In brief

The real yield of a cryptocurrency is a comparison of the yield a project provides to its revenue. If the return from staking is greater than the return generated, then the emissions are capital dilution. This means that their yield is not sustainable or can be considered as the “real” yield. Actual returns are not necessarily greater than emissions, which are often used for marketing purposes. However, this index can be seen as a useful tool to evaluate the long-term yield prospects of a project.

Introduce

Projects with sizable APYs are often seen in the decentralized finance (DeFi) sector, and this is certainly attractive to many investors. However, if you ever come across the opportunity to stake with a 100% or even 1000% APY, you should also question whether this is too good to be true. A common method for evaluating promised returns is to calculate a project's actual yield. This simple, quick and relatively effective calculation can help you evaluate the feasibility of the promises at a glance and estimate how “real” the actual returns are.

What is DeFi Yield Mining?

Yield mining is the act of allowing users to earn cryptocurrency rewards when they lock their assets in yield-bearing pools. There are various opportunities for yield mining, including liquidity pools, staking on the native network, and lending protocols. What they all have in common is that they generate yields for users in exchange for using their money. Typically, yield mining participants use protocols that maximize their yield. They are called yield optimizers. Yield mining participants will also move their funds around, in search of the best yields available in the market.

As DeFi became more popular, many protocols began offering higher rewards to incentivize users to stake. However, this often results in unusually high and unsustainable APYs, some even over 1000%. When these APYs drop due to shrinking project treasuries, token prices will often plummet as users rush to sell off the "farmed" tokens. As it turns out, demand for such tokens is driven by token emissions rather than their utility.

High APY is quite common in DeFi. So how do we estimate the true value of projects and their profit-making potential? One option is to look at the net yield from a project's cryptocurrency.

Realistic and sustainable returns versus diluted emissions

When we describe a yield as “real,” what we are talking about is its sustainability. If the project's revenue includes the number of tokens distributed to stakers, then the project's funds will not be depleted. Theoretically, the project can maintain the same APY in real terms indefinitely if revenue remains constant.

However, they often use diluted emissions – which is how a project distributes APY in a way that is unsustainable over the long term, and largely depletes its budget. If revenue does not increase, the project will not be able to maintain the same APY level. Such APY is typically distributed in the project's native token, as its large supply is readily available.

Staking participants may also be farming these tokens and selling them on the open market, thereby reducing their price. This is a vicious cycle because having to provide more native tokens to maintain APY also depletes funds faster.

Note, while “real yield” is better delivered in blue-chip tokens, a project that distributes its native tokens can also do so in a sustainable manner.

What is the real yield index of cryptocurrencies?

The Cryptocurrency Real Yield Index is a quick way to evaluate a project's offered yield relative to its revenue. This allows you to see how much of a project's rewards are diluted or are primarily supported by token issuance rather than funded by revenue. Let's look at an example.

In a little over a month, project During that same period, the project earned $50,000 in revenue. With only $50,000 in revenue but $100,000 paid for emissions, there would be a real yield deficit of $50,000. It is therefore clear that the APY provided depends more on diluted emissions than real growth. Our simple example here doesn't consider operating costs, but it's still a reasonable rough estimate to use when evaluating yields.

You may have noticed that real returns are conceptually similar to stock market dividends. A company that pays dividends to shareholders that are not supported by corresponding revenues is clearly unsustainable. For blockchain projects, revenue comes mainly from fees from a service provided. In the case of automated market makers (AMMs), this may be liquidity pool transaction fees, while the yield optimizer may share its performance fees with token holders its administration.

How to make sure your DeFi yields are real?

First, you will need to find a reputable project that offers a reliable and used service. This will give you the best starting point to earn sustainable returns. Next, look at the project's yield potential and exactly how you get involved. You may need to provide liquidity to a protocol or stake its governance tokens in a pool. Locking native tokens is also a common mechanism.

For many yield seekers, yield payouts in blue-chip tokens are preferred due to them being lower volatility assets. Once you have found a project and understand its mechanics, be sure to check the project's real yield using the above formula. Let's look at a yield model that has real yields baked into its token system – as well as how to test it with our metrics.

An automated market making protocol provides yield in two ways. First, for holders of governance tokens,ABC, and second, for holders of XYZ,its liquidity provider tokens. By design, ten percent of platform revenue is held in the treasury and the remainder is split 50/50 between holders of the two tokens in the respective reward pool and paid out in BNB.

According to your calculations, the project generates a monthly revenue of 200,000 USD. According to the project's tokenomic, 90,000 USD in BNB is distributed to participants staking in the ABC reward pool and 90,000 USD to those staking in the XYZ reward pool. We can calculate the real yield as follows:

200.000 USD – (90.000 USD X 2) = 20.000 USD

Our calculations show there is a surplus of $20,000 and this yield pattern is sustainable. This tokenomic model distributes yields and ensures that emissions will never be more than revenues. Choosing a DeFi project with a sustainable distribution model is a great way to find real profits without having to work with the metrics yourself.

Does real yield make DeFi projects better?

In short, not really. In the past, some projects have successfully attracted users thanks to the amount of emissions. Typically, these projects gradually reduce emissions and transition to more sustainable models. It would be a mistake to think that striving for real returns is preferable and that relying on emissions is completely unsustainable. However, in the long run, only DeFi projects with revenue-generating models and real use cases will be able to survive.

summary

Given the lessons learned from previous DeFi cycles, the fact that more protocols are successfully implementing features that drive adoption and generate sustainable revenue is a positive. As for emissions, the message about them is also clear: users need to clearly understand what they are, as well as their role in expanding the user base and the project's ability to achieve sustainability.

Read more:

• What is Yield Farming in Decentralized Finance (DeFi)?

• What Is DeFi 2.0 And Why Is It Important?

• The complete guide to decentralized finance (DeFi) for beginners