Decentralized finance is beginning to embrace a hot new phrase: \u201creal yield.\u201d<\/strong> It refers to DeFi projects that survive purely on distributing the actual revenue they generate rather than incentivizing stakeholders by handing out dilutionary free tokens.<\/p>\n Where does this real yield come from? Are \u201cfees\u201d really a sustainable model for growth at this early stage?<\/p>\n It depends on who you ask.\u00a0<\/p>\n The DeFi ponzinomics problem is our natural starting point.<\/p>\n DeFi started to arrive as a concept in 2018, and 2020\u2019s \u201cDeFi summer\u201d saw market entrants \u2014 DeGens \u2014 piling headfirst into DeFi to early mind-blowing returns of 1,000% a year for staking or using a protocol. Many attributed the real explosion of interest in DeFi to when Compound launched the COMP token to reward users for providing liquidity.\u00a0<\/p>\n But these liquidity mining models were flawed because they were based on excessive emissions of protocols\u2019 native tokens rather than sharing organic protocol profits.<\/p>\n Liquidity mining resulted in unsustainable growth, and when yields diminished, token prices dropped. Depleting DAO treasuries to supply rewards programs \u2014 or simply minting more and more tokens \u2014 for new joiners looked like a Ponzi scheme. Known as \u201cyield farming\u201d to some, others preferred to call it \u201cponzinomics.\u201d<\/p>\n While recognizing these returns were unsustainable, many sophisticated investors became enthralled with staking (locking up tokens for rewards). One VC told me they paid for their lifestyle by staking tokens during 2020\u20132021 \u2014 even knowing it was akin to a Ponzi scheme about to collapse.\u00a0<\/p>\n The dangers of unsustainable yields were seen in mid-2022, when the DeFi ecosystem and much of the rest of crypto were gutted in a handful of days. Terra\u2019s DeFi ecosystem collapsed with grave contagion effects. Its founder, Do Kwon, is wanted by South Korean authorities and is subject to an Interpol \u201cred notice\u201d but says he is \u201cnot on the run.\u201d High-profile hedge fund Three Arrows Capital (3AC), which heavily invested in Terra, was liquidated in June 2022.<\/p>\n The reality is that \u201creturns based on marketing dollars are fake. It\u2019s like the Dotcom boom phase of paying customers to buy a product,\u201d says Karl Jacob, co-founder of Homecoin.finance of Bacon Protocol \u2014 a stablecoin backed by United States real estate.\u00a0<\/p>\n \u201c20% yield \u2013 how is that possible? Marketing spend or digging into assets are the only way to explain those returns. This is the definition of a Ponzi scheme. For an investor, high yield indicates a tremendous amount of risk.<\/p>\n<\/blockquote>\n Henrik Andersson, chief investment officer of Apollo Capital, notes the yield in Terra wasn\u2019t actually coming from token emissions. \u201cI wouldn\u2019t call Terra a Ponzi scheme even though the yield wasn\u2019t sustainable; it was essentially \u2018marketing money,\u2019\u201d he says.\u00a0<\/p>\n It\u2019s easy to be cynical, then, when the phrase \u201creal yield\u201d started to emerge to popular applause recently. Bankless analyst Ben Giove wrote<\/a> recently, \u201cDeFi isn\u2019t dead. There are real, organic yields out there,\u201d in a piece explaining<\/a> that real yields are \u201copportunities for risk-tolerant DeFi users to generate yield at above market-rates through protocols such as GMX, Hop, Maple and Goldfinch. With the bulk of their yield not coming from token emissions, it is also likely that these protocols will be able to sustain their higher returns for the foreseeable future.\u201d<\/p>\n \u201cReal yield is a hashtag reaction to Terra LUNA\u2019s collapse, but that means people agree more on what it isn\u2019t than on what it actually is,\u201d argues Mark Lurie, founder of Shipyard Software, which operates a retail-focused DEX, Clipper.exchange. <\/p>\n \u201cI\u2019ve been on the real yield train for a year and a half \u2014 and I\u2019m glad someone is paying attention.\u201d He says there are a few potential definitions, \u201cbut sustainable returns on capital is one that actually makes sense.\u201d<\/p>\n \u201cAn example of real yield is interest on a loan, like Compound Finance.\u201d Another example is \u201cfees charged on transactions and returned to capital providers \u2014 e.g., gas fees in proof-of-stake\u00a0layer 1s, trading fees in DEX protocols.\u201d<\/p>\n Jack Chong, who is building Frigg.eco to bring financing to renewable energy projects, says there are a lot of manufactured narratives in the crypto space. Real yield is one of them, he posits.<\/p>\n \u201cThe meaning of real yield depends on which corner of crypto you sit in, and there\u2019s two variants,\u201d says Chong, an Oxford graduate and Hong Kong native. \u201cOne definition suggests that real yield is a protocol that has cash flow. It is a digital native cash flow denominated in ETH or crypto.\u201d\u00a0<\/p>\n In other words, it\u2019s a business model that has revenue.<\/p>\n \u201cThe exact wording of many threads on Twitter is that real yield is staking for cash flows. The distinction is the source of that yield \u2014 a lot of crypto ecosystems are self-reflexive,\u201d Chong argues, referring to the digital money circulating and creating gains for investors without coming from actual revenue, like Terra.<\/p>\n \u201cLinguistically, real yield doesn\u2019t have to be about trading protocols,\u201d he continues. \u201cThe other meaning is yield from real world assets.\u201d An example is a rental return from a tokenized piece of real estate, such as a fractionalized city car space split among investors.<\/p>\n Chong, who founded a biotech startup and once studied Arabic in Jordan with diplomacy in his sights, has a mission to deploy crypto for productive use. \u201cAny North Star for any financial system should be to deploy capital and make a profit. The whole \u201creal yield\u201d story is just common sense in TradFi, he points out.<\/p>\n Real yield is of course linguistically disparaging of all that came before it as \u201cfake yield.\u201d So, what are these yields?<\/p>\n DeFi will eat TradFi. The key is via Real World Assets (RWA).<\/p>\n But the industry lacks a rigorous case\u2026.<\/p>\n So we wrote a 70-page primer to walk through our idea maze 🔍<\/p>\n Here’s a sketch of the report so that you can skip to the section you like 🧵 pic.twitter.com\/WnrhXA8aKM<\/a><\/p>\n \u2014 jackchong.eth (@jackchong_jc) September 27, 2022<\/a><\/p><\/blockquote>\n<\/div>\n<\/figure>\n Real yield can involve lending and borrowing models in which higher risk equates to higher interest rates for borrowers and, consequently, higher yields for lenders. That\u2019s the model of the under-collateralized lending platform and real yield pin-up boy Maple Protocol.\u00a0<\/p>\n Maple enables institutions, such as market makers or VCs, to take out under-collateralized loans via isolated lending pools. A \u201cpool delegate\u201d assesses the risk of a borrower\u2019s creditworthiness. To date, Maple has originated $1.8 billion in loans and recently launched<\/a> a $300-million lending pool for Bitcoin mining firms.<\/p>\n Interest from loans (or usury) is an obvious but lucrative business model. Banks mostly make money from loans.\u00a0<\/p>\n Holly Satoshi! $sUSD<\/a> rewards this week from staking at @synthetix_io<\/a> is huge!<\/p>\n Usually $sUSD<\/a> value vs. $SNX<\/a> value is +- 30%, but now it is reaching 68%!!<\/p>\n The future of staking is getting closer. Almost time to switch off the brrrrrr. <\/p>\n ⚔️<\/p>\n \u2014 CT ⚔️ 🔴✨ (@0xToit) September 21, 2022<\/a><\/p><\/blockquote>\n<\/div>\n<\/figure>\n One of the most obvious sources of real yield is providing tokenholders with a slice of the revenue generated by fees imposed on users of the platform. In other words, there is an actual product or service earning revenue.<\/p>\n Jacob, an OG dating back to Web1, argues that proof-of-work staking returns on Ethereum now incorporate real yield.<\/p>\n \u201cETH could be considered a real yield. With Eth1, most money flowed to miners \u2013 proof-of-work (or mining transactions to prove their validity) was a kind of real yield already. Miners were getting real yield. Now stakers are able to earn yield from network transactions. Transactions happen often, and a lot of more people get paid. For every transaction, ETH stakers make money.<\/p>\n<\/blockquote>\n In other words, transactional revenue is a reward for ecosystem building.\u00a0<\/p>\n Others are joining the real yield trend or emphasizing that part of their protocol.<\/p>\n Synthetix is a highly successful decentralized protocol for trading synthetic assets and derivatives. Tokens on that platform are actually synthetic assets designed as a tokenized representation of investment positions.<\/p>\n It\u2019s too complicated to explain here, but the elevator pitch is that users stake the native token SNX to mint the stablecoin SUSD, which underpins all the liquidity and other tokens on the platform. Stakers are handsomely rewarded with token emissions \u2014 sometimes over 100% APY \u2014 as well as a cut of the SUSD fees paid by traders to use the platform.\u00a0<\/p>\n All of a sudden this year, SUSD fee revenue went through the roof<\/a> when 1inch and Curve realized they could use Synthetix\u2019s synthetic assets for no slippage trading between things like BTC and ETH.<\/p>\n As a result, Synthetix is now considering a proposal by founder Kain Warwick to stop inflationary rewards and move to rewarding<\/a> stakers based entirely on real trading fees.<\/p>\n That\u2019s the very definition of real yield. It will be interesting to see if their real revenue is enough to incentivize stakers on the fairly risky and complicated platform.<\/p>\n But how does this all succeed in a bear market?<\/p>\n The most profitable narrative in the bear market:<\/p>\n “Real Yield.” <\/p>\n But what is it and how does it work?<\/p>\n Here’s a Breakdown and 7 Protocols that Fit the Criteria: <\/p>\n (including a few hidden gems)<\/p>\n \u2014 Edgy \u2013 The DeFi Edge 🗡️ (@thedefiedge) August 12, 2022<\/a><\/p><\/blockquote>\n<\/div>\n<\/figure>\n Another way fees might be earned for providing liquidity is to assist in cross-blockchain liquidity. Liquidity providers risk facing exposure to the price volatility of the underlying asset they are providing liquidity for. Impermanent loss happens when the price of your deposited assets changes from when you deposited those assets. This means less dollar value at the time of withdrawal than when deposited. So, your rewards or headline real yield from staking liquidity may be offset by the losses upon withdrawal.\u00a0<\/p>\n Lurie says:<\/p>\n \u201cPonzi yields may be defined as the unsustainable granting of speculative tokens. But yields from protocol transaction fees can also be fake if the underlying economic model is unsustainable. For example, liquidity providers to SushiSwap earn fees from transactions, but typically lose more to \u2018impermanent loss\u2019 than they make from fees, which means they are losing money.<\/p>\n<\/blockquote>\n The important thing, obviously, is income minus expenses, says Lurie. \u201cThe biggest problem in DeFi is that actual gains are complex to measure because of the concept of impermanent loss,\u201d Lurie tells Magazine. This is the greatest trick in DeFi, he says.\u00a0<\/p>\n \u201cProtocols that are fundamentally unsustainable make themselves seem profitable by relabeling revenue from fees as \u2018yield\u2019 and relabeling loss in principal as \u2018impermanent loss.\u2019 <\/p>\n Naturally, they advertise revenue (which can only be positive) while claiming that losses are \u201cimpermanent\u201d and\/or hard to measure. At the end of the day, real yield should mean profits to capital providers. Focusing on revenue without expenses is just the Ponzi principle in another form.<\/p>\n Questions to Ask:<\/p>\n \u2022 Where is the yield coming from?<\/p>\n \u2022 How much revenue does the protocol generate?<\/p>\n \u2022 What is the native token supply and emissions?<\/p>\n \u2022 What tokens are they paying the shared revenue in?<\/p>\n \u2022 What is the overall base network traction?<\/p>\n \u2014 Edgy \u2013 The DeFi Edge 🗡️ (@thedefiedge) August 12, 2022<\/a><\/p><\/blockquote>\n<\/div>\n<\/figure>\n Real yield has emerged due to current investment cycles and market conditions. Chong points out, \u201cReal yield more closely reflects TradFi and has a lot to do with the cycle of market participants.\u201d <\/p>\n \u201cDuring the DeFi summer, hedge funds acted as speculative vultures. Now institutional investors like Goldman Sachs are looking for new directions in crypto on what will survive the bear market.\u201d Others such as Morgan Stanley, Citigroup and JP Morgan are all watching closely<\/a> and writing their own reports on crypto.<\/p>\n Apollo\u2019s Andersson notes that real yield means that while there were \u201chistorically wide question marks around the value of crypto assets, since 2020, protocols that generate revenue as on-chain cash flow are not that different from equities in that sense.\u201d <\/p>\nPonzi farm<\/strong>ing<\/h2>\n
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Real yield enters the chat<\/h2>\n
![\"Real](\"https:\/\/cointelegraph.com\/magazine\/wp-content\/uploads\/2022\/10\/Real-Yield-is-all-about-sustainable-returns-on-capital.png\")
Manufactured narratives<\/h2>\n
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Real yield: Interest and fees<\/h2>\n
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Impermanent loss and other risks<\/h2>\n
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Traditional investors like real yield<\/h2>\n
![\"Traditional](\"https:\/\/cointelegraph.com\/magazine\/wp-content\/uploads\/2022\/10\/Traditional-investors-like-DeFi-projects-and-tokens-with-revenue.png\")
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