Sustainable Yield in DeFi: How Do You Know the Field Is Real?
Crypto real yield is a measure of comparing a project's offered yield against its revenue. If the returns generated through staking are greater than the provided interest when taking inflation into account, then the emissions are dilutionary. It indicates that the yield isn't sustainable or "real" in simpler terms. Dilutionary emissions can sometimes be used for promotional initiatives, but they're not necessarily worse than real yield. Regardless, real yield can serve as an effective tool in determining a project's long-term earning potential.
DeFi investments can look hugely attractive with their large APYs, but if returns of 100% or more are promised, it is reasonable to be wary. Real yield is a simple calculation — it is a quick and easy method to assess how reasonable the promised yield is and give a better indication of how likely it is to actually come to fruition.
DeFi Yield Farming
Yield farming lets people gain cryptocurrency rewards for locking up their possessions in yield-producing pools. There are various methods to yield farm, such as liquidity pools, native network staking, and lending protocols. All of these generate income for users in exchange for putting their funds to work. Yield farmers frequently employ protocols that optimize their returns, known as yield optimizers. Additionally, yield farmers often switch between protocols to find the best available yields.
As DeFi profile grew, protocols were incentivizing stakers with increasing rewards. It resulted in significant and unsustainable APYs, with some as high as 1000%. When the treasuries ran dry, these APYs dropped, and the token prices plummeted as farmers liquidated their staked holdings. It became apparent that supply rather than utility drove the demand for these tokens.
To estimate the true value and interest-generating potential of DeFi projects with high APYs, one option is to analyze the crypto real yield of the project.
Sustainability of Yield
The sustainability of yield is what is meant when we say it is "real." If the project's income is sufficient to cover the amount given out to token holders, the project does not have to use its own money. The APY may remain constant in the long term if the revenue stays the same.
It is not uncommon for projects to emit dilutionary tokens, which are unsustainable in the long run. It occurs when the treasury runs out, and the project can't generate enough revenue to sustain the same APY reward. To cope with this, projects often distribute native tokens, as a large amount is already available. However, if the revenue does not increase, it is impossible to preserve the same APY rate.
Stakers may be farming and attempting to sell these tokens on the open market, potentially depressing their value. It can start a risky spiral, where more of the native tokens must be issued to offer equivalent APYs, in turn further reducing the finances in the treasury.
When talking about "real yield," it is preferred to be given out in blue-chip tokens. Nonetheless, a project that is issuing its own token has the capability to do so in a sustainable manner.
How Does Crypto Real Yield Measure Performance?
The crypto real yield metric is a speedy tool to evaluate a project's offered yield in relation to its revenue. Using this metric, it is possible to determine the rewards derived from token emissions rather than income. Let's explore a basic example.
Project X has distributed 10,000 of its tokens over the course of a month at an average price of $10, totaling $100,000 in emissions. In the same period, the project generated only $50,000 in revenue. It creates a gap of $50,000 in yield, indicating that the APY is mainly reliant on token dilution, not actual growth. This example does not factor in operating costs, yet it is still a useful framework when assessing yield.
Real yields are conceptually similar to stock market dividends. Companies that offer dividends without corresponding revenue are unsustainable. In blockchain projects, revenue is often gained through service fees. For example, an automated market maker (AMM) may have a liquidity pool transaction fee, while a yield optimizer may reward holders of its governance token with a performance fee.
Finding a reliable project that provides dependable services is essential to start earning a steady income. Examine the project's potential yield and what you must do to get involved. Generally, this requires you to supply liquidity to a protocol, stake governance tokens in a pool, or lock native tokens.
Many investors seek out high-yield payouts from blue-chip tokens due to their low volatility. After you've identified a project and grasped its structure, don't forget to assess its actual yield using the calculation provided above. Let's examine a particular yield model to understand how the yield is built into tokenomics and how to use our metric to verify it.
The automated market maker protocol provides rewards to holders of its governance token, ABC, and its liquidity provider token, XYZ. Ten percent of platform revenue is kept in the treasury, while the leftover 90% is divided into two equal pools; 50% is set aside for holders of ABC and the other 50% for holders of XYZ. These rewards are subsequently paid in BNB.
We know that the project makes $200,000 in monthly revenue. Of that, $90,000 is distributed to stakers in the ABC rewards pool and $90,000 to stakers in the XYZ rewards pool.
$200,000 – ($90,000 X 2) = $20,000
According to our calculations, there is an extra $20,000, and the yield model is reliable. The tokenomics model for yield allocation promises that emissions will never surpass profits. Picking a DeFi project with a safe distribution model is an excellent way to find real yield without doing the math yourself.
How Does Utilizing Real Yield Enhance DeFi?
In conclusion, it is not necessarily true that striving for real yield is always better than relying on emissions. In the past, specific projects have succeeded by relying on emissions strategies and have steadily shifted towards more sustainable models. Ultimately, however, only DeFi projects with well-established revenue-generating models can hope to remain financially viable in the long run.
It is beneficial for the DeFi space to take the lessons learned from previous cycles in order to successfully implement features that will encourage adoption and guarantee sustainable revenue. It is important for users to understand the concept of emissions, how it works, and how it can contribute to a project's growth and sustainability.