“Real Yield” Mania Has Hit DeFi. Here Are Five Projects to Watch

Because the period of high-risk, high-reward yields in decentralized finance has all however come to an finish, a brand new pattern of initiatives providing smaller however extra sustainable yields has began to switch it. 

What Is DeFi’s “Actual Yield” Pattern?

Anybody remotely concerned with crypto has observed that the market strikes in cycles. So-called “bullish” intervals sometimes comply with Bitcoin halving occasions and—towards their finish—are sometimes marked by exorbitant mission valuations as new market entrants rush to pile into the hype and guarantees. The sharp worth surges that characterize bull markets are sometimes adopted by even faster plunges and extended “bearish” intervals that solely initiatives with essentially the most sturdy fundamentals survive. 

Furthermore, each cycle is usually enveloped by totally different narratives—prevalent tales that intention to explain the present market construction or speculate on the following. Whereas the primary simmering of DeFi arrived in 2018 with the emergence of initiatives like Dharma, MakerDAO, and Compound, the area actually took off throughout the “DeFi summer time” of 2020 after Compound launched the COMP token to reward customers for offering liquidity. 

DeFi summer time kicked off a interval of yield farming mania that noticed quite a few initiatives mimicking Compound by launching tokens to supply yields to customers. In essentially the most excessive cases, liquidity suppliers have been provided synthetic APYs that briefly topped 5, six, and even seven figures. This liquidity sourcing mannequin helped bootstrap the nascent business but in addition proved unsustainable in the long term. Liquidity dried up throughout DeFi as customers began to vanish and most DeFi tokens considerably underperformed ETH all through the 2021 bull run. 

This early liquidity mining mannequin is flawed as a result of it’s based mostly on extreme emissions of the protocols’ native tokens slightly than sharing natural protocol earnings. For protocols, sourcing liquidity is vital. Nevertheless, taking this strategy is extremely costly, with some projections estimating a mean price of round $1.25 for each $1 of liquidity secured. For liquidity suppliers and stakers, in the meantime, the nominally excessive yields protocols supply are deceptive as a result of the actual yield—measured as nominal yield minus inflation—is non-existent.

After exhausting a number of narratives since DeFi summer time, the crypto business is now converging towards a brand new one. As with most others earlier than it, it’s enveloped by a brand new buzzword: actual yield. The time period refers to protocols that incentivize token possession and liquidity mining by sharing earnings generated from charges. Actual yield protocols usually return actual worth to stakeholders by distributing charges in USDC, ETH, their very own issued tokens which have been taken off the market via buybacks, or different tokens that they haven’t issued themselves. 

Whereas the listing of protocols behind the pattern is rising, 5 have stood out from the bunch as torchbearers of the rising “actual yield” narrative.

GMX (GMX)

GMX is a decentralized spot and perpetual alternate that has made rounds in latest weeks after its native governance token neared its all-time excessive worth regardless of the continued bear market (GMX topped $62 in January; it hit $57 on September 5). Since launching in late 2021, GMX has rapidly accrued deep liquidity and seen its buying and selling volumes soar. Moreover the obvious product market match, a big a part of its success will be attributed to its distinctive revenue-sharing mannequin. 

The mission has two native tokens: GLP and GMX. GLP represents an index of the obtainable belongings for buying and selling on the platform, whereas GMX is the mission’s native governance and revenue-sharing token. 70% of the alternate’s buying and selling charges are paid to liquidity suppliers or GLP token holders within the type of ETH on Arbitrum and AVAX on Avalanche, and the remaining 30% goes to GMX stakers. It at present gives 14% APR for staking GMX and 28% for holding GLP, not accounting for boosted yield provided for vesting. 

This yield—secured via natural revenue sharing slightly than dilutionary token emissions—has confirmed engaging for liquidity suppliers and governance token holders. Because of this, GMX has accrued essentially the most liquidity on Arbitrum (over $304 million in complete worth locked on the chain) and has one of many highest staking charges for its governance token within the asset class, with round 86.15% of its complete provide staked.

Synthetix (SNX)

Synthetix is a decentralized protocol for buying and selling artificial belongings and derivatives. It’s one of many oldest protocols in DeFi, discovering early success within the Ethereum ecosystem after it revamped its tokenomics mannequin to supply actual yields to SNX holders. In line with Token Terminal knowledge, the protocol generates an annualized income of round $82 million, and the complete sum goes to SNX stakers. With SNX’s worth of round $3 and a fully-diluted market capitalization of round $870 million, the token’s price-to-earnings ratio stands at 10.47x.

The present APR for staking SNX stands at round 53%, with the yield partly coming from inflationary staking rewards within the native token and partly from alternate buying and selling charges within the type of sUSD stablecoins. As a result of some liquidity mining rewards come from inflationary token emissions, Synthetix will not be a pure actual yield protocol. Nonetheless, it’s one in every of DeFi’s high revenue-generating protocols providing one of many highest blended yields for single-sided staking in the marketplace.

Dopex (DPX)

Dopex is a decentralized choices alternate on Arbitrum that lets customers purchase or promote choices contracts and passively earn actual yields. Its flagship product is its Single Staking Possibility Vaults, which give deep liquidity for choice consumers and automatic, passive revenue for choice sellers. Moreover the SSOVs, Dopex additionally permits customers to wager on the course of rates of interest in DeFi via Curiosity Charges Choices and wager on the volatility of sure belongings via so-called Atlantic Straddles.

Whereas all Dopex merchandise permit customers to earn actual yields by taking over some directional danger, the protocol additionally generates actual income via charges, which it redirects to stakeholders. 70% of the charges return to the liquidity suppliers, 5% to delegates, 5% to buying and burning the protocol’s rebate token rDPX, and 15% to DPX single-sided governance stakers.

Like with Synthetix, among the staking yields for DPX come from dilutionary token emissions, that means the liquidity mining mannequin is blended. Dopex at present gives round 22% APY for staking veDPX—a “vote-escrowed” DPX that stays locked for 4 years. 

Redacted Cartel (BTRFLY)

Redacted Cartel is a meta-governance protocol that acquires the tokens of different DeFi initiatives to wield governance affect and supply liquidity-related companies to different DeFi protocols. It at present generates income from three sources: the treasury, which consists of various yield-generating governance tokens; Pirex, a product that creates liquid wrappers that permit for auto-compounding and the tokenization of future vote occasions; and Hidden Hand, a market for governance incentives or “bribes.” 

To earn a portion of Redacted Cartel’s income, customers must “revenue-lock” the protocol’s BTRLFLY token for 16 weeks to obtain rlBTRFLY. They then obtain a portion of fifty% of Hidden Hand’s income, 40% of Pirex’s, and between 15% and 42.5% of the treasury’s. The actual yield is paid out in ETH each two weeks. Within the final yield distribution, the protocol paid out $6.60 price of ETH per rlBTRFLY, which comes from its actual income.

Features Community (GNS)

Gains Network is the decentralized protocol behind the perpetual and leveraged buying and selling platform gTrade. Moreover crypto belongings, gTrade lets customers commerce artificial belongings like shares and overseas alternate currencies. Many think about it the strongest competitor to GMX.

The protocol permits stakeholders to earn actual yields generated from the buying and selling platform charges in a number of methods. For instance, customers can stake GNS or present single-sided DAI liquidity to earn yields generated from charges. In complete, 40% of the charges from market orders and 15% from restrict orders are allotted to GNS single-sided stakers, which at present earn a compounded annual yield of round 4% paid out within the DAI stablecoin. Alternatively, liquidity suppliers within the single-sided DAI vault and the GNS/DAI liquidity swimming pools earn actual yields of about 6% and 18% APY.

Last Ideas

Whereas “actual yield” might have generated a buzz, it’s price noting that this liquidity sourcing mannequin isn’t good. For one, protocols should be worthwhile to present one thing to their stakeholders, so it doesn’t do a lot for brand spanking new initiatives with few customers. Protocols within the bootstrapping part should nonetheless resort to inflationary liquidity mining to compete and entice enough liquidity and buying and selling volumes. Moreover, if protocols should hand out their revenues to liquidity suppliers or token holders, meaning they’ve much less funding for analysis and improvement. This might doubtless damage some initiatives in the long term. 

Actual yields or not, time and time once more, historical past has proven that when the markets take a downturn and liquidity dries up, solely the protocols with the strongest fundamentals and greatest product-market match survive. Whereas the “actual yield” pattern has solely lately caught on, its survivors ought to flourish as DeFi grows sooner or later. 

Disclosure: On the time of writing, the writer owned ETH, rlBTRFLY, and several other different cryptocurrencies.