional finance, Real Yield refers to actual profit - profit after deducting inflation. For example, when you buy a bond with an annual return of 8%, but the annual inflation rate is 7%. => Then the real yield of the bond is 1%.
In fact, this concept is nothing new, because it is just a simple way of operating ordinary business. But when applied to Defi projects, it is more complicated. So what is the Real Yield in Defi?
First of all, you need to know that in the crypto market, there are many Defi projects that allow users to pledge, send, and lock their own coins. In return, they will receive rewards/profits/interests.
The reward/profit here is not USD or BTC, but generally the token issued by the project. For example, if you deposit coins into the lending platform Compound (COMP), the profit you earn is the COMP token.
What happens after that?
– They raise the interest rate (called APR, APY) to sky-high levels to entice people to stake/send tokens on their platform. Then they issue staking tokens to pay out rewards.
– If the market is trending upward, the price of that token will go up – that’s a good thing. But what if the market is trending downward? People rush to sell the token, the price drops quickly, and even loses liquidity.
Unsustainable. Unfortunately, this is how many DeFi projects have been operating. And now, it requires DeFi protocols to rethink how projects operate. Thus, this concept was born: Real Yield.
Real Yield in Defi is the only Defi project that can generate income from the services it provides. It then distributes the profits extracted from this income source to users who are staking or searching for tokens. This income must be denominated in blue chip assets or stablecoins to ensure high value preservation and liquidity over time.
How important is Real Yield?
If you are someone who has participated in DeFi protocols such as Yield Farming and Staking Pool to make profits in 2020-2021, you can fully understand how "terrible" the interest rates offered by these protocols are for participants.
Looking at the above picture, you can easily see how much money an investor will get after a period of farming by just doing normal math. In particular, as more and more people participate in farming, the APR and APY levels will decrease, and the last person to participate is the one who "loses" the most.
But with Real Yield, projects will focus more on how to make a profit from their products, rather than just printing tokens to bluff and distribute to users. In the long run, creating sustainable profits will help projects develop steadily, rather than being inflated like APY and then sinking.
However, profitability alone is not enough, there are still many problems:
What happens if the project doesn't generate enough profit to pay out such huge sums of money to investors?
And if Farming issues such a large number of tokens, how “terrible” will inflation be? As a result, there have been many “Rug Pull” cases, causing many people to go bankrupt because they fell into the “mouse trap” set.
As we all know, the revenue generated by a project sometimes cannot offset the inflation of the project's tokens because they reward people with incredible numbers. That's why we sometimes think that the project is profitable, but in fact they are losing money. Therefore, we have the following formula to calculate the actual rate of return:
Among them, Revenue is the income of the project, and Token Emissions is the number of tokens obtained by users through incentives.
=> As you can see, Real Yield was born as a standard to help evaluate whether a cryptocurrency project is truly sustainable and has long-term development.
Elements of Creating a Sustainable Real Yield Project
Usually, when it comes to DeFi, many people first think of hacker attacks, canvassing, token inflation, price crashes, and products with low applicability.
However, the Real Yield movement opens up a new perspective for investors on the decentralized financial market, which is different from the traditional financial market - TradFi (Traditional Finance). Specifically, the project must meet the following conditions:
There are clear products.
There are obvious users.
The project needs to generate revenue (the most important factor).
Why the above 3 factors? Since most traditional DeFi protocols incentivize users with very high APR and APY levels, users tend to sell stablecoins or other assets immediately after receiving rewards, which inadvertently creates huge selling pressure on project tokens.
Therefore, the project must generate more diversified revenue streams from protocol activities to "compensate" for the market's inflation level. Real Yield is different from the normal Yield in "Real", which is why any project that earns a lot of real profit from its protocol, the project has a Real Yield. The following are common ways that protocols profit from their operations:
DEX: Uniswap, SushiSwap, Curve, 1inch, Balancer, PancakeSwap, Trader Joe, Osmosis, QuickSwap, and SpookySwap: In this case, the fees users pay for each trade are real earnings.
NFT Marketplace: OpenSea and LooksRare: NFT transaction fees and licensing fees are actual revenue.
Derivatives trading: dYdX, GMX and Synthetix: closing, opening, holding fees, liquidation fees are actual yields
Lending: Aave, Compound, MakerDAO, and TrueFi: Spreads between lending and borrowing rates
Infrastructure: Filecoin, Helium, Arweave and The Graph: renting data storage resources, providing data, data query fees…
=> In short, a real revenue project must have a business model that users are willing to pay to use. The more fees collected, the more sources there are, and the new project can be maintained and developed sustainably.
Note: Not every project with good income is Real Yield. The essence of Real Yield is the profit after deducting inflation. If the income is 5% and the token inflation rate is 5%, the yield here = 0.
How to find real yield projects?
To determine actual profits in DeFi, you can use a combination of 2 tools: Token Terminal and Messari.
Step 1: Use Token Terminal to view the total project revenue and protocol revenue. From the homepage, select "Metrics", then "Protocol Revenue" and search for the protocol you want to analyze.
Step 2: Use Messari to determine the project's token issuance. Navigate to the profile of a given token and select "Token Economics" and then "Supply Schedule". If Messari does not provide this data, use CoinGecko or Dune Analytics as alternatives.
Step 3: Compare the Revenue lookup on Terminal to its Emissions on Messari. Remember to multiply the emissions value by the price of the token to understand the total value its emissions are generating for stake.
Then you calculate according to the formula I mentioned above:
Revenue – Token Emission = Actual Yield
Note that this is not a completely accurate measure as it does not provide a given project’s overhead. However, it will give you a rough idea of how reliant a project is on issuing tokens for revenue.
After you feel you have identified a protocol that shows promising numbers, make sure that protocol has the following:
1. Product/Market Fit: There must be a fundamental desire among everyone to use the protocol, regardless of market conditions or token incentives.
2. There must be on-chain revenue: If the protocol does not generate revenue, it is not real profit. Make sure this revenue exceeds token emission + operating costs. Only by generating revenue can the project continue to develop.
3. Profits should be paid in blue-chip coins: Defi projects that meet the actual yield standard are those that pay profits to users in valuable tokens/coins such as BTC, ETH, or stablecoins such as USDC or BUSC. There is no full payment in tokens issued by the project.
3. Profits should be paid in blue-chip coins: Defi projects that meet the actual yield standard are those that pay profits to users in valuable tokens/coins such as BTC, ETH, or stablecoins such as USDC or BUSC. There is no full payment in tokens issued by the project.
4. Have a clear roadmap: Projects with Real Yield are not necessarily good, and vice versa - projects without Real Yield are not necessarily poor quality projects. What is important is that the project has a clear roadmap to use the Yield from the emission source.
Also, you need to remember that revenue, profit, and user value are two different issues. Since many projects generate revenue, the profit is high but they do not share that revenue with token holders.
Top Real Yield Projects in Top Defi
But if you are worried that how to find Real Yield projects in Defi is too complicated, don’t worry too much. Today we will reveal the top 5 real yield projects to you.
1.GMX (GMX)
GMX is Arbitrum's flagship DEX with a TVL of $250 million. It offers up to 30x leverage with low slippage for spot crypto pairs such as BTC, ETH, and AVAX. The GMX protocol consists of two tokens: GMX - the utility and governance token, and GML - the liquidity provider token.
GMX grid holders receive 30% of the fees generated by swaps and leverage, while GLP holders receive the remaining 70%. In addition, these fees are paid in ETH - a "blue chip" cryptocurrency with relatively reliable long-term value.
The success of GMX with its unique economic model has made GMX one of the most successful Real Yield projects at present. According to data from November 2022, GMX has distributed profits of approximately US$73 million, and the number of users using the product is as high as 238,000. LP earns 70% of GMX's revenue through GLP tokens, and the remaining 30% belongs to GMX holders (GMX locked users) distributed in the form of ETH or AVAX, depending on the chain used. GMX currently has 86% of its tokens locked for profit according to the above model.
dYdX (DYDX)
dYdX is a very popular decentralized exchange based on Ethereum. It supports spot trading, but mainly focuses on providing users with derivatives and margin trading.
According to Token Terminal, dYdX has generated $63 million in protocol revenue in the past 90 days. DYDX holders can stake dYdX to receive a portion of this revenue, and they are also eligible for discounts on trading fees.
It should also be noted that despite the profitability of the dYdX token, it has previously had a significant dilution. Its circulating supply is currently 65 million, but the maximum supply is 1 billion. Its remaining supply will be distributed over the next four years - only 2.5% is available to current dYdX stakers.
Synthetix (SNX)
Synthetix is a decentralized protocol for trading synthetic assets and derivatives. It is one of the oldest protocols in DeFi and has quickly become successful in the Ethereum ecosystem after improving its token economics model to provide real returns to SNX holders. According to Token Terminal data, the protocol generates about $82 million in revenue per year, all of which goes to SNX investors.
The current APR for SNX staking is often very high, sometimes exceeding 100%. The yield comes partly from inflation rewards in the native token and partly from exchange trading fees in the form of the stablecoin sUSD. Because part of the liquidity mining rewards come from the issuance of inflation tokens, Synthetix is not a pure Real Yield protocol. However, it is one of the top income-generating protocols in DeFi, offering one of the highest blended yields on the market.
Umami (UMAMI)
Another Arbitrum-based protocol that is very popular among projects with Real Yield. Umami is a market maker and liquidity provider that helps partner protocols quickly scale their liquidity. It prides itself on providing “sustainable, hedged DeFi yields.”
All UMAMI products rely on earning revenue from on-chain revenue streams, rather than an inflationary token model. By sending one’s Umami to mUmami, the owner can earn a 6% APR on Umami’s financial and protocol revenues, in WETH. While not as high as some other protocols, the project explicitly embraces “real yield” as a strategy and consistently follows this principle.
Dopex (DPX)
Dopex is a decentralized options exchange on Arbitrum that allows users to buy and sell options contracts and passively earn real income. Dopex also allows users to bet on DeFi through Interest Options and earn interest, and bet on the volatility of certain assets based on a tool called Atlantic Straddles.
While all Dopex products allow users to earn real profits by accepting certain specific risks, the protocol also generates real revenue through fees passed on to stakeholders. 70% of fees are returned to liquidity providers, 5% to delegators, 5% is used to purchase and burn rDPX tokens for the protocol, and 15% is returned to DPX unilateral governance stakers.
Like Synthetix, part of DPX’s staking returns come from the issuance of diluted tokens, meaning the liquidity mining model is hybrid. Dopex currently offers about 22% APY for staking veDPX — a “vote-guaranteed” DPX that will be locked up for four years.
Redacted（BTRFLY）
Redacted is a protocol based on a bonding mechanism for minting BTRFLY tokens with a fairly high APY (about 180,000%) provided from the project’s treasury. In other words, the Redacted Cartel is considered a yield aggregator for yield aggregators, optimizing the highest level of capital efficiency and helping users realize certain benefits of the protocol.
BTRFLY can be staked and locked for 16 to 17 months in exchange for locked BTRFLY (rlBTRFLY). Redacted also deducts the revenue generated by the Redacted product ecosystem and shares the funds with rlBTRFLY holders, which are paid in ETH.
Currently, the main rewards for users come from token issuance. But the newly launched BTRFLY v2 BTRFLY becomes a token with limited supply and focuses on "creating real profits for rlBTRFLY holders."
Will “Real Yield” become a trend in Defi?
I personally think that Real Yield should be the goal that Defi projects need to pursue. The emergence of Real Yield will eliminate projects with poor quality and high virtual value...help purify the market. The future of the Real Yield DeFi protocol will create sustainable products and services, real utility, real profits, and bring value to the community. From there, it will help users have a more positive view of cryptocurrencies, especially DeFi.
Although Real Yield has left a lot of good impressions, the model is not perfect and still has some limitations:
First: a protocol needs to be profitable in order to offer something to its stakeholders, so it doesn’t do much for new projects with few users.
Second: Protocols in the new development stage still need to use token issuance to compete and attract users to provide liquidity and trading volume.
Third: If the protocol shares this revenue with liquidity users or token holders, it means that the project has less research and development funds. In the long run, this may affect some projects.
Fourth: Many projects overuse "Real Yield" to beautify their names. Please request that Real Yield will only be generated when the project has stable profits to share with project investors. Therefore, you need to carefully check these projects before investing.
Only protocols with clear principles, directions, and products that fit the market will survive. The trend of "Real Yield" has just begun, and there are still many bright doors to look forward to in the future of DeFi.
in conclusion
Hopefully, through this article, you have learned what Real Yield is in Defi and what are the projects that best meet the "Real Yield" criteria today. Always keep in mind that only "real profitable" projects can be sustainable in the long run. Therefore, always observe the cryptocurrency market so that you can evaluate and find standard real yield projects to invest in. This article is for reference only and is not an investment advice. I hope you find this information useful and beneficial. I wish you all good luck and success in 2023!