A clear theme surrounding the 2022 bear market is the growing focus on the fundamentals of cryptocurrencies across sectors, especially DeFi .
As prices drop, unrestrained spending habits coupled with the lack of sustainable business models are a concern. While many DeFi blue-chip protocols have been admired for their ability to make money, not a lot of attention has been paid to whether they are actually making money.
Let’s take a look at the earnings of 6 market-leading blue-chip protocols over the past 6 months, digging into the broader impact: Uniswap, Aave, Compound, Maker, Maple, and Lido.
Before starting our analysis, it is necessary to clearly define whether a protocol is profitable or not, and we lack a clear consensus on profitability.
While all DeFi protocols generate revenue to compensate participants, such as lenders and liquidity providers, for the risks they cause, the protocol itself captures very little of the value in these benefits, without exception.
Also, there is usually little discussion of the initial cost of generating this benefit. In many business models, the protocol “needs to spend money before making money.” The biggest and most common business expense is token distribution, no matter what field of business it’s in.
Tokens are powerful tools that can be used to motivate users of various behaviors, and are most widely used in DeFi to motivate the use of liquidity mining.
Our analysis will also keep these notions in mind, and we will use the definition of profitability presented in the article “Comparing the profitability of DEXs” by talking about Fight Club.
In the paper, the author defines profitability (net income) as follows: net income = agreement income – distribution
The protocol revenue the author refers to takes into account the fees incurred to token holders, and we will expand this definition to include all DAO revenue, whether it is token holder revenue that accumulates native treasury, or is used for other purposes income.
Distribution refers to the distribution of tokens to participants within the protocol, such as through liquidity mining or promotion programs. This definition does not include team or investor token unlocking.
While not covering all operational overhead, such as compensation, this definition gives us a good understanding of how profitable a particular DAO is to run the protocol.
While looking at net income, we also cover profitability. Profitability is a valuable metric that allows us to see how efficiently each protocol captures the value of its portion of total revenue, allowing for more nuanced comparisons of profitability.
We will use two ratios, namely “Profit Margin” and “Profit Margin”
Protocol profit margin is a measure of the protocol’s revenue rate, or how much of the total revenue generated goes to the DAO. The agreement margin is calculated by dividing the agreement revenue by the total revenue.
**Metrics for the past 6 months (Jan 27-July 27)**
Maker Protocol Revenue
Maker generates revenue by charging borrowers interest (called a stability fee) and by taking a share from the settlement of the protocol.
During the 6-month period, the protocol generated a total revenue of $28.61 million, all of which went to the DAO. Because Maker has no token distribution, this makes both protocol and profit margins as high as 100%. Still, it’s worth mentioning that Maker and other DAOs are keeping an eye on their own operational overhead, even though the protocol has remained profitable during this time.
Aave Protocol Revenue
Aave generates revenue by taking a commission for paying interest to platform lenders.
Over the past 6 months, Aave has generated $101.41 million in total revenue, of which $90.48 million was paid to lenders (supply-side revenue) and $10.92 million went to the protocol. Its agreement profit margin reached 10.8%.
However, Aave spent $74.89 million on token distribution to incentivize users, costing the protocol $63.96 million.
Compound Protocol Revenue
Compound generates revenue by taking a cut of interest paid to lenders (although currently used to buffer protocol reserves).
Compound generated $42.31 million in revenue, of which $4.8 million went to the protocol. The agreement margin was 11.3% – 0.5 percentage points higher than its main competitor on Aave.
Despite higher profit margins, Compound still lost $21.36 million over the past six months (though smaller than Aave’s).
Maple Finance Protocol Revenue
The revenue generated by Maple comes from the liquidity pool, which represents the loan origination fee for the loans issued, and the liquidity pool represents the entity that manages the platform’s liquidity pool. Currently, the fee is 0.99%, of which 0.66% goes to the protocol (divided equally by the DAO treasury and xMPL stakers) and the remaining 0.33% goes to the liquidity pool representatives.
In the past 6 months, Maple generated $2.15 million in protocol revenue, and spent $25.74 million on MPL incentives to encourage users to deposit in various liquidity pools, which cost Maple $23.58 million in this phase.
Lido Protocol Revenue
Lido generates revenue by taking 10% of the staking rewards earned by validators on the Beacon chain as a commission.
Lido generated $15.64 million in protocol revenue in this regard, but distributed a total of $48.98 million in LDO through incentivizing liquidity on exchanges such as Curve, Balancer, and through Voitum bribes and protocol promotion programs.
That is, Lido lost $33.34 million during this period.
Potentially profitable agreement
Uniswap supply-side revenue
Uniswap has brought in $458.5 million in revenue to liquidity providers in the past 6 months. However, there is no revenue flowing to the protocol, because Uniswap has not turned on the “fee switch”. After the fee switch is turned on, the DAO will earn 10%-25% of the LP fee of the liquidity pool.
How the fee switch affects Uniswap’s liquidity is unknown, and scaling back fees for liquidity providers could cause them to migrate to other platforms. This may hurt trade execution and reduce the volume of trades on the highly competitive DEX exchange.
The saving grace of Uniswap is that it has spent zero on token distribution for the past 6 months, making it likely a profitable protocol, provided the fee switch is turned on.
We can see that, based on our definition, MakerDAO is the only one of the 6 protocols that is profitable.
This is understandable. The vast majority of early-stage startups are unprofitable—and DeFi protocols certainly count as early-stage projects.
In reality, the above protocol and many others simply follow the Web2 playbook, operating at a loss to support growth, a strategy that has proven very successful in various startups and companies.
Still, issuing tokens is of course a fundamentally unsustainable strategy. Money is not endless, and liquidity mining schemes are highly reflexive, and the longer the scheme lasts, the less potent and effective it becomes, as the tokens issued are given selling pressure. Additionally, selling pressure on issued tokens often deprives the protocol of the ability to invest in itself, and DAO treasuries are often concentrated in the protocol’s native tokens.
Perhaps more worrying about these blue-chip deals than the lack of profitability is their extremely narrow profit margins.
For example, lender agreements like Aave, Compound, and Maple have profit margins of only 10.8%, 11.3%, and 6.7%, respectively. Lido has an 89.9% market share in the liquid staking space, and its protocol profit margin is only 10%.
Given the fierce competition in DeFi chokeholds, these protocols are unlikely to really increase profit margins, or they would put themselves at risk of losing market share to others, or being forked.
For these protocols to be profitable, the real solution may be to think outside the box and create higher-yielding profit streams.
Doing this is certainly challenging, and we’ve seen DAOs emerge on this path, such as Aave issuing its own GHO stablecoin, similar to Maker’s business model (Maker has a high profit margin that it is proud of, and so far has not needed to Depends on token incentives).
Posted by:CoinYuppie，Reprinted with attribution to:https://coinyuppie.com/bankless-which-defi-protocols-are-profitable-over-the-last-6-months/
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