The latest trend in decentralized finance (DeFi) lingo might become one of the best things to happen to the nascent financial sector. The term “real yield” has entered the DeFi zeitgeist in a big way, and it has a stickiness that feels like real yield is here to stay.
Protocols have begun advertising they offer real yield, but do they? One prominent DeFi founder is warning users that the term could be abused as a marketing ploy, and Crypto Twitter (NYSE:TWTR) is chiming in with ways to identify protocols that produce real yield as it becomes a popular catchphrase.
What is Real Yield? Like other popular catchphrases in DeFi’s recent history, real yield has been defined slightly differently by different sources. Thankfully, the meaning of real yield is less enigmatic than terms like DeFi 2.0 and NFT jargon like “wassie” and “noot noot.”
In a tweet thread posted by the user @TheDeFinvestor, real yield is described clearly: “If a protocol is generating more money than it is spending through emissions, then it fits the real yield criteria.” In other words, if a DeFi protocol makes more money than it gives away, it qualifies as producing real yield.
According to The DeFiant, “Real yield is a share of a protocol’s revenue, denominated in a mainstream asset like ETH or USDC, which holders of a protocol’s governance tokens can access by staking or locking them.” Specifying that users earn “mainstream assets” further defines another quality of real yield.
What isn’t Real Yield? It might be instructive to look at what does not constitute real yield. This can be done by contrasting real yield with another concept known as inflationary yield.
Inflationary yield isn’t derived from fees or other economic activity. Instead, inflationary yield is generated by DeFi protocols minting their tokens and giving them away, essentially paying users to play along with the game.
There are plenty of legitimate reasons why protocols would give their tokens away. Inflationary yields can incentivize users to try new products, and it's a great way to ensure governance tokens end up in the hands of stakeholders who use a service.
On the other hand, inflationary yields are, by definition, bound to lose their value as more of them are minted and as more users dump them for stablecoins. Earning Inflationary tokens can in no way be considered a stable yield strategy–no one in their right mind would pay US dollars for bonds that yielded Argentinian pesos.
Why is Real Yield Suddenly a Hot Topic? During a bull run, numbers are always going up, and it’s hard to tell what DeFi protocols provide real value and what protocols are being sustained by market euphoria. Many project tokens that looked like real yield during the bull market have ended up losing 99% of their value.
In the aftermath of unsustainable 1,000,000% APY OHM forks and the lessons learned from Terra’s collapse, much of the DeFi community is wary of where yield comes from. So, if a protocol can generate real yield during a bear market, it signifies solid economic fundamentals.
The APY on real yield in a bear market might not be as sexy as inflationary yield in a market juiced-up on hopium. What’s important for users these days is that real yield provides tangible gains when, across the board, prices are stagnant or falling.
Additionally, protocols building in a bear market need to find better ways to attract users than providing inflationary yields, since the sentiment towards these rewards has grown cold. The real yield trend is pushing more protocols to find ways to generate real income, and that’s fantastic news for the future of DeFi.
Where Can Users Find Real Yield? The DeFi community has several options when it comes to earning real yield. Arguably, there are two main ways real yield is earned in DeFi: revenue is shared by a protocol, or users can earn yield from providing liquidity that other users pay fees to use.
Revenue Sharing Real Yield Several projects have been sharing their revenue with users who stake the protocol’s governance or utility tokens. As of late, the perpetual exchange GMX has become a poster child for the real yield movement, since it shares 30% of its revenue with users who stake its token, and it pays these rewards in ETH, one of the biggest blue-chip tokens in all of crypto.
GMX isn’t the only player in the real yield department, but it’s a prime example of a protocol requiring users to stake its token, exposing those users to the fluctuations in that token’s price. Taking on token volatility for real yield rewards is a common theme with most protocols, but users have options other than staking to earn yields.
Liquidity Provider Real Yield DeFi provides users with many opportunities to discover real yield by themselves. Interestingly enough, some of this yield can be earned through providing liquidity with stablecoins, which greatly reduces the risks associated with token price volatility.
The recent introduction of the concentrated liquidity DEX has increased the capital efficiency of providing liquidity for real yield, but it has posed a few drawbacks in terms of user-friendliness. Concentrated liquidity can earn liquidity providers (LPs) higher profits by providing fewer tokens, but it demands that users actively manage their positions.
It’s much easier to “set it and forget it” when chasing after real yield, and Kamino Finance has been leading the charge to help automate real yield opportunities when providing concentrated liquidity. Kamino enhances the yields that users can earn by automatically rebalancing liquidity positions into optimal ranges and auto-compounding fees.
Can Real Yield Shape the Future Success of DeFi? If real yield became the future of DeFi, it might be possible to put DeFi’s critics to bed once and for all. It might be true that the first few waves of DeFi adoption heavily relied on inflationary yield to get off the ground, but the ecosystem is maturing into one that provides a real utility that users are willing to pay for, which translates into real yield for other users.
As real yield continues to trend, and as more developments in DeFi focus on providing a real yield for users, it’s not unimaginable that institutional players could begin entering the DeFi fracas. Then, who knows how big DeFi can get?
One day, DeFi’s inflationary yield period could be looked back upon in the same way we look back at banks giving away toasters and other kitchen appliances to entice users to open checking accounts. But, of course, that would also mean that DeFi has a long future ahead of itself if real yield has anything to say about it.
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