Benefits of the DeFi economy: loans, transactions, agreements, pledges, etc.

What is an income asset?

Tokens are a new digital primitive. They give property rights and can represent anything, such as money, artwork, game items, and access rights.

Income-generating assets are tokens that represent a share of certain yield-generating activities (such as loans, transactions, or agreement dividends). They are the pipelines of the digital economy, conveying revenue to market participants who provide capital or provide services, and therefore play a fundamental role in DeFi.

Type of income source

In DeFi, most of the benefits are driven by the following factors: loans, transactions, pledges, agreement dividends, liquidity mining or some mixed factors. Below we will introduce each source, identify well-known examples, and mention the factors that affect changes in earnings.

loan

Loan income comes from the interest paid by the borrower on the loan. Top-tier loan agreements rely on algorithmic models to set interest rates for borrowers and lenders. Well-known assets that represent loan positions include ctoken (Compound), atomic (Aave), and ftoken (Fuse). When lenders provide their assets to the lending market, they receive a token in return, which represents part of the lending activity in the market.

The rate of return based on the underlying price is the following function:

  • Interest rate model
  • The liquidity of the lending market, that is, the utilization rate
  • Appetite for leverage

For example: c USDC

trade

Exchange income comes from exchange fees, that is, the fees paid by traders to exchange with the reserve pool. Well-known assets representing exchange positions include Uniswap LP shares and Curve LP shares. When liquidity providers (LP) provide their assets to the liquidity pool, they will receive LP shares in return, which represents their liquidity share.

The rate of return priced in LP shares is the following function:

  • transaction fee
  • Volume
  • Market volatility
  • Relative contribution of liquidity

Recent developments in the automated market maker (AMM) field have increased the flexibility of LP positions, but at the expense of predictability. For example, since UniswapV3 introduces range orders, LP can provide restrictions on its liquidity between the upper and lower price limits. Interval orders increase the capital efficiency of LP, but also add another important factor:

  • Probability of price range

Pledge

The pledge income comes from the pledge reward issued by the L1 protocol to the verifier. The verifier locks the capital to ensure the security of its network and achieve distributed consensus. For example, users can lock ETH to ensure the security of Ethereum 2.0, and gain revenue through good behavior. Well-known assets that represent pledge positions are called pledge derivatives, including stETH (Lido). When the pledge party deposits their assets in the pledge pool, they will receive a pledge token in return, which represents the pledge activity share of a specific blockchain (such as ETH2.0).

The target-denominated rate of return is a function of the following:

  • Pledge economy
  • The total amount of the subject pledge
  • Market volatility

For example: stETH

protocol

The benefits of the agreement come from the dividends distributed by the agreement to its token holders as a reward for good governance. The agreement does not distribute actual dividends, but explores other implementation methods, such as repurchase and construction, and purchase and destruction models. The agreement uses these models to purchase governance tokens from the open market. Regardless of whether the purchase is burned or used for an incentive plan, the purpose is to increase the upward pressure on the price of tokens due to a decrease in supply.

The rate of return in governance tokens is a function:

  • The agreement decides to distribute, repurchase, or destroy tokens
  • Agreement profit

Liquidity mining

Liquidity mining (LM) revenue comes from the agreement rewards distributed for market participants to provide required services (such as loans or provide liquidity). Essentially, this is how the agreement increases revenue and incentivizes behavior in a way that hopes to be beneficial to the agreement. Generally, LM rewards are denominated in the governance tokens of the agreement and are automatically rewarded to holders of specific tokens related to the agreement. Well-known examples include COMP’s ctoken and Balancer’s BAL mining.

The rate of return in governance tokens is a function:

  • Emission rate
  • Relative contribution of liquidity
  • The price of governance tokens

Hybrid

Mixed income sometimes comes from liquid mining structured products. This is a pre-packaged strategy in which multiple liquid mining projects are carried out on profitable assets to obtain additional income, thereby achieving “double decline” or compound interest. . Famous examples include: Year Vaults and Harvest Finance.

The rate of return based on the underlying price is the following function:

  • All factors related to potential sources of revenue
  • Relative contribution of liquidity

Example: Yearn Vault v2-WETH

in conclusion

In this article, we position profitable assets as the basic type of DeFi, pass the rate of return to market and governance participants, and determine their sources, from loans to pledge activities.

Posted by:CoinYuppie,Reprinted with attribution to:https://coinyuppie.com/benefits-of-the-defi-economy-loans-transactions-agreements-pledges-etc/
Coinyuppie is an open information publishing platform, all information provided is not related to the views and positions of coinyuppie, and does not constitute any investment and financial advice. Users are expected to carefully screen and prevent risks.

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