Daily Briefing: The Rise of Real Yields
What is "real yield," and why is everyone in DeFi talking about it? Tim Craig unpacks the space's latest buzzword.
- "Real yield" refers to DeFi protocol fees that go to token holders.
- Several Ethereum protocols offer "real yield" today.
- There's a good reason the trend has caught on, but there are downsides.
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A closer look at the “real yield” buzzword.
What Is “Real Yield”?
There’s a new buzzword making the rounds in crypto this month, but if you’re not deep in the trenches of decentralized finance and yield farming, you may not have heard it yet. The phrase “real yield” has quickly become the new standard for what’s hot and what’s not, and the protocols offering it are receiving the lion’s share of attention from DeFi degens. But what does real yield even mean, and why do people love it so much? Let’s take a look.
Put simply, real yield is where a DeFi protocol captures a small fee from its users and redirects it to its token holders. What makes real yield different from previous forms of yield farming is that this DeFi “dividend” is paid out in an asset outside the protocol’s control, such as ETH or USDC, rather than in its own native token. This makes the yield “real” as its value isn’t being inflated away by excessive emissions of the protocol’s native token.
Several protocols offer real yields in the current DeFi market, with more launching by the day. Leveraged trading platforms such as GMX and MUX Protocol, meta governance protocol Redacted Cartel, pure yield platform Umami Finance, and even the up-and-coming Ethereum infrastructure protocol Manifold Finance all offer yields paid wholly or partly in ETH or USDC.
While real yield sounds like a marked improvement over previous attempts at sustainable DeFi tokenomics, it’s important to understand the downsides of such a strategy, too. The phrase real yield has quickly become a way for protocols to signal to potential users that they should deposit their tokens because what they can earn is real, i.e., better than their competitors, even if that’s not necessarily the case.
For example, a protocol can advertise a double-digit real yield paying out in ETH for staking its native token while at the same time using native token emissions to draw in the liquidity that makes the double-digit APY possible in the first place. In this situation, users will almost always be diluted by the amount of tokens that went out to pull in that ETH real yield.
Another point to consider is that if a protocol is handing out all its revenue to token holders, it can’t use that money to grow itself. As Redacted Cartel co-founder 0xSami puts it, “If you are not finding natural adoption without incentives, it is a horrible idea to pass out the money you could use to fund the R&D [research and development] of finding PMF [product market fit] out to token holders. Like the peacock, flaunting your colours too much will hurt the DAO as the peacock easily becomes a victim to prey out in the wild.”
I’m not saying to avoid the protocols offering these rewards; there are good reasons why many of them are so popular. However, now that real yield has become a well-known buzzword, less scrupulous protocols will try to engineer the highest possible real yields to draw in users and liquidity, even if it results in a net negative for token holders and hurts the protocol’s longevity.
Thanks for reading, everyone. Until next time.
Disclosure: At the time of writing this piece, the author owned ETH, MCB, BTRFLY, and several other cryptocurrencies.