Summary
The cryptocurrency real yield metric compares the yield a project is offering to its revenue. If the actual staking return is higher than the interest provided, the issuance is diluted. This means the project's returns are unsustainable, or "not real." While the real yield is not necessarily better than the diluted issuance, which is often used for marketing purposes, the metric can serve as a useful tool to measure a project's long-term earnings prospects.
Introduction
High annual percentage yields (APYs) are often seen in the decentralized finance (DeFi) space and are undoubtedly attractive to investors. However, if you have ever encountered a 100% or even 1000% return on a staking opportunity, it is reasonable to doubt whether it is real. A popular way to evaluate the promised returns is to calculate the project's real return. This calculation method is simple, fast, and relatively effective, which can help you clearly evaluate the feasibility of the project's promises and estimate the "reality" of its actual returns.
What is DeFi liquidity mining?
With liquidity mining, users can earn cryptocurrency rewards by locking their assets in a yield pool. There are many different opportunities for liquidity mining, including liquidity pools, native network staking, and lending protocols. What these opportunities have in common is that they all generate returns for users by putting their funds to work. Yield miners typically use protocols that maximize their returns, known as yield optimizers. They also move funds around in order to find the best returns in the market.
As DeFi becomes more and more popular, many protocols have begun offering high rewards as an incentive for stakers. However, this often results in unnaturally and unsustainably high annual yields (APYs), with some projects offering APYs exceeding 1000%. Once these APYs drop due to shrinking project coffers, users will rush to sell their mined tokens, and token prices will often plummet as a result. It turns out that demand for such tokens is supported by issuance rather than utility.
Given the high APYs common in the DeFi space, how can one estimate the true value of a project and its potential to generate interest? One approach is to focus on the project’s real yield on cryptocurrency.
Sustainable Real Yield and Diluted Distribution
When we use the word "real" to describe a project's earnings, we are talking about the sustainability of its earnings. If the project's earnings can cover the number of tokens distributed to stakers, its own funds will not be depleted. In theory, if the project's earnings remain constant, it can bring users the same high APY indefinitely.
However, dilutive emissions are also common, most commonly when a project distributes APY in a way that is unsustainable over the long term, eventually leading to the depletion of its coffers. If the project does not increase revenue, it will not be able to maintain the same APY level. The APY in this case usually comes from the project's native token, which has a large supply and is easy to obtain.
Stakers may also sell these mined tokens on the open market, causing their price to drop. This can create a vicious cycle where projects must issue more native tokens to users to maintain the same APY, which causes the treasury to be depleted faster.
Note that while it is best to distribute “real yield” in the form of blue chip tokens, projects that distribute native tokens can also distribute real yield in a sustainable manner.
What is the Cryptocurrency Real Rate of Return Indicator?
The Crypto Real Yield Indicator is a quick way to assess the yield a project provides relative to its revenue. With this indicator, users can understand the proportion of diluted rewards in the project's rewards, or know that the project is mainly funded by token issuance rather than revenue. Let's take a simple example:
Over the course of a month, Project X issued 10,000 tokens at an average price of $10, with a total issuance value of $100,000. During the same period, the project earned $50,000 in revenue. Given only $50,000 in revenue and $100,000 in issuance, the project has a true yield deficit of $50,000. Therefore, the APY offered by the project is clearly highly dependent on dilutive issuance rather than actual growth. This simple example does not take into account operating expenses, but it is still a reasonable rough estimate to use when evaluating returns.
You may have noticed that real yield is conceptually similar to dividends in the stock market. If a company pays dividends to shareholders without corresponding income to support it, it is obviously unsustainable. For blockchain projects, their income mainly comes from service fees. For automated market makers (AMMs), their income may mainly come from liquidity pool transaction fees, while yield optimizers may share their performance fees with their governance token holders.
How to ensure the authenticity of DeFi returns?
First, you need to find a reputable project that can provide services that are trustworthy and useful. This is a good foundation for you to obtain sustainable returns. Secondly, you need to pay attention to the project's profit potential and specific user participation methods. You may need to provide liquidity to the protocol or stake its governance token in a fund pool. In addition, locking the native token is also a common mechanism.
Many users who seek yield prefer to receive yield in the form of blue-chip tokens because such assets have lower volatility. If you find a potential project and understand its mechanics, be sure to use the formula in the previous article to check the real yield of the project. Let's take a yield model that incorporates the real yield into its token economics as an example to show how to use the real yield indicator in this article to verify the real yield of the project.
The automated market maker protocol provides income in two ways. One is to provide income to holders of its governance token ABC, and the other is to provide income to holders of its liquidity provider token XYZ. According to the design, 10% of the platform's revenue is deposited in the treasury, and the remaining income is evenly distributed to the holders of the two tokens, deposited in their respective reward pools and paid in the form of BNB.
According to your calculations, the project will receive $200,000 in revenue per month. According to the project's token economics, the ABC and XYZ reward pools will each receive $90,000 in BNB to reward their respective stakers. We can calculate the real rate of return like this:
$200,000 – ($90,000 X 2) = $20,000
Our calculations show that the project has a $20,000 surplus and the revenue model is sustainable. This revenue distribution token economics model ensures that token issuance will never exceed revenue. By choosing a DeFi project with a sustainable distribution model, users can well realize real yields without having to deal with this data themselves.
Does relying on real yield make DeFi better?
In short, not necessarily. In the past, some projects did successfully gain users by increasing token issuance. However, these projects tended to gradually reduce their token issuance and move to a more sustainable model. It would be wrong to say that seeking a real rate of return is objectively better and relying on dilution is completely unsustainable. But in the long run, the revenue generation model of DeFi projects will only survive if it is combined with real use cases.
Conclusion
Through the lessons learned from previous DeFi cycles, the DeFi space will benefit greatly if more and more protocols can successfully implement features that increase adoption and drive sustainable revenue models. The conclusion about issuance is also clear: users are better off understanding the nature of token issuance and its role in expanding a project's user base and achieving potential sustainability.
Further reading
What exactly is liquidity mining in decentralized finance (DeFi)?
Introduction to DeFi 2.0 and why it matters
A Beginner's Guide to Decentralized Finance (DeFi)
