Résumé
Cryptocurrency real yield as a metric compares a project's offered yield relative to its revenue. If the staking yield is higher in real terms than the interest generated, the issues are dilutive. This means that their output is not sustainable or, in simple terms, “real.” The actual return is not necessarily better than dilutive issues, which are often used for marketing purposes. However, this indicator can serve as a useful tool to assess the long-term performance prospects of a project.
Introduction
The large APYs often offered in the world of decentralized finance (DeFi) certainly spark the curiosity of many investors. Still, if you've ever encountered 100% or even 1,000% returns on a staking opportunity, it's fair to wonder if it's too good to be true. A popular method for assessing promised returns is to calculate the actual return on a project. This simple, quick and relatively effective calculation can help you assess at a glance the feasibility of a project's promises and estimate how "real" its performance is.
What is DeFi yield farming?
Yield farming allows users to earn cryptocurrency rewards by locking up their assets in yield pools. There are several possibilities for generating yield, including liquidity pools, native network staking, and lending protocols. What they have in common is that they generate a return for the user in exchange for the use of their funds. It is common for farmers to use protocols that maximize their yields, known as yield optimizers. Farmers will also move their funds, seeking the best returns available on the market.
As DeFi became more popular, many protocols began offering higher rewards to incentivize stakers. However, this has often resulted in unusually high and unsustainable APY rates, with some even exceeding 1,000%. Once these APYs dropped due to the project's treasury depletion, token prices often collapsed as users rushed to sell the farmed tokens. It turned out that demand for these tokens was driven by emissions rather than their utility.
With high APY rates being commonplace in the DeFi space, how can we estimate the true value of projects and their interest-earning potential? One option is to look at a project’s actual crypto yield.
Real and sustainable return vs. dilutive emissions
When we describe performance as “real,” we are talking about its sustainability. If the project's revenue covers the amount of tokens distributed to participants, its own funds are not exhausted. Theoretically, the project could maintain the same APY in real terms indefinitely if revenues remain the same.
However, it is also common to see dilutive issuance, a scenario in which a project distributes APY in a way that is not sustainable in the long term, most often by depleting its cash flow. If project revenues do not increase, it will be impossible to maintain the same level of APY. This type of APY is often distributed in the project's native token, as it is readily available in large quantities.
It is also possible that stakers farm these tokens and sell them on the open market, which lowers their price. This can lead to a vicious cycle where more native tokens must be distributed to provide the same APY, depleting funds even faster.
Note that while it is better for “real return” that it be distributed in secure tokens, a project distributing its native token could also do so sustainably.
What is crypto real yield as a metric?
Measuring real crypto yield is a quick way to assess the yield offered by a project in relation to its revenue. This allows you to see how dilutive the project's rewards are, or primarily supported by token issuances rather than funded by revenue. Let's take a simple example.
In one month, Project Over the same period, the project made $50,000 in revenue. With only $50,000 in revenue but $100,000 paid in emissions, there is a real yield shortfall of $50,000. Therefore, it is clear that the APY offered is highly dependent on dilutive issuance rather than actual growth. Our simple example does not take into account operating costs, but it is a reasonable rough estimate to use to evaluate performance.
You may have noticed that real yield is conceptually similar to dividends in the stock market. A company that pays shareholders dividends that are not supported by corresponding revenues would obviously not be viable. For blockchain projects, revenue comes mainly from fees related to a service offered. In the case of an automated market maker (AMM), this may be transaction fees from a liquidity pool, while a yield optimizer may share its performance fees with the holders of its governance token .
How to make sure your DeFi yield is real?
First of all, you will need to find a reputable project that offers a reliable and used service. This will give you the best starting point for achieving sustainable returns. Next, take a look at the project's return potential and how exactly you're participating. You may need to provide liquidity to a protocol or stake its governance token in a pool. Locking native tokens is also a common mechanism.
For many yield seekers, yields distributed in blue-chip tokens are preferable because these assets are perceived to be less volatile. Once you find a project and understand its mechanics, don't forget to check the actual performance of the project using the formula above. Let's look at a yield model that incorporates real yield into its business model, as well as how to verify this with our metric.
An automated market maker protocol provides returns in two ways. First, to the holders of its governance token, ABC, and second, to the holders of XYZ, its liquidity provider token. By design, ten percent of the platform's revenue is kept for treasury, and the rest is split 50/50 between the holders of the two tokens in their respective reward pools and paid out in BNB.
By your calculations, the project generates $200,000 in monthly revenue. In accordance with the project's business model, $90,000 worth of BNB is distributed to stakers in the ABC reward pool and $90,000 to stakers in the XYZ reward pool. We can calculate the actual yield as follows:
200 000 $ – (90 000 $ x 2) = 20 000 $
Our calculation shows that there is a surplus of $20,000, and that the return model is viable. The yield distribution economic model ensures that emissions will never exceed revenues. Choosing a DeFi project with a sustainable distribution model is ideal for finding real yield without having to work with the numbers yourself.
Does relying on real yield make DeFi better?
Not necessarily. Broadcasts have worked successfully in the past for some projects to attract users. In general, these projects gradually reduce their emissions and shift to more sustainable models. It would be wrong to say that the search for a real return is objectively better and that relying on emissions is absolutely not viable. But, in the long term, there is only room for revenue-generating DeFi projects with real-world use cases.
Conclusion
With lessons learned from previous DeFi cycles, it would be beneficial for the space to see more protocols successfully implement features that drive adoption and sustainable revenue generation. When it comes to shows, the message is also clear: users would do well to understand them for what they are, as well as the role they play in expanding the projects' user base and their potential sustainability.
More information
What is yield farming in decentralized finance (DeFi)?
What DeFi 2.0 is and why it matters.
The Complete Beginner's Guide to Decentralized Finance (DeFi)