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The concept is that DeFi protocols will pay out yields in major cryptocurrencies like Bitcoin or Ethereum or in stablecoins like USDC or BUSD. The funds are supposed to flow from the actual revenue of the protocol, and staking or locking the governance token is the way to earn them.
There are reasons to be excited about this trend, but there are legitimate concerns as well. In this article, we’re going to discuss real yield, how the trend is playing out, and take a look at some of the platforms where it’s being offered.
What is real yield?
Real yield is very similar to a stock dividend. With real yield, you invest money in a DeFi protocol, and through that investment, the protocol is able to generate revenue from which it provides you a small share. Meanwhile, you of course still hang onto your investment as well.
The key difference between real yield and a lot of what has been happening up until now in the world of DeFi is in the “real” part. During the rollercoaster years of DeFi in 2020 and 2021, protocols were paying out yields, but they were typically doing so using an entirely different method.
In those days, yields often ran into the range of four figures or even higher, with protocols paying their users through an endless cycle of unsustainable token emissions. The idea was that it was better to attract capital even at the cost of token inflation. But when the market cracked last spring, it began a cascading effect that has seen many of those token values go down, with the illusory yields nowhere to be found.
Additionally, during the early days of DeFi, many users were uncommitted to projects, jumping around to new ones as quickly as they could in a practice known as yield farming. The end result has left DeFi as a bit of a desiccated landscape in the wake of the bear market, and investors are looking for any promising signs, such as the real yield trend, that might water the crops.
How is the real yield trend playing out?
One fear circulating is that the real yield trend is acting more as a way to signal a positive direction to investors than an indicator that the protocol is actually taking one.
For instance, the previously most popular method of evaluating DeFi projects was based on the total value locked (TVL) — a metric that measures the size of an ecosystem — but this failed to provide adequate insight into the health of many entities.
Due to the massive yields during DeFi summer, many entrants to protocols were just passing through and artificially boosting the TVL. Additionally, TVL didn’t get to the bottom of operating costs and other issues related to capital efficiency.
Now, with real yield, it’s possible that the community may be headed down a similar road, looking for a comprehensive indicator where there isn’t one to be found. There are a number of risks, not least the fact that it’s entirely possible for a protocol to emit tokens to earn stablecoins and then pay those out to users — a kind of hybrid situation that may seem like real yield.
It’s also possible to keep emission low and pay out real yield to attract stakers only to dramatically ramp up emissions at a later date — once the unwitting users have already locked up their investments, of course.
Other issues include the fact that start-ups generally need their capital, and paying out large yields solely for the purpose of onboarding new users in a Ponzi-like fashion could come back to boomerang down the road.
What DeFi protocols are paying real yield?
Below is a brief list of a few of the main protocols driving the real yield trend, though there are certainly others.
Synthetix has some history in the DeFi world, dating back to the early days. It’s a decentralized protocol where synthetic assets and derivatives can be traded. After it overhauled its tokenomics, it took off on the Ethereum blockchain. Now it provides real yield to its users.
Synthetix pays yields of roughly 53%. These yields come from a mixture of emissions-driven staking rewards paid out in the protocol’s token as well as sUSD stablecoins earned from trading fees on the exchange. It can be considered a hybrid yield offering.
GMX is a decentralized exchange ( DEX) that began in 2021. It has recently seen all-time highs in the trading of its governance token. The exchange’s two native tokens, GLP and GMX, are representations of an index of the assets available on the platform and a governance/revenue-splitting token, respectively. The DEX pays 14% APR to those who stake GMX and 28% to those who hold GLP. The yield flows from organic profit sharing on the platform rather than from inflationary token maneuvering.
Dopex is a DEX specializing in options that allows people earn real yields. The platform’s Single Staking Options Vaults are similar to single staking vaults, while it’s also possible to bet on changes in interest rates with Interest Rates Options as well as other derivatives. Dopex can be considered a hybrid provider in terms of real yield, with some of the staking yields for the native token coming from inflationary emissions. For those willing to lock up the platforms’s “vote-escrowed” veDPX for a term of four years, the APY is 22%.
Real yield is a welcome addition to the DeFi stable after a rough year of crypto price crashes that saw interest in governance token yield farming take a beating. It provides a more realistic and practical expectation for investors on their investment returns, and hopefully sustainable results. Just how sustainable, will be answered over the coming years.