Summary

Real crypto yield as a metric compares the yield offered by a project with its income. If the return from staking is greater in real terms than the interest given, then the emission causes dilution. This means that the yield is not sustainable or in layman's terms it is not "real". Real yield is not always better than dilution effect emissions which are often used for marketing purposes. However, this indicator can serve as a useful tool for gauging the long-term yield prospects of a project.

Introduction

The large APYs often offered in the decentralized finance (DeFi) space are certainly attractive to many investors. However, if you ever encounter returns of 100% or even 1000% from staking opportunities, it is worth asking whether the promises are made up. One popular method for evaluating promised yields is to calculate the real yield of a project. This easy, fast, and relatively effective calculation can help you assess the feasibility of a project's promise at a glance and estimate how “real” the actual yield is.

What Is DeFi Yield Farming?

Yield farming allows users to earn cryptocurrency rewards for locking their assets in a pool that has a yield. There are various opportunities for yield farming, including liquidity pools, native network staking, and lending protocols. The similarity is that they all bring returns to the user as a reward for using the funds. Yield farmers generally use protocols that maximize returns, namely yield optimizers. Yield farmers will also move their funds around in search of the best yields available in the market.

As DeFi's popularity rises, many protocols are starting to offer higher rewards as incentives for stakers. However, this often results in unreasonably high and unsustainable APYs. Some of them even exceed 1000%. Once the APY drops due to a shrinking project treasury, token prices will plummet as users rush to sell tokens from farming. As it turns out, demand for the token is supported by emissions, not token utility.

With the abundance of high APYs in the DeFi space, how does one estimate the true value of a project and its interest earning potential? One option is to look at a project's real crypto yield.

Real, Sustainable Returns vs Dilutive Emissions

When we describe yield as “real”, the context is its sustainability. If the project's income can cover the number of tokens distributed to stakers, then its own funds will not be drained. Theoretically, the project should maintain the same APY in real terms indefinitely if its revenue remains the same.

However, emissions with a dilution effect are also common. In this scenario, a project distributes APY unsustainably in the long term generally by depleting its treasury. If the project's revenue does not increase, it is impossible to maintain the same APY level. The APY is often distributed in the form of the project's native token, due to the large supply already available.

Stakers may also farm the tokens and then sell them on the open market, thereby lowering the price. This can lead to a vicious cycle. More native tokens have to be awarded to offer the same APY, so the treasury runs out faster.

Note that although “real yield” tends to be provided in the form of blue-chip tokens, projects that distribute their native tokens can also do so on an ongoing basis.

What Is Real Crypto Yield as a Metric?

The crypto real yield metric is a quick way to evaluate the yield a project offers in relation to its earnings. This allows you to see the size of project rewards that cause dilution or are primarily supported by token emissions rather than funded by revenue. Let's take a simple example.

Over the course of one month, project In the same period, the project generated $50,000 in revenue. With income of only $50,000 and payments in the form of emissions of $100,000, there is a real yield deficit of $50,000. Therefore, it is clear that the APY offered is highly dependent on dilution-effect emissions rather than real growth. This simple example does not consider operational expenses, but it is still a reasonable rough estimate to use when evaluating yield.

You may notice that real yields are contextually similar to dividends in the stock market. Companies that pay dividends to shareholders that are not supported by appropriate earnings are clearly unsustainable. For blockchain projects, the main source of revenue is fees from the services offered. The automated market maker's (AMM) revenue source can be liquidity pool transaction fees, while the yield optimizer can share its performance fees with the holders of its governance tokens.

How to Ensure that Your DeFi Yields are Real?

First, you have to find a reputable project that offers trusted and used services. This will provide the best starting point in producing sustainable yields. Next, pay attention to the potential yield of the project and how you participate. You may have to provide liquidity to a protocol or stake its governance tokens in a pool. Native token locking is also a common mechanism.

Most yield seekers prefer yield payments in the form of blue-chip tokens, as these assets are considered to have lower volatility. After finding a project and understanding its mechanism, remember to check the project's real yield using the formula above. Let's look at a yield model that integrates real yield into its tokenomics – along with how to check it against our metrics.

An automated market maker protocol offers yield in two ways. First, for ABC owners, namely the governance token, and second, for XYZ owners, namely the liquidity provider token. Generally, ten percent of the platform's revenue is kept for the treasury. The remainder is split 50/50 between the owners of both tokens in their respective reward pools and paid in the form of BNB.

Based on calculations, the project generated monthly revenue of $200,000. As per the tokenomics of the project, $90,000 of BNB was distributed to stakers in reward pool ABC and $90,000 to stakers in reward pool XYZ. We can calculate the real yield as follows:

$200.000 – ($90.000 X 2) = $20.000

This calculation shows there is a surplus of $20,000 and the yield model is sustainable. The tokenomics model for yield distribution guarantees that emissions will never be greater than income. Choosing a DeFi project with a sustainable distribution model is a great way to find real yield without having to look for the numbers yourself.

Can Relying on Real Yield Make DeFi Better?

In short, not necessarily. Emissions has worked successfully in the past for some projects to gain users. Typically, these projects reduce their emissions gradually and then move to a more sustainable model. It is not true that pursuing real yield is objectively better and that relying entirely on emissions is unsustainable. However, in the long run, there is only one DeFi project model option that generates revenue with real utility.

Closing

With lessons learned from previous DeFi cycles, the field will benefit as more protocols successfully implement features that drive adoption and sustainable revenue. Regarding emissions, the message is also clear: users should understand them for what they are, and their role in expanding the project's user base and potentially achieving sustainability.

Further Reading

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

• What is DeFi 2.0 and what is its importance?

• A Beginner's Guide to Decentralized Finance (DeFi)