The Rise of "Real" Yield
What is Real Yield?
Decentralized finance is quickly embracing the concept of 'real yield,' a new trend that promises to disrupt the DeFi market entirely. The phrase refers to DeFi projects that incentivize stakeholders in the form of a token outside the protocol's control (such as USDC or ETH).???
Previously, DeFi models relied on the emissions of a protocol's native tokens to distribute generated revenue. The yields on such models resembled a Ponzi-like scheme, as they were frequently unsustainable. Eventually, DeFi investors began to reserve their capital for DeFi protocols and were willing to share their organic profits.
As Bankless analyst Ben Giove recently noted, "DeFi isn't dead. There are real, organic yields out there (that serve as) opportunities for risk-tolerant DeFi users to generate yield at above-market rates through protocols such as GMX, Hop, Maple, and Goldfinch. With the bulk of their yield not coming from token emissions, it is also likely that these protocols will be able to sustain their higher returns for the foreseeable future."
Why Real Yield Came About
In 2021, DeFi users frequently invested in tokens with high initial yields until they became subject to impermanent loss. Investors began to jump from asset to asset, staking them for rewards only as long as the token's price held up. Investing became a game to dump a declining asset before others did.??
This form of yield farming forced DeFi protocols to emit more tokens to maintain an attractive yield. This remedy further devalued the token, alarming investors and accelerating the token's collapse. In contrast, real yield eliminates investor concerns about a token's value being inflated away by emissions of the protocol's native token.?
The Downsides to Real Yield
0xSami, the co-founder of Redacted Cartel, recently published an article entitled wolf in sheep's clothing to argue that a token's APY can be easily gamed. DeFi projects merely need to offer enormous token incentives to draw in user deposits.??
According to OxSami, DeFi projects that advertise a real yield risk emitting tokens simply to attract revenue-generating capital. This capital would enable the project to offer a high ETH or USDC-denominated real yield even though users only receive the yield by staking a rapidly inflating governance token.?
OxSami also notes that a protocol that distributes its revenue to token holders cannot gear that same revenue toward growth. "If you are not finding natural adoption without incentives, it is a horrible idea to pass out the money you could use to fund the R&D of finding product market fit out to token holders. Like the peacock, flaunting your colors too much will hurt the DAO as the peacock easily becomes a victim to prey out in the wild," said OxSami
The Wider Impact of Real Yield
At first glance, it seems natural for a protocol to incentivize its stakeholders with native token rewards. However, investors can hardly measure a token's actual yield, given the likelihood of impermanent loss. It's too easy for a protocol to denote revenue from transaction fees as yield and to chalk up any losses in the principal to 'impermanent loss.'
Given this state of affairs, the introduction of real yield in the DeFi world appears almost? inevitable. Indeed, its advent promises to rebuild investor trust in the DeFi ecosystem, a sentiment in short supply after the meltdown of Terra and Celsius.??
Finally, the emergence of real yield will jumpstart a renewed interest in DeFi from traditional finance. With TradFi immersed in profit-and-loss metrics, real yield can only help facilitate the intermingling of the two fields.?