- Use Cases
Thanks to its decentralized nature and nascent stage, DeFi enjoys a rate of innovation and levels of experimentation rarely seen in traditional finance. Among the most recent innovations is "real yield" a new approach for DeFi projects to attract liquidity.
Real Yield projects seek to reward liquidity providers by providing them with a share of the project's revenue. For example, Umami, one of the first real yield projects, provides 50% of the protocol's revenue to stakers of its UMAMI token. This differs from the once-popular token emission strategy of generating yield which was criticized for being unsustainable due to its inflationary nature.
In some ways, real yield projects function much like dividend stocks, where shareholders receive a percent of the company's profits in exchange for holding their investment. This structure incentivizes liquidity providers to stay invested long-term and to play a role in growing the project by attracting users and increasing transaction volume.
Real yield is still in its early days, and it remains to be seen whether it will be a successful model for attracting liquidity over the long term. If it is, it could significantly impact the DeFi landscape.
Risks of Real Yield Projects
While tokens issued by a real yield project are far less likely to enter a hyper inflationary state than projects that provide yield through token emissions, they are not immune to the other risks encountered with DeFi protocols, like the potential for exploits or rug pulls.
In some cases, yields may drop below those offered by safer investments, potentially leading to capital outflows and liquidity issues. Some projects could also choose to do token emissions to increase yields or attract capital even if they previously chose not to, creating inflationary risk.
What to Look for in a Real Yield Project?
In addition to broader DeFi metrics that serve as indicators of a project's health, such as utilization rate, number of LPs, transaction count and volume, and TVL/market cap, there are some additional details to look at when evaluating a project that offers real yield:
Emissions model: Does the project do token emissions, and if so, under what conditions? Projects with low- or zero-emissions will have a lower risk of dilution. UMAMI, for example, advertises a zero-emissions model with a fixed token cap of 1,000,000. By comparison, GMX, reserves the right to mint GMX tokens beyond its max supply cap of 13.25 million, if necessary to support product launches, following a governance vote.
Payout currency: Are yields paid in trusted and liquid currency such as BTC or ETH, or are they paid in the project's own token, which may be harder to liquidate. Of the two examples mentioned above, Umami pays rewards in ETH while GMX pays in a mix of ETH, AVAX, and GMX.
Evaluating DeFi Projects
While many DeFi projects publish vanity metrics on their websites, truly evaluating opportunities to generate yield requires access to on-chain data.
The Amberdata platform provides visibility into all parts of the DeFi ecosystem that matter, supporting trading and lending strategies on over 75 protocols. We provide access to granular, real-time, and historical data that helps institutional investors identify opportunities and quantify risk by viewing key indicators such as flows in and out of protocols, active users, and transactions within and across protocols and pools. Request a demo today to find out how we can power your institutional DeFi strategy.
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