Is DeFi's Real Yield the Real Deal?

What is real yield?

The #realyield narrative is a relative newcomer to the scene. In this article we break down what real yield means in DeFi and how some projects are harnessing this narrative to promote their products.

Real yield refers to DeFi opportunities that generate returns as a result of the product instead of as a result of farming or native token rewards.

[ Read our tokenomics guide ]

As the bear market has continued, DeFi projects across the space have had to make hard choices on how to structure their tokenomics. With prices on DeFi protocol tokens down bad on the year, it no longer makes sense for many projects to incentivize their products with native tokens.

Where did the real yield narrative come from?

DeFi summer of 2020 was kicked off by projects like Sushi where yield came almost entirely from protocol token rewards. But as the bull market cycle of the past few years turned into a prolonged downturn in this year, projects have looked for other ways to incentivize usage.

[ Read our primer on Sushi’s Vampire Attack]

While token rewards can be good to bootstrap a protocol, over time they become a heavy expense and depress the prices from farmers constantly selling. Further, when token rewards decrease, many users also disappear and move on to other farming opportunities.

This means that token rewards are not only expensive for project treasuries but keep projects from finding true product-market-fit.

The prolonged macro bear market has also played a role. The “risk-free” rate set by US treasuries in traditional finance has spiked as high as 4%. This makes it ever-less attractive for capital to stay in DeFi with all of the associated risks and nuances.

So to attract liquidity and make it through the bear market, projects are turning to a time-honored tradition in business: actually making money.

What are some projects that promote real yield?

One of the earliest and understated progenitors of real yield in DeFi is Curve. With their original tokenomics mechanism, Curve set up a system where the longest-term believers in the protocol would make the most money. The veCRV token collects an admin fee on each swap (currently 50% of the swap fee). This is converted from pool tokens into Curve 3pool and distributed weekly to veCRV lockers. Since you need to lock veCRV for 4 years to maximize your amount, long-term stakeholders get the largest share of admin fees.

Sustainable fee yields drive this real yield narrative. A similar story of driving plays out in other prominent protocols.

GMX is often touted as one of the prime examples of real yield in DeFi. Liquidity providers in GMX’s GLP token hold a basket of stablecoins and crypto blue-chip. In turn this liquidity is made available through a virtual AMM to traders, allowing them zero-slippage trades with leverage.

GLP holders profit from several sources of revenue in this system. Along with the fees from trading, traders also pay high borrowing rates for taking leverage. Finally, GLP liquidity acts as the counterparty to all trades, so when traders lose, GLP holders win.

The result is that yields for GLP holders have been in the double digits, and GLP holders have outperformed their benchmark index of crypto assets.

Is this real yield sustainable?

There is a clear pattern in the real yield narrative. A well-designed product with smart tokenomics can generate good fee yield for token holders and liquidity providers. But it remains to be seen if this real yield is sustainable.

Since fees drive the return on investment, if fees go down, so does the yield. But the trend is encouraging. Even in a bear market, protocols like GMX have seen some of the highest volumes (and therefore fee yield) ever. As capital and users continue to move on chain, we can be hopeful that volume continues to increase. With the transparency and security offered by DeFi compared to centralized exchanges, we could also see more users move to use protocols like GMX.

What are other sources of real yield in DeFi?

Some standout protocols are delivering real yield with fees, some protocols are looking at other sources of sustainable returns.

While AMMs like Uniswap were pioneers in the space, there is a lot of data to suggest that being an LP in traditional AMMs is a losing game. Because you are always trading losing tokens for winning ones, much of the flow to Uniswap and other AMMs is arbitrage and toxic by nature. The result is that markouts on LP positions suggest LPs on WETH-USDC have lost millions of dollars in aggregate.

New versions of AMMs like SWAAP and Clipper move away from the constant-product market maker model.

Instead, these protocols look to capture different types of flow. Clipper targets retail flow with a small pool and low fees. Swaap allows trades against its pool at an oracle price, acting more like a traditional market maker and capturing a spread on trades.

New versions of AMMs like these push the real yield narrative and suggest reduced impermanent loss for LPs.

Porting over trades from traditional finance has also been a popular move to capture real yield. Basis trading is when a trader longs an asset in one venue and shorts it on another, capturing a yield spread between funding rates. Hedge funds in tradfi and crypto have regularly used this trade, and some protocols are replicating this in DeFi. By going long an asset on a decentralized perpetual exchange like Perp Protocol, while also shorting an asset on a lending market like Aave, an automated vault can capture a funding spread and generate real yield for depositors. There is no free lunch though as rebalances and changes in carry costs (the cost/gain of funding on your position) can eat into gains.

What is the future of real yield in DeFi?

If DeFi grows and these products continue to attract users, the search for yield will continue. Protocols that can attract real usage and have smart tokenomics will be able to capture the value and generate yield for their token holders as well as LPs. Similarly, borrowing yield sources from tradfi and porting the components to DeFi offers an attractive source of yield. Builders will continue to innovate in the crypto space, and as users turn away from the ponzinomics of token rewards, the real yield narrative will continue to have legs.

Tags

Integral Insights

Updates

March 4th, 2024

Integral Insights February ‘24

Another milestone was reached on February 21st when Integral processed over $2 billion in cumulative volume.

Updates

February 1st, 2024

Integral Insights: January ‘24

Our initial launch with the ETH-RPL pool was a success, quickly elevating us to the second most utilized liquidity pool for this pair’s trading.

Research

January 17th, 2024

Is Liquidity Fragmentation Really That Bad?

When the token evolves into a store of value, it attracts outside traders, focusing on trading costs and slippage. This is when concentrated liquidity truly shines.

Updates

January 2nd, 2024

2023 Review

At Integral, our focus remains on developing a sustainable product for on-chain trading, serving both traders and liquidity providers.

Updates

December 12th, 2023

Integral Now Rewards Liquidity Providers with Trading Fees on Ethereum Mainnet

This enhancement enables liquidity providers (LPs) to directly receive a portion or all trading fees from Integral pools.

Updates

December 6th, 2023

Integral Insights: November ‘23

During November, Integral processed an average of approximately 6 million in volume with around 1.5 million in TVL. The system’s overall capital utilization sits at around 350%. It is the 10th most used DEX on Ethereum.

Updates

November 28th, 2023

Integral Now Rewards Liquidity Providers with Trading Fees

This enhancement enables liquidity providers (LPs) to directly receive a portion or all trading fees from Integral pools.

Research

November 15th, 2023

How Do University Blockchain Societies Gain So Many Votes?

Explore how university blockchain societies like FranklinDAO and Michigan Blockchain have grown into influential players in DAO governance, utilizing delegated votes and strategic partnerships to shape the future of DeFi protocols like Uniswap, Compound, and Aave.

Updates

November 6th, 2023

Integral Insight: October ‘23

We give an update for our work in October and highlight a profitable LP position from a long-term user.

Research

October 26th, 2023

Understanding the Stakes in Lido’s Growing Share of Staked ETH

The community is arguing whether a protocol may have too much control over the Ethereum network. Lido controls a large percentage of staked ETH, which could have consequences for the network’s future security and neutrality.

News

October 14th, 2023

Changes to Staking and Farming

Looking back at our progress so far and to the future with new updates to staking and farming.

Updates

October 11th, 2023

Integral Insight: September ‘23

We give an update for our work in September with utilization going up on higher volume for our new pools.

Research

October 11th, 2023

The Hottest Narratives of the Summer

What were the hottest narratives of the summer? Our DeFi research team delves into the growth of trading bots, RFV traders and more in this overview.

Research

October 2nd, 2023

Uniswap Governance: A Deep Dive

Governance is considered a critical component for the decentralization and community-driven development of DeFi protocols. We take a look at one of the largest goverance ecostystems in DeFi, Uniswap. In this blog post, we'll discuss the landscape of Uniswap's governance, pulling data from empirical research to dissect the system's delegates and proposals, revealing some interesting findings.

Research

September 19th, 2023

What is the DAI Savings Rate (DSR)?

Our research team takes a look at the DAI Savings Rate and its influence on various yield dynamics in DeFi.

Updates

September 15th, 2023

Integral Insight: August ‘23

We give an update for our work in August with cheaper gas fees and the launch of the Integral Relayer on Arbitrum!

Product

September 7th, 2023

Integral Relayer Launches on Arbitrum

We are excited to announce the launch of the Atomic Relayer on Arbitrum. This will bring the efficient and tested system for atomic trades to the Arbitrum Layer 2 network!

Research

August 26th, 2023

How CRV Got Sold OTC

In this post we cover how the Curve founder sold large amounts of CRV in over-the-counter trades in order to prevent a potentially catastrophic liquidation event in DeFi.

News

August 18th, 2023

Integral Insight: July '23

Sharing our progress in July: preparations for atomic swaps on Arbitrum, trading SIZE with lower gas fees and more.

Narratives

August 4th, 2023

Can Real Yield Replace Token Incentives for LPs?

DeFi protocols have relied on the distribution of native tokens to incentivize liquidity providers (LPs). In a previous post, we delved into traditional liquidity incentives and the utilization of vote-escrow tokens. Now, we shift our focus to a fresh approach that has captured the attention of DeFi enthusiasts: concentrated liquidity methods.