Whether it’s DeFi 2.0 or ultrasound money, crypto loves its narratives.
The latest one is “real yield,” which, like the DeFi trends before it, is being touted in both substantive and vaporous ways.
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. If this sounds like a dividend, you’re not far off.
For many DeFi users left holding governance tokens down 80% or more off all-time highs, cash flow in ETH or stablecoins is a welcome change.
The concept of real yield contrasts with the ponzi-esque APYs of 2021, when people barely batted an eye at four-digit yields. Those returns were broadly fueled by projects’ native tokens, which would be distributed at unsustainable rates in order to attract users’ deposits.
DeFi users were hopping from project to project, depositing assets for the token rewards, and trying to dump them before everyone else did. This is what’s known as yield farming, and the practice proved extremely lucrative in 2020 and 2021.
Now, influencers are lauding projects for their real yield — Redacted Cartel, Umami Finance, Gains Network, GMX, and Synthetix are among those garnering praise for passing revenue on to their users.
As the concept gains traction, however, some are concerned that “real yield” will become a signalling metric, rather than one which demonstrates the financial health of a protocol.
0xSami, the co-founder of Redacted Cartel, which is actually among the real yield protocols, is one such skeptic. He published an article on Aug. 7 entitled wolf in sheep’s clothing underscoring the dangers of projects optimizing for real yield.
“I think in the same way that TVL (total value locked) is a flawed metric, we should not use the ETH APY as the real metric,” he told The Defiant. TVL encompasses the total value of assets locked in a protocol’s smart contracts. The metric is great to signal a protocol’s size, but it can be easily gamed by offering outsized token incentives for user deposits. TVL also doesn’t address how efficiently the capital is being used.
To 0xSami, optimizing for real yield, even if the APY is in the somewhat reasonable, low two-digit range, runs two main risks. One is that projects can still emit tokens to attract revenue-generating capital. Projects can then tout their ETH or USDC-denominated real yield, even though users are accessing that yield by staking a rapidly inflating governance token.
Delaying token emissions while also requiring users to lock tokens up can be a particularly insidious combination. In this scenario, projects can point to a low emissions-to-revenue ratio as evidence of a protocol’s business viability.
Then, six months down the line, for example, emissions can be set to skyrocket. This devalues users’ still-locked tokens, perhaps much more so than the so-called real yield that users earned, leaving them holding the governance token bag yet again.
Alex O’Donnell, CEO of Umami Labs, the company behind Umami Finance, generally agrees with 0xSami’s concerns. Still, Umami is leaning into the real yield narrative, referencing it in their documentation and using the hashtag on their Twitter profile.
Not Just A Meme
O’Donnell emphasized to The Defiant that while token emissions aren’t necessarily bad, emitting them to directly incentivize financial activity and then calling some of that activity “real yield”, runs counter to the movement.
“Real yield is not just a meme, but it’s not something that exists in isolation,” the Umami CEO said. This echoes memories of TVL, which isn’t useless but is far from a magic bullet for evaluating DeFi protocols.
Umami generates yield for UMAMI depositors by taking a portion of the yield from the protocol’s USDC vault, a yield-generating strategy that uses both GMX, a perpetuals exchange, and Tracer, another derivatives platform.
“Once something is positioned as desirable, everyone wants to say they have it, and the definition is at risk of getting diluted,” O’Donnell said.
Investing In Growth
0xSami’s second concern about real yield is that as the metric gains momentum, projects will be forced to optimize for the metric in order to attract and retain users. This will likely happen at a time when the project should be building up its treasury.
“Keeping the money in-house to retain talent and fund new developments will serve your community better in the long term,” he wrote in his post.
Early-stage growth companies typically pay little to no dividends to their stockholders, instead electing to reinvest that capital into expanding their businesses. With crypto projects still in their infancy, it’s easy to make the argument that the majority of revenue should go towards growth.
Here too, O’Donnell generally agrees, though he thinks that in the current environment, some emphasis on real yield is necessary.
Rebuilding Trust In DeFi
“The DeFi ecosystem is still in a place where it is trying to win trust from users and there’s many good reasons why users don’t have complete trust,” he said. Blowups like Terra and Celsius have certainly hurt DeFi’s reputation.
“In that context, showing users through your actions that you are going to make good on the promise that if they hold your token, they will capture a share of the value that you’re creating, is really critical,” O’Donnell continued.
Last week on the Frax Finance-centered podcast, Flywheelpod, the Umami CEO revealed that the protocol has been approved for an account with Circle, the purveyor of USDC, as a part of its efforts to build products geared towards institutions. This may allow Umami to onboard users directly through fiat accounts, rather than having to go through an exchange.
Theoretically, if Umami is able to onboard institutional capital, fees generated by those deposits will flow to UMAMI stakers, which would be a significant source of “real yield.”
Whenever a new metric comes along that can be used as an effective marketing tool, there’s bound to be efforts to optimize for it. As the real yield narrative runs its course, 0xSami for one hopes to properly contextualize it.
“It’s a question of getting around the smoke and mirrors before scams come in and rug retail again,” he said.