Will productive DeFi assets like Sushiswap and AAVE have higher returns?

It may not matter if the asset is productive or not, what matters most is the underlying product and its growth.

Today, there are two main classifications of DeFi tokens: productive and non-productive.

Unproductive DeFi tokens are the classic ‘no value’ governance tokens we all know and love – tokens like UNI and COMP are perfect examples – and although they have generated hundreds of millions of dollars in revenue since their inception, these tokens simply represent the right to participate in governance without the right to cash flow.

On the other hand, we have seen the emergence of productive DeFi tokens like SUSHI and AAVE. These are the holy grail of crypto capital assets because they represent both governance and the right to cash flow on the chain. Unlike non-productive tokens, they allow holders to receive passive income in return in the form of agreed fees (and in some cases, inflationary rewards).

In the case of Aave, holders can pledge in the security module and their funds will serve as collateral of last resort. In return, they receive a bonus from ecosystem reserves and agreement fees. Similarly, SUSHI holders have the option to pledge their tokens and receive xSUSHI, which gives them 16.6% of all fees generated by Sushiswap.

Intuitively, one would think that productive assets are more advantageous – that is, that they are always a better choice for investors. But that may not be the case; ultimately, what matters most in investing is market performance.

As with traditional finance, it may not be whether the token has cash flow rights that matters most. Instead, it is fundamental growth, such as trading volume, revenue, and users, that drives valuation.

This paper uses some quantitative evidence to support this claim, so we will use two similar sets of protocols, one with productive assets and the other with non-productive assets.

These two sets of protocols are (1) Uniswap and Sushiswap and (2) Compound and Aave.

A cross-sectional comparison

  1. Uniswap and Sushiswap
    Of course, the key metric for understanding any DEX token (such as SUSHI and UNI) is the volume of transactions. This is a fundamental measure of decentralized exchange adoption and success, and higher volume means that the protocol generates more fee revenue, which drives the value of these DeFi tokens.

And when it comes to volume, Uniswap is dominant, with average daily trading volume at the beginning of 2021 at around $733 million, according to Token Terminal, and with the launch of Uniswap V3 last month, Uniswap’s average daily trading volume has grown to $1.4 billion, doubling from doubled from the beginning of the year. In comparison, Sushiswap started the year with an average daily volume of just under $400 million and has grown to $560 million, a modest 42% increase over the last 6 months.

Will productive DeFi assets like Sushiswap and AAVE have higher returns?

Trading volume and fees are directly correlated, so it is not surprising that the daily revenue graph is the same as the volume graph above. However, there is a key difference in the significance of these revenues for both protocols. As mentioned earlier, SUSHI holders can pledge their tokens and receive xSUSHI, which effectively represents the right to receive 16% of all revenue generated by the protocol. UNI, on the other hand, has no such revenue and all revenue generated by the agreement flows to the liquidity provider (LP).

In addition, Uniswap’s year-to-date revenue growth rate is 72%, with LPs generating $3.3 million in daily revenue. In contrast, Sushiswap’s revenue has grown by only 42% this year, with LPs earning $1.6 million per day (xSUSHI holders earn approximately $250,000 per day).


Will productive DeFi assets like Sushiswap and AAVE have higher returns?

Note: If Uniswap uses the same scheme as Sushiswap, then “xUNI Holders” can expect to earn over $220 million this year! If the pledge rate is the same as Sushiswap, this means that UNI pledgers will earn an annualized return of 7.55%, almost the same as Sushiswap.
At the end of the day, there is only one metric that matters to investors: price performance. Every investor wants to bet on the fastest horse, and the market is the ultimate judge of that. Despite the fact that UNI does not have cash flow rights, or even that it is a relatively static governance ecosystem, it still outperforms SUSHI.

After some digging, we can see that this makes sense. UNI outperformed SUSHI in key areas that drive DEX (volume and revenue) valuations. however, we should also highlight one important aspect that could directly impact the performance of both this year: the token supply schedule.

Sushiswap experienced a massive SUSHI token unlock in late March, while it continued to offer liquidity mining rewards to LPs on a weekly basis. Uniswap, on the other hand, has no plans to release tokens to the market, and a large number of tokens are in the hands of teams and investment houses, which may be a key factor in the decline SUSHI experienced in March-April.

That said, both protocols have had a banner year, with SUSHI token prices up over 189% and UNI up 378% so far this year.

The winner: the ‘worthless’ governance token

Will productive DeFi assets like Sushiswap and AAVE have higher returns?
  1. Compound and Aave
    Compound and Aave are a similar contrast to Uniswap and Sushiswap, with Compound representing a slower moving lending protocol backed by US VCs, and Aave being the opposite, with its team and community taking a ‘fast moving’ route while empowering the AAVE token cash flow by introducing Aavenomics gives AAVE tokens the right to cash flow.

But how are these comparable? Similar to DEX and trading volume, a key issue to focus on with lending protocols is the growth of lending volume.

More lending volume translates into better interest rates for LPs, which in turn attracts more capital and thus increases the lending capacity of the agreement. While Compound has long been a leader, it has been overtaken since the launch of Aave’s liquidity mining program in May 2021.

The launch of Aave’s liquidity mining program has led to a surge in market demand for borrowing on the protocol. As a related figure can be given here, Aave started 2021 with only $500 million in outstanding debt, an insignificant figure compared to Compound at the time (which was over $1.7 billion at the time).

Since the beginning of the year, Aave’s lending volume has increased by 1700% and it has processed more than $10 billion in loans, while Compound’s figure has increased by more than 200% and it has processed $5.3 billion in loans.

Will productive DeFi assets like Sushiswap and AAVE have higher returns?

Aave has also taken the lead in daily revenue due to a surge in lending volume, which is good news for Aave holders.

Currently, Aave generates just under $1 million in daily revenue, most of which goes to LPs, while Compound generates just $550,000 per day for LPs.

Interestingly, Aave’s revenue is up over 360% this year, while Compound’s growth rate is flat at 2% after a recent drawdown.

Will productive DeFi assets like Sushiswap and AAVE have higher returns?

I’ll repeat: What matters to investors at the end of the day is the performance of the app, and what investors want to see is rising numbers.

With Aave’s explosive growth this year, it’s not surprising that it outperformed Compound. Overall, both assets grew by more than 123% this year, but AAVE won with a 255% annual growth rate.

Winner: Productive DeFi Token

Will productive DeFi assets like Sushiswap and AAVE have higher returns?

Although Uniswap (UNI) is an unproductive asset, it outperforms productive assets, and Aave, a productive asset, outperforms its unproductive competitor, Compound. so what does this mean? It may not matter if the asset is productive or not, what matters is the underlying product and its growth.

If the fundamentals exist and it is growing, the market will respond to it, regardless of whether the token has a value accrual mechanism.

No offense to UNI holders (I’m one of them), but I’ll point out that it has no cash flow rights and little governance to speak of (I admit it’s had more governance activity lately).

But guess what, Uniswap is still the dominant force in the DEX space, with no other protocol coming close to the volume and fees it generates, as evidenced by its 60%+ market share and triple-digit year-to-date growth rate.

Will productive DeFi assets like Sushiswap and AAVE have higher returns?

The same holds true for Aave, which has more borrowing and revenue than its rivals and has significantly outpaced Compound’s growth this year thanks to a well-timed liquidity mining program. i bet this would hold true if AAVE were an unproductive, unproductive governance token. the productive nature of AAVE is just icing on the cake. The productive nature of AAVE is just the icing on the cake.

My argument is that it doesn’t really matter whether the token is productive or unproductive. What matters is that the product fits the market, and the rate at which it grows. So yes, while having a mechanism for accumulating value that holders can rely on and point to is a nice addition, ultimately that doesn’t guarantee that the numbers will go up, nor does it mean that it will be superior to similar protocols with non-productive tokens.

We see that this holds true in traditional finance as well. Amazon and other high-tech growth stocks have never paid a dividend, and I’ve never met anyone who’s actually involved in shareholder governance.

But how many things did you order from Amazon this month?

Posted by:CoinYuppie,Reprinted with attribution to:https://coinyuppie.com/will-productive-defi-assets-like-sushiswap-and-aave-have-higher-returns/
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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