Get the weekly summary of crypto market analysis, news, and forecasts! This Week’s Summary The crypto market ends the week at a total market capitalization of $1,165 trillion. Bitcoin is up by over 2% after a rollercoaster of a week. Ethereum decreased by almost 1% over the past seven days. XRP gained more than 15% in value this week. Almost all altcoins are trading in the green, with very few exceptions. The DeFi sector decreased the total value of protocols…
Real Yield: The Top DeFi Tokens for Generating Actual Revenue
This year’s brutal bear market has claimed a sizable batch of crypto startups and nascent coins. To weather the volatility, the long-term believers in decentralized finance (DeFi) are in search of one thing: “Real Yield.”
The term has grown in popularity among those looking for hidden gems in the market for decentralized finance applications. But, more importantly, it marks an appetite for responsible crypto investment opportunities that can outlast a turbulent market cycle.
So what exactly is “real yield” in the context of DeFi? Here’s a step-by-step guide on real yield, spotting it, and the top DeFi tokens for investing in the sector.
What is Real Yield in DeFi?
Real yield refers to yield accrued by generating actual protocol revenue, such as trading fees. Part of this yield may then be collected by holders of the protocol’s native token, much like a dividend stock.
In other words, investing in a “real yield” protocol effectively bets on its ability to retain users and volume over time. It’s a true value investment.
It sounds like ordinary, responsible money management, right? But, unfortunately, it’s taken a while for the crypto market to mature and value such tried and true investment principles.
Why Real Yield Matters
DeFi has long been distracted by tokens and services offering wildly inflated, unsustainable, often triple-digit annual yields. Such a model was popularized as a shortcut for bootstrapping a protocol with liquidity, users, and high total value locked (TVL).
Sadly, while attractive to traders, these rates could only be upheld through “fake yield” – token emissions. In other words, they required minting new units of the protocol’s native token and dolling out rewards using said token.
This requirement can be sidestepped to some degree if a token’s price continues to rise to support its juicy APR. But this never happens in practice. Instead, profit-taking, sentiment changes, and more attractive yields on other DEXs all serve to stop – and often reverse – price momentum.
The project is then forced to emit more tokens to increase its yields and retain its ecosystem. However, this only devalues the token further, driving away more investors and fueling the ecosystem’s death spiral.
Projects that rely on “fake yield” are prone to short lifespans and fatal collapse. Networks like Terra, and the accompanying collapse of TerraUSD and LUNA, are painful reminders of that fact.
Alternatively, real yield projects use value accrual mechanisms that rely on a real, steady, and relatively loyal user base.
How Do I Find Real Yield?
Identifying real yield in DeFi requires two easy tools: Token Terminal and Messari.
- First, use Token Terminal to view a project’s total and protocol revenue. Then, from the site’s homepage, select “metrics,” then “Protocol Revenue,” and search for the protocol you’d like to analyze.
- Then, use Messari to identify a project’s token emissions. First, navigate to the profile for a given token, then select “token economics” followed by “supply schedule.” If Messari doesn’t provide this data, use CoinGecko or Dune Analytics as alternatives.
- Compare the token’s protocol revenue on the token terminal with its emissions on Messari. Make sure to multiply a token’s emissions by its price to understand the total value its emissions create for stakers.
- Revenue – Token Emissions = Real Yield
Note that this is not a perfectly accurate method, as it doesn’t provide the operational expenses of a given project. Nevertheless, it offers a general overview of a project’s reliance on token emissions for yield.
Once you feel that you’ve identified a protocol that shows promising figures, make sure it possesses the following:
- Product/Market Fit: People must fundamentally desire to use the protocol, regardless of market conditions or token incentives.
- Onchain Revenue: If the protocol generates no revenue, then it’s not real yield! Ensure this revenue surpasses its token emissions + operating expenses.
- Sound Money Payouts: Avoid being paid in unestablished, highly volatile, or inflationary altcoins. Payouts provided in BTC, ETH, or stablecoins are generally the most reliable.
Top 5 Real Yield Protocols in DeFi
For now, don’t worry about the research. We’ve provided five leading protocols and tokens below to introduce you to the world of real yield!
Note: Do not construe the following as expert financial or trading advice. This article is meant solely for educational purposes.
The Ethereum-based dYdX is the largest decentralized perpetual exchange in the world. It supports spot trading but mainly focuses on providing users with derivatives and margin trading.
According to Token Terminal, dYdX raked $63 million of protocol revenue in the past 90 days. As a result, holders can stake dYdX get a slice of that revenue, and be eligible for trading fee discounts.
Currently, staking rewards are received by a centralized party – though the project intends to change this by the end of 2022.
It’s also worth noting that, while profitable, the dYdX token has significant dilution ahead of it. Its circulating supply is 65 million, but its max supply is 1 billion. Its remaining supply will be distributed over the next four years – with only 2.5% going to existing dYdX stakers.
GMX is Arbitrum’s top dapp, with $250 million in TVL. Low slippage offers up to 30x leverage on spot crypto trading pairs like BTC, ETH, and AVAX.
The protocol comprises two tokens: GMX – the utility and governance token, and GML – the liquidity provider token.
Staking GMX nets holders 30% of fees generated through swaps and leverage trading, while GLP holders get the other 70%. Moreover, these fees are paid out in ETH – a ‘blue chip’ crypto with relatively reliable long-term value.
According to GMX’s website, GMX, and GML are earning over 19% APR on Arbitrum. However, some fees are paid in escrowed GMX tokens (esGMX), a GMX equivalent that cannot be transferred to other wallets.
GMX has a soft supply cap of 13.25 million (though this can change with a governance vote in the future). CoinMarketCap estimates that about 7.8 million GMX are in current circulation.
Redacted is a smart contract suite empowering cash flow for DeFi protocols. It centers around its meta-governance token BTRFLY, backed by a handful of the protocol’s other governance assets.
BTRFLY can be staked and locked away for 16 to 17-month epochs in return for revenue-locked BTRFLY (rlBTRFLY). This token rewards the holder with revenue from the Redacted treasury and product ecosystem, paid in ETH.
It also grants holders rewards through inflationary BTRFLY emissions – though this model is on its way out. The newly launched BTRFLY v2 makes BTRFLY a limited supply token and focuses on “producing real yield for rlBTRFLY holders.”
Another Arbitrum protocol, Umami, is a market maker and liquidity provider that helps partner protocols rapidly scale their liquidity. It prides itself on providing “sustainable, risk-hedged DeFi yield.”
UMAMI’s products rely on sourcing revenue from on-chain revenue streams rather than inflationary token models. As a result, UMAMI’s supply is hard capped at 1,000,000 tokens: with 639,591 circulating.
By depositing one’s Umami for mUmami, holders can earn 6% APR, denominated in WETH, from Umami’s treasury and protocol revenue. Though not as high as some other protocols, the project explicitly targets “real yield” as a strategy and rejects its competition’s “ponzu tokenomics.”
“Each $UMAMI token represents a fixed claim on Umami’s governance and protocol revenues,” states its tokenomics page. “It can never be diluted away by inflationary emissions or capital raises.”
Finally, there’s SOVRYN – a DeFi protocol built atop the Bitcoin sidechain, Rootstock. Sidechains are one of many scaling solutions for Bitcoin attempting to increase its functionality, like Lightning and Taro.
SOVRYN is focused on bringing a full suite of decentralized financial services to Bitcoin. These already include a spot exchange, margin trading, a lending pool, and Bitcoin-backed stablecoins.
All fees generated through swapping, lending, borrowing, and leveraging are used to reward holders of SOV – the protocol’s governance token.
The SOV token supply is capped at 100,000,000, but only about 22% has been minted as of today. The remainder will be distributed over six more years to founders, developers, early funders, ecosystem builders, programmatic sales, and liquidity mining. None, however, are slated to reward existing SOV stakers.