Since August, KOLs on Twitter have been increasingly heated about Real Yield. The origins and explosion of this discussion coincide with GMX’s excellent performance in a bear market.
Real yield, as it literally expresses, which DeFi protocols can generate real benefits and feedback such benefits to users; From another point of view, the protocol no longer simply uses its own tokens to incentivize liquidity mining, but gives users stablecoins or mainstream tokens, such as ETH, USDT, etc.
Terra collapsed, Celsius Network and Voyager Digital filed for bankruptcy, and Three Arrows Capital collapsed. These shocks have cast a shadow over the hearts of previous DeFi enthusiasts, and the argument that “DeFi is dead” is endless. In this context, the Real Yield narrative is very simple and powerful, which is not only the good expectations of DeFi users, but also symbolizes the DeFi project’s fight against Ponzi schemes, pursuing sustainable project benefits and returning the proceeds to users.
However, any hotly discussed narrative needs to be repeatedly considered and considered, and this article hopes to examine the rationality of Real Yield calculation from three aspects, and the significance of Real Yield from a narrative perspective:
- Real Yield concept grooming
- How Real Yield is calculated
- Real Yield Meaning
I. Real Yield conceptual grooming
In the current definition of Real Yield, there are two main issues:
- Is the net revenue of the agreement positive?
- If the net income is positive, does the protocol distribute it to token holders? More importantly, in what form is the protocol distributed, the additional tokens of the protocol, or mainstream tokens such as stablecoins, ETH?
The defining points are:
- Real Yield’s agreement has a positive net revenue;
- Real Yield’s protocol distributes proceeds to token holders in the form of mainstream tokens.
Taking these two standards as a starting point to re-evaluate whether the current mainstream DeFi protocols can produce Real Yield, we will see where it is worth exploring.
1. Most agreements fail to achieve positive returns
In a Deviman’s study of Real Yield, 12 of the 19 agreements had positive net income, but only 4 of the 12 incentive agreements had positive net income. The 19 TOP agreements have a total weekly net income of -$73 million. This is true among the top protocols, and it is even harder to achieve positive returns for emerging DeFi protocols.
2. The net proceeds are distributed to token holders by a handful of protocols
Similarly, in this research article, we can see that only 6 of the 19 top protocols actually distribute the main proceeds to token holders, with the number of each protocol allocated as shown below, with perpetual protocols such as Synthetix and GMX currently leading the way, followed closely by NFT marketplaces such as LooksRare and X2Y2.
3. Whether it must be distributed in mainstream tokens (or sound money).
What token form to distribute to users is a point of debate in the Real Yield concept.
The current situation is: 11 of the 19 TOP protocols are incentivized with their own tokens. 2 of the 8 non-incentivized protocols do not yet have tokens (Opensea and MM).
In a bear market, users are more concerned about the income of real money, so they prefer to pay in the form of ETH or stablecoins, but if we think from another angle, if it is in a bull market, perhaps users will prefer the native token of the protocol, because the native token can also capture a larger value imagination.
4. The concepts of distributing real benefits and distributing real benefits sustainably need to be treated differently
Of the 19 protocols, there are 6 that distribute real proceeds to token holders: Synthetix, GMX, LooksRare, X2Y2, Convex, and Curve. In the statistical period, the protocol with the most weekly distribution revenue was Synthetix, however due to Synthetix’s negative net income, the sustainability of its true revenue distribution is questionable.
II. How Real Yield is calculated
Most definitions calculate Real Yield as Real Yield = Protocol Revenue – Token Cost, for example, @defiman uses the formula as:
Net Revenue = Protocol Revenue – Market value of protocol emissions
Let’s analyze the details in this calculation formula one by one:
1. Why net income and not net profit
The reason why most articles choose net income as an indicator to measure protocol revenue is that data such as operating costs are generally difficult to find or fully capture, such as infrastructure and team salary-related information, so it is understandable to use net income as an indicator.
2. How to calculate the total agreement revenue
- First of all, the total revenue composition of the protocol is different in different tracks: for example, the DEX protocol revenue composition in DeFi comes from transaction fees, of which the income from futures (perpetual) trading is generally much better than the income from spot trading due to the fee rate.
- Second, in DeFi projects, total protocol revenue is not necessarily a measure of a protocol’s ultimate pole; In order to reflect the competitive advantage, spot transaction fees are likely to become lower and lower. For example, in order to expand the trading audience, Uniswap deployed to the cheaper Polygon, which reduced the total protocol revenue to a certain extent; In order to compete with Curve, a 0.01% fee TIER for stablecoin pairs was introduced. So protocol margin does look thin (see table below), so that while protocol revenue is lower, the number of users may increase. It can be seen that the agreement of different tracks does not trade off revenue differently.
3. How to consider the cost of token release
- First of all, token emission is subtracted as a cost because from the perspective of token holders, it is a marketing strategy to attract traffic from the protocol, and in addition, the additional issuance of tokens dilutes the value of existing circulating tokens.
- Market capitalization of current token release = current coin price * token circulating volume (token circulating during the selected time period, 3 months/1 year, etc.)
- However, token price fluctuations are difficult to calculate and can also affect the magnitude of token fluctuations in bull and bear market environments
- What the token release variable means in the above formula: if we want to maximize the net revenue of the protocol, then the token release cost needs to be minimized. Of course, as long as the sum of token releases and operating costs is less than the total revenue of the protocol, it is considered healthy. Because in the current stage of long-tail DeFi project development, users need token release as an incentive; However, in the long run, token release due to its own reflexive nature is not a sustainable means of drainage.
4. In the current definition, the distribution of fees between token holders and the DAO is ignored
- First of all, if all projects blindly pursue Real Yield and choose to direct these fees to token holders instead of DAOs, this will lead to some problems in the future.
- In the fee discussions around UNI and DAOs, a trend can be seen that all DAOs are being urged to define and determine their token payment policies. How to balance this income distribution within the DAO is a game theory game between DAO organizations and token holders.
- Similarly, choosing to keep money modestly within the DAO to retain talent and fund new developments will better serve the community in the long run.
III. Real Yield Significance Discussion
1. RealYield appears in the background
While we point out where Real Yield is a measure of DeFi, everything happened for reasons that fit the circumstances.
In 2021, almost all DeFi protocols are very aggressive in using token release models to quickly attract liquidity. The direct “involution” of the DeFi protocol and FOMO sentiment create such a phenomenon. The last DeFi boom came to an abrupt end in the middle of this year with the collapse of projects like Terra and Celsuis. With the arrival of the bear market, the market began to question the actual role of DeFi, speculation retreated, and users and researchers began to delve into whether DeFi projects produced real money or meme coin bubbles.
It can be said that the attack on faked yield has led to the demand and pursuit of real yield.
Meanwhile, at the end of August, according to Nansen data, the number of transactions on GMX once surpassed Uniswap, becoming the protocol with the largest number of transactions in the week on the Arbitrum network. GMX as one of the projects that generate “RealYield”, the Real yield narrative is completely ignited, KOLs are hotly discussing who will become the next GMX, and even become a new marketing strategy for DeFi projects.
2. Why discuss Real Yield
In a bear market environment, users will be more likely to pursue stable and real returns. If a project is fairly accepted as a Real Yield project, such an evaluation can become an important indicator for users to screen reliable projects. Or as DeFi evolves, users begin to examine the sustainability of APY, and double-digit APY discourages people from further exploring whether DeFi can bring real value to the cryptocurrency community.
For the project side, especially the initial project, although the label of real yield can quickly attract attention, it may not be true according to the above real yield definition and analysis method. For example, Polysynth, who does options strategy, has a real yield tag on Twitter, and although the income given by Polysynth is indeed a stablecoin, its own assets into the strategy vault they manage will face great risks, and investors may face up to 60% of the principal loss.
Moreover, even the Real Yield label is not beneficial to long-term development. At this stage, DeFi projects still need to use liquidity mining to do cold start in the early stage, so blindly pursuing real yield means that funds for protocol construction will be compressed, such as community building, project research and development, marketing, etc.
3. Narrative economics
Markets don’t work through numbers, but stories, narratives.
There is a theoretical discipline called Narrative economics, the core of which is that words and language can easily influence the behavior of people in the market, so as to influence the market. Markets are volatile and emotional because people who participate in them tend to listen to stories. Interesting narratives can touch people’s values, which in turn can connect people’s behavior.
That’s why it’s necessary to keep track of the narrative in the market, which is why we talk about Real Yield. There is a digital-based interpretation and translation behind it, so that the story can mobilize people’s emotions to participate in investment and trading.
Robert Shearer, author of Narrative Economics, also said that
“In the end, due to insufficient information, a large number of people made decisions that led to economic volatility… Moreover, their decisions drive overall economic activity. So it’s certainly an attractive narrative that drives these decisions.”
The theory of narrative economics does exist, but to become a good researcher and investor, you need to further interpret the narrative, distinguish reasonable points and debatable logic.
That’s why we are taking a fresh look at Real Yield.
Posted by:CoinYuppie，Reprinted with attribution to:https://coinyuppie.com/examining-the-new-defi-narrative-the-concept-and-calculation-of-true-returns/
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