Abstract

The Cryptocurrency Real Yield Indicator compares the yield provided by a project with its revenue. If the actual staking return is higher than the interest provided, the issuance will be diluted. This means that the project's earnings are unsustainable, or "unreal." While true yield is not necessarily better than dilutive issuance, which is often used for marketing purposes, the metric can serve as a useful tool for gauging a project's long-term earnings prospects.

Introduction

High annual yield (APY) is usually seen in the past The field of centralized finance (DeFi) is undoubtedly attractive to investors. However, if you have ever encountered a 100% or even 1000% return on a staking opportunity, it is reasonable to doubt whether it is real. One popular way to evaluate promised returns is to calculate the project's true rate of return. This calculation is simple, fast and relatively effective, helping you to clearly assess the feasibility of a project's promise and estimate the "realness" of its actual benefits.

What is DeFi liquidity mining?

With liquidity mining, users can earn cryptocurrency rewards by locking their assets in a yield pool. Liquidity mining opportunities are diverse and include liquidity pools, native network staking, and lending protocols. What these opportunities have in common is that they all generate returns for users by putting their funds to work. Liquidity miners typically use protocols that maximize their returns, known as revenue optimizers. They also move funds in order to seek the best returns in the market.

As DeFi becomes more and more popular, many protocols have begun to provide high rewards as an incentive for stakers. measure. However, this often leads to unnatural and unsustainable high annual yields (APY), with the APY of some projects even exceeding 1,000%. Once these APYs decline due to the shrinkage of project treasury, users will be eager to sell the mined tokens, and token prices will often plummet as a result. It turns out that demand for such tokens is supported by issuance volume rather than utility.

Given the high APYs common in the DeFi space, how to estimate the true value of a project and its potential to generate interest? One approach is to focus on a project’s true cryptocurrency yield.

Sustainable Real Yield vs. Dilutive Issuance

When we use When the word "real" is used to describe a project's benefits, we are talking about the sustainability of its benefits. If the project’s revenue is able to cover the number of tokens allocated to stakers, its own funds will not be exhausted. In theory, if the project revenue remains the same, it can bring the same high APY to users indefinitely.

However, dilutive emissions are also common. The most common situation is that a project allocates APY in a long-term unsustainable way, and ultimately causing its coffers to be depleted. If project revenue does not increase, the same APY level cannot be maintained. The APY in this case usually comes from the project's native token, because the native token has a large supply and is easy to obtain.

Stakers may also sell these mined tokens on the open market, causing their prices to decrease. This can create a vicious cycle where projects must issue more native tokens to users to maintain the same APY, which can lead to the coffers being depleted faster.

Please note that while it is best to issue "real yields" in the form of blue chip tokens, projects that issue native tokens can also Deliver real yields in a sustainable manner.

What is the real return rate indicator of cryptocurrency?

The Cryptocurrency Real Yield Metric is a way to quickly assess the yield a project offers relative to its revenue. With this indicator, users can understand the proportion of diluted rewards in the project's rewards, or know that the project is mainly funded by token issuance rather than revenue. Let’s take a simple example:

In one month, Project tokens, with a total issuance value of $100,000. During the same period, the project earned $50,000. Given that revenue is only $50,000 and issuance is $100,000, the project's true yield deficit is $50,000. Therefore, the APY provided by the project is obviously highly dependent on dilutive issuance rather than actual growth. The simple example here does not take into account operating expenses, but it is still a reasonable rough estimate that can be used when evaluating earnings.

You may have noticed that real yield is conceptually similar to dividends in the stock market. If a company pays dividends to shareholders that are not backed by corresponding revenue, it is clearly unsustainable. For blockchain projects, their income mainly comes from service fees. For automated market makers (AMMs), their revenue may mainly come from liquidity pool transaction fees, while revenue optimizers may share their performance fees with their governance token holders.

How to ensure the authenticity of DeFi returns?

First, you need to find a reputable project to ensure that it provides services that you can trust and use. This is a good basis for you to achieve sustainable profits. Second, you need to focus on the project’s revenue potential and specific ways for users to participate. You may need to provide liquidity to the protocol or stake its governance tokens in a pool. In addition, locking native tokens is also a common mechanism.

Many yield-seeking users prefer to be paid out in the form of blue-chip tokens due to the lower volatility of such assets. If you find a potential project and understand its mechanics, be sure to use the formula in the previous article to see the project's true rate of return. We take a yield model that incorporates real yield into its token economics as an example to introduce how to use the real yield indicator in this article to verify the real yield of a project.

The automated market maker protocol provides revenue in two ways. One is to provide income to holders of its governance token ABC, and the other is to provide income to holders of its liquidity provider token XYZ. According to the design, 10% of the platform's revenue is stored in the vault, and the remaining revenue is evenly distributed to holders of the two tokens, stored in their respective reward pools and paid out in the form of BNB.

Based on your calculations, this project will earn $200,000 per month. Based on the project’s token economics, the ABC and XYZ reward pools will each receive $90,000 in BNB to reward their respective stakers. We can calculate the real rate of return like this:

$200,000 – ($90,000 X 2) = $20,000

Our calculations show that the project has a $20,000 surplus and the revenue model is sustainable. This revenue distribution token economics model ensures that token issuance never exceeds revenue. By choosing a DeFi project with a sustainable distribution model, users can well achieve real yields without having to deal with the data themselves.

Will relying on real yields make DeFi better?

In short, not necessarily. In the past, some projects have indeed successfully gained users by relying on increased token issuance. However, these projects tend to gradually reduce their token issuance and move to a more sustainable model. It would be wrong to say that seeking real yields is objectively better and relying on dilutive issuance is simply unsustainable. But in the long run, the revenue generation model of DeFi projects can only survive if it is combined with actual use cases.

Conclusion

With lessons learned from previous DeFi cycles, if more and more protocols can successfully implement features that increase adoption and drive sustainable revenue generation models, DeFi will The field will benefit immensely. And the conclusion regarding issuance is clear: users would do well to understand the nature of token issuance and its role in expanding a project’s user base and achieving potential sustainability.

Extended reading

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

• Introduction to DeFi 2.0 and its importance

• "Decentralized Finance (DeFi) Beginner's Guide"