Summary

Decentralized Finance (DeFi) protocols provide decentralized financial services through smart contracts and charge fees based on these services. When a DeFi project's revenue increases, it attracts more users and liquidity.

Introduction

To choose the right one from the numerous DeFi protocols on the market may require a lot of time and effort. Many of them are similar, so how do we know which one will allow us to earn the most passive income from cryptocurrencies? The first step is to understand the platform’s revenue and how much of it is shared with users. You can then use this information to rationally make informed decisions about where to invest your assets.

How the DeFi protocol works

Decentralized Finance (DeFi) protocols provide a range of financial services operated through smart contracts. For example, DeFi protocols can provide decentralized trading services, loans, and liquidity pools, all run through smart contracts on the blockchain. All you need to access and use these services is a wallet and some cryptocurrency to pay for your transactions.

There are almost no limits to the financial services that DeFi can provide. You can access trading services, money markets, derivatives and savings products in the DeFi world. All of these services are permissionless and disintermediated in nature.

How DeFi protocols bring benefits

The operating costs of DeFi services come from The computing power required to run smart contracts. Users usually pay for this through fuel fees. However, there are other additional costs associated with services such as development and maintenance. DeFi protocols charge fees for their services to cover these fees and generate revenue.

Decentralized Exchange (DEX)

Users who buy and sell tokens on the DEX must pay a fee to use its services. For example, a transaction might incur a 0.3% fee for the DEX operator’s funding or liquidity reserves.

Lending Agreement

Users who borrow from a lending protocol must pay a borrowing fee. Some of this will be used to pay liquidity providers (other users who provide funds), and the rest will be paid to the protocol.

Why revenue is important

In addition to covering the cost of the protocol itself In addition, increased revenue and profits can benefit stakeholders. DeFi projects typically maintain a revenue sharing model through their governance token holders. They may also use the proceeds to increase APRs for stakers or liquidity providers on their platform.

For DEX, higher returns can attract more users, thereby increasing liquidity. If yield aggregators pool users' staked funds together as a "bribe (or incentive)" to network validators, then they may receive a higher APR.

In short, we can use a circular approach to describe the capital inflow and income of a project:

1. Popular projects attract liquidity, attract more users and form a virtuous cycle.

2. Higher trade flow and liquidity can reduce slippage and speed up execution.

3. More users can improve legitimate transaction volume, leading to more revenue.

4. Revenues are shared with staking users, thereby providing more liquidity.

This cycle can also attract users who want to participate in liquidity mining. Those who want to invest can increase their chances of maximizing returns through compound interest. The more successful the project is, the more liquidity will be available, and in turn, the more liquidity miners it will attract. This process generates more revenue that can be used to improve the protocol's services.

How to check how much revenue the DeFi protocol has generated

DeFi runs on the chain , which means that almost all transaction information (depending on the blockchain used) is verifiable. Everyone has easy access to a blockchain explorer, but that doesn’t mean we’re necessarily clear about the scope of the protocol’s benefits. There are many blockchain data aggregators that simplify the task so you can better understand the benefits of each protocol.

With a Google search and some research from trusted sources, you should be able to find metrics and statistics about DeFi protocol returns . These numbers can help you make smarter investment decisions.

Conclusion

Whether you are looking at the actual rate of return of the project or the basic information, income is a key indicator that needs to be studied. Only by understanding how a protocol generates and shares its benefits can you invest wisely. You can learn more about this topic by taking a deep dive into DeFi 2.0, yield mining, and general finance topics at Binance Academy.

Extended reading

• Decentralized Finance What exactly is liquidity mining in (DeFi)? | Binance Academy

• Introduction to DeFi 2.0 and its importance | Binance Academy

• Introduction to DeFi | Binance Academy

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