What is “Real Yield” in DeFi?
After the DeFi summer, a new term called “Real Yield” is emerging, which refers to protocols that incentivize token ownership and liquidity mining by sharing profits generated from fees. Real yield protocols generally return real value to stakeholders by distributing fees in USDC, ETH, their own issued tokens that have been taken off the market through buybacks, or other tokens that they haven’t issued themselves.
Why is “Real Yield” important?
Experienced crypto investors know that the market moves in cycles. These “bullish” periods often follow Bitcoin’s halving events and eventually lead to projects that are overvalued. After that are even faster and stronger declines, leading to a prolonged “bearish” period.
The DeFi summer triggered a period of yield farming, which saw many projects mimicking Compound by launching tokens to provide profits to users. In the most extreme cases, liquidity providers have offered artificial APYs topped up to five, six, or even seven figures for short periods. This model of liquidity sourcing helped kickstart the nascent but unsustainable industry. Liquidity dried up on DeFi as users started leaving and most DeFi tokens underperformed.
The liquidity mining model is flawed because it has emitted too much of the protocol’s native tokens instead of sharing the profits from the underlying protocol. For protocols, sourcing liquidity is key. However, this method is extremely expensive. Meanwhile, for liquidity providers and stakers, the nominally high yield protocols offered by liquidity providers are deceptive because the real yield—measured as nominal yield minus inflation—is non-existent.
As a result, projects that rely on “fake yield” are prone to short lifespans and rapid collapse, as Terra and UST case is the clearest evidence.
Meanwhile, “real yield” projects use a value accumulation mechanism based on a real, stable and loyal user base.
When the market is uptrend, we are mostly interested in short-term, unstable profits. But for a long-term path, “real yield” is a priority for both investors and DeFi. Only quality and attractive DeFi projects can balance and bring investors real and sustainable returns.
However, while “real yield” may have generated a buzz, it’s worth noting that this liquidity sourcing model isn’t perfect. Therefore, investors still need to research carefully both the advantages and disadvantages of investing in “real yield” projects before making a decision.
Disclaimer: This article is for informational purposes only, not investment advice.
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