The high annual percentage yields (APYs) frequently advertised in the DeFi sector are certainly appealing to many investors. However, if you have encountered claims of 100% or even 1000% returns from staking, it's natural to wonder if they are too good to be true. To determine the validity of these promises, one widely used approach is to calculate the actual yield of the project. This simple and efficient method allows you to quickly assess the feasibility of a project's claims and determine the realism of its yield.
What Is Yield Farming
Yield farming involves locking up assets in pools to earn cryptocurrency rewards. This can be done through liquidity pools, native network staking, or lending protocols, as long as it generates returns for the user. Yield farmers often use yield optimizers to maximize their profits and continuously search for the best returns in the market.
The growing popularity of DeFi led to many protocols offering high rewards as incentives for stakers. However, this often resulted in unsustainable and abnormally high APYs, some even surpassing 1000%. When these APYs declined due to the depletion of project treasuries, token prices would usually drop as users hurriedly sold their farmed tokens. This showed that the demand for these tokens was driven by emissions instead of their practicality.
To accurately assess the worth of projects and their interest-generating capability in the DeFi sector, one option is to examine the real yield of a project's cryptocurrency. This calculation can provide a quick and effective way to determine the feasibility of a project's promises and estimate the realism of its yield.
Real Yield (Sustainable) vs. Dilutionary Emissions (Unsustainable)
When we talk about "real yield," we mean the sustainability of the yield. If a project's income covers the amount of tokens given to stakers, it means that the project's funds are not being depleted, and in theory, the same APY in real terms could be maintained indefinitely if the revenues remain the same.
However, it is also common to see dilutionary emissions, where a project distributes APY in a manner that is not sustainable in the long run, typically by draining its treasury. If the project's income does not increase, it will not be possible to maintain the same level of APY. This type of APY is often given in the project's native token, as a large supply of it is readily available.
Stakers may also participate in yield farming and sell the tokens on the open market, lowering their price. This creates a negative feedback loop where more native tokens need to be given out to offer the same APY, which quickly drains the treasury.
It's worth noting that while "real yield" is typically given out in blue-chip tokens, a project can also distribute its native token sustainably.
Real Yield As A Metric
The crypto real yield metric is a simple way to evaluate the offered yield of a project in relation to its revenue. This allows you to determine how much of the project's rewards are supported by token emissions instead of actual revenue.
For instance, let's consider project X. Over a month, project X has distributed 10,000 of its tokens at an average price of $10, bringing their total emissions value to $100,000. Meanwhile, the project has generated $50,000 in revenue during the same period. With only $50,000 in revenue and $100,000 paid out in emissions, there's a real yield deficit of $50,000. This makes it clear that the APY offered is highly dependent on dilutionary emissions instead of real growth. This example doesn't take into account operating expenses, but it's still a useful rough estimate when evaluating yield.
The concept of real yield is similar to dividends in the stock market. A company that pays dividends to shareholders that are unsupported by revenue would not be sustainable. For blockchain projects, revenue primarily comes from fees for a service offered. For example, an automated market maker like Sushi might generate revenue from a liquidity pool transaction fee, while a yield optimizer might share its performance fee with the holders of its governance token.
How Do You Know If Yield Is Real?
If you are looking to earn sustainable yield in the DeFi space, it is important to find a reputable project that offers a trusted and widely used service. Once you have found a suitable project, it is important to understand how you can participate in its yield potential, which may require you to provide liquidity to a protocol or stake its governance token in a pool.
It is also important to check the project’s yield potential and payout mechanism. Many yield seekers prefer yield payout in blue-chip tokens due to their perceived lower volatility. In order to assess a project’s real yield, you can use the formula explained in the earlier paragraphs.
Let’s take an example of an automated market maker (AMM) protocol that offers yield in two ways, to holders of its governance token (ABC) and to holders of its liquidity provider token (XYZ). According to its tokenomics, 10% of the platform revenue is kept in the treasury, while the remaining 90% is split between holders of ABC and XYZ, paid out in DAI.
Suppose the project generates $200,000 in monthly revenue and according to its tokenomics, $90,000 of DAI is distributed to stakers in the ABC rewards pool and $90,000 to stakers in the XYZ rewards pool. The real yield can be calculated as:
$200,000 – ($90,000 X 2) = $20,000
The calculation shows that there is a surplus of $20,000, indicating that the yield model is sustainable. This is a great example of a DeFi project that offers real yield without needing to work with the figures yourself.
Finding real yield in the DeFi space requires a careful selection of reputable projects, understanding their yield potential and payout mechanisms, and evaluating their real yield using the formula provided. Choosing a DeFi project with a sustainable distribution model is key to earning real yield in the DeFi space.
It is important for the DeFi space to learn from past cycles and strive towards successful implementation of features that encourage both adoption and the generation of sustainable revenue. When it comes to emissions, it is crucial for users to educate themselves on their purpose and significance in growing a project's user base and ensuring its sustainability. Understanding the role of emissions is key in making informed decisions in the DeFi space.
Exchange | Furo | Docs | Discord | Twitter | Telegram | Newsletter | YouTube | Github
