What Is Real Yield in DeFi?
Crypto real yield is a metric used to compare the yield offered by a project with its revenue. If the returns from staking are higher in real terms than the interest provided, the emissions are considered dilutionary, which means that the yield is not sustainable or “real.” Although dilutionary emissions are often used for marketing purposes, real yield is not necessarily better. However, this metric can be a useful tool to assess a project’s long-term yield-bearing prospects.
Decentralized finance (DeFi) offers substantial APYs, which can be very attractive for investors. However, if you come across staking opportunities promising 100% or even 1000% returns, it is reasonable to question if they are too good to be true. To evaluate the promised yields, you can calculate the project’s real yield. This simple and effective calculation can help you quickly assess the feasibility of a project’s promises and estimate how “real” its yield actually is.
DeFi Yield Farming is a process that enables users to earn cryptocurrency rewards by locking up their assets in yield-bearing pools. There are multiple ways to yield farm, such as liquidity pools, native network staking, and lending protocols, all of which provide returns to users for putting their funds to work. Yield farmers frequently use yield optimizers to maximize their returns and will switch their funds to look for better returns in the market.
As DeFi gained popularity, protocols began offering higher rewards to stakers, leading to abnormally high and unsustainable Annual Percentage Yields (APYs), with some exceeding 1000%. When project treasuries dwindled, these APYs would drop, and the token prices would plummet as users rushed to sell off their farmed tokens. It was discovered that demand for such tokens was being driven by emissions, rather than their utility.
With high APYs prevalent in the DeFi space, it can be challenging to estimate a project’s true value and its ability to generate interest. One way to assess this is by examining the project’s crypto real yield. When we refer to yield as “real,” we mean it’s sustainable. If a project’s revenues cover the amount of tokens distributed to stakers, its funds won’t be drained. Theoretically, a project could maintain the same APY indefinitely if revenues remain consistent.
However, some projects distribute APY in a way that’s unsustainable in the long run, typically by depleting their treasuries. If a project’s revenue doesn’t increase, it becomes impossible to maintain the same level of APY. These APYs are often distributed in the project’s native token, as a vast supply is readily available. Stakers may farm these tokens and sell them on the open market, leading to a vicious cycle that depletes the treasury even faster.
Note that while “real yield” is typically provided in blue-chip tokens, a project distributing its native token can do so sustainably.
What Is Crypto Real Yield as a Metric?
Crypto real yield is a metric used to estimate the true value of cryptocurrency projects and their interest-generating potential. When we talk about yield as being “real,” we are referring to its sustainability. In the context of crypto, it means that a project’s revenues cover the amount of tokens distributed to stakers and that the project is not depleting its own funds.
Yield farming is a popular way to earn cryptocurrency rewards for locking up assets in yield-bearing pools. However, some projects offer unnaturally high and unsustainable APYs as incentives for stakers, which can result in token prices plummeting once those APYs drop due to dwindling project treasuries.
To estimate the true value of a project, one can look at its crypto real yield, which indicates whether the project’s APY is sustainable in the long run. If a project can maintain the same APY in real terms indefinitely, given that its revenues remain the same, then it has a sustainable yield. On the other hand, if a project distributes its APY in a way that is unsustainable in the long run, such as by depleting its treasury, then it will not be able to maintain the same level of APY.
In summary, crypto real yield is a metric that helps investors evaluate the sustainability of a project’s yield and can help prevent investments in projects that offer unsustainable returns.
How to Ensure Your DeFi Yield is Real?
In brief, emissions have been effective for certain projects in attracting users. These projects usually reduce their emissions over time and transition to more sustainable models. It would be incorrect to assert that pursuing real yield is universally superior, and that relying on emissions is entirely unviable. Nonetheless, in the long term, only DeFi projects with revenue models that have genuine applications will endure.
