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Examining the new narrative of DeFi: the concept and calculation method of real income

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Examine the rationality of Real Yield calculation from three aspects, and the significance of the emergence of Real Yield from a narrative perspective.

Original author: " Examining the new DeFi narrative #RealYield "

Original author: Dr.DODO

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Since August, KOLs on Twitter have been discussing Real Yield more and more intensely. The genesis and explosion of this discussion coincides with GMX's stellar performance in the bear market.

Real yield As it literally expresses, which DeFi protocols can generate real income and feed back such income to users; from another perspective, the agreement no longer simply uses its own Token to motivate liquidity mining. Mine, but give users stable coins or mainstream Token , such as ETH, USDT, etc.

Terra crashes, Celsius Network and Voyager Digital file for bankruptcy, and Three Arrows Capital collapses. These shocks have cast a shadow over the hearts of previous DeFi fanatics, and the argument that "DeFi is dead" is endless. Against such a background, the emergence of the Real Yield narrative is very simple and powerful. It is not only the good expectation of DeFi users, but also symbolizes the struggle of DeFi projects against Ponzi schemes, pursuing sustainable project income and returning the income to users.

However, any heated narrative requires repeated scrutiny and consideration. This article hopes to examine the rationality of Real Yield calculations from three aspects, and from From a narrative point of view, the significance of the emergence of Real Yield:

Real Yield concept carding

How to calculate Real Yield

Discussion on the meaning of Real Yield

I .Real Yield Concept

In the current definition of Real Yield, it mainly focuses on two issues:

1) Is the net revenue of the agreement positive?

2) If the net income is positive, whether the agreement will distribute it to Token holder? More importantly, what form is the agreement distributed in, and the additional issuance of the agreement Token , still mainstream Token Such as stable currency, ETH?

The dividing points of the definition are:

1) The net income of the Real Yield agreement ( net revenue) is positive;

2) The protocol of Real Yield will bring revenue to the mainstream Token in the form of Token holder.

Based on these two criteria, re-evaluate whether the current mainstream DeFi protocols can produce Real Yield, and we will see what is worth exploring.

Most protocols fail to achieve positive returns

In a study on Real Yield by defiman, 12 of the 19 agreements had positive net income, but only 4 incentive agreements have positive net income. The 19 TOP agreements have a total weekly net income of -$73 million. This is the case in the top-ranked protocols, and it is even more difficult for emerging DeFi protocols to achieve positive returns.

distribute the net proceeds to Token Holder is a minority agreement

Again, in this research article, we can see that only 6 of the 19 top protocols actually allocate the main revenue to Token Holders, the amount allocated per protocol are shown below, with perpetual protocols like Synthetix and GMX currently leading the pack, followed by NFT marketplaces like LooksRare and X2Y2.

Do you have to use mainstream Token (or sound money) to allocate

What kind of Token The distribution of forms to users is a point of contention in the concept of Real Yield.

The current situation is: 11 of the 19 TOP protocols are using their own Token Motivate. 2 out of 8 protocols that don't incentivize yet Token (Opensea and MM).

In the bear market, users pay more attention to the income of real gold and silver, so they prefer to pay in the form of ETH or stable currency, but if we think from another angle, if in In a bull market, perhaps user preferences will tend to favor the native token of the protocol, because the native Token It can also capture a greater value imagination space.

Distributing real income and sustainably distributing real income, the two concepts need to be treated differently

Among these 19 agreements, real benefits are allocated to Token There are 6 protocol holders: Synthetix, GMX, LooksRare, X2Y2, Convex, and Curve. During the statistical period, Synthetix was the protocol that distributed the most income every week. However, since Synthetix's net income was negative, the sustainability of its real income distribution was questionable.

Synthetix rewards SNX stakers with two revenue streams: 51.6 % SNX inflation rate of return and 5.89% sUSD transaction fee

Conceptually, the definition of Real Yield can start from two issues of income and distribution, but we It can also be seen that there is something worth discussing behind this definition. Similarly, in terms of specific calculations, there are also some ambiguous factors, which we will discuss in the next section in the form of formulas.

II. How Real Yield is calculated

The calculation of Real Yield by most definitions can be summarized as Real Yield=Agreement Income- Token Cost, for example, the formula used by @defiman is:

Net Revenue = Protocol Revenue - Market value of protocol emissions

Let's analyze the details of this calculation formula one by one:

Why Net Income and Not Net Profit

The reason why most articles choose net income as the indicator to measure agreement revenue is because data such as operating costs are generally difficult to find or capture completely. For example, information related to infrastructure and team wages, so it is understandable to use net income as an indicator.

How to calculate the total income of the agreement

First of all, the composition of the total agreement income of different tracks is different: for example, the income composition of the DEX agreement in DeFi comes from transaction fees, and due to the fee rate, the income of futures (perpetual) transactions is generally far better than that of spot Transaction revenue.

Secondly, in DeFi projects, the total income of the agreement is not necessarily an indicator to measure the ultimate of an agreement; in order to reflect the competitive advantage, the spot transaction fee may will get lower and lower. For example, in order to expand the trading audience, Uniswap is deployed to the cheaper Polygon, which reduces the total income of the agreement to a certain extent; and in order to compete with Curve, a 0.01% fee TIER for stablecoin pairs is introduced. So the protocol margin looks really thin (see the table below), so that although the revenue of the protocol is reduced, the number of users may increase. It can be seen that the agreements of different tracks have different trade offs for revenue.

How to consider Token Release cost

First of all, the reason why token emission is used as a cost subtraction is because in Token From the holder's point of view, this is a marketing strategy for protocol drainage. In addition, Token The additional issuance makes the existing circulating Token Value is diluted.

current Token Released market value = current currency price * Token Liquidity (in the selected time period Token circulation, 3 months/1 year, etc.) However, Token Price fluctuations are difficult to calculate and can affect Token Amplitude of fluctuation

Token Release the significance of this variable in the above formula: If we want to maximize the net income of the agreement, then Token Release costs need to be minimized. Of course, as long as Token It is also considered healthy if the sum of release and operating costs is less than the total revenue of the agreement. Because in the current development stage of long-tail DeFi projects, users need Token released as an incentive; but in the long run, due to its own reflexive Token Release is not a sustainable means of drainage.

In the current definition, the Token Fee allocation between holders and DAO

Currently, if all projects blindly pursue Real Yield, choose to direct these fees to Token Holders instead of DAO, which will cause some problems in the future.

In the fee discussions around UNI and LAO, one can see the trend that all DAOs are pushed to define and finalize their Token payment policy. How to balance this income distribution within the DAO is the responsibility of the DAO organization and Token Holder's Game Theory Game.

Similarly, choosing to keep money inside the DAO in moderation to retain talent and fund new developments will serve you better in the long run in the community.

III. Discussion on the meaning of Real Yield

RealYield appears background

Although we have pointed out that Real Yield is open to question as a measure of DeFi indicators, there are reasons for everything that is in line with the environment at that time.

In 2021, almost all DeFi protocols will use Token Release mode to quickly attract liquidity. The direct "involution" and FOMO sentiment of the DeFi protocol created such a phenomenon. The last round of DeFi boom came to an abrupt end in the middle of this year with the collapse of projects such as Terra and Celsuis. With the advent of the bear market and the mud and sand of the currency circle, the market began to question the actual role of DeFi, and the speculative sentiment retreated. Users and researchers began to delve into whether DeFi projects produced real money or meme coin bubbles.

It can be said that the attack on fake yield has led to the demand and pursuit of real yield.

At the same time, at the end of August, according to Nansen data, the number of transactions on GMX once surpassed that of Uniswap, becoming the agreement with the largest number of transactions on the Arbitrum network within a week. GMX is one of the projects that generate "real yield" (Real Yield), and the Real yield narrative is completely ignited. KOLs are hotly discussing who will become the next GMX, and it has even become a new marketing strategy for DeFi projects.

Why Discuss Real Yield

In a bear market environment, users will pursue more stable and real returns. If a project is fairly regarded as a Real Yield project, such an evaluation can become an important indicator for users to screen reliable projects. In other words, with the development of DeFi, users began to examine the sustainability of APY. The double-digit APY made people discouraged, and they hoped to further explore whether DeFi can bring real value to the cryptocurrency circle.

For the project side, especially for the initial stage of the project, although the real yield label can quickly attract people's attention, but according to the above definition of Real Yield and Analytical methods are not necessarily valid. For example, Polysynth, which is an option strategy, puts a real yield label on its Twitter name. Although the income Polysynth gives is indeed a stable currency, putting its own assets into the strategic vault they manage will face great risks. Investors may Face a loss of up to 60% of your principal.

Also, even labeling it Real Yield is not good for long-term development. At the current stage, DeFi projects still need to use liquidity mining to do a cold start in the initial stage, so the blind pursuit of real yield means that the funds used for protocol construction will be compressed, such as community construction, project research and development, marketing, etc.

narrative economics

The market does not operate through numbers, but stories, narrative.

There is a theoretical discipline called Narrative economics (narrative economics). The core of the theory is that words and language can easily affect people's behavior in the market, thereby affecting market. Markets are volatile and emotional because people who participate in them tend to listen to stories. Interesting narratives can touch people's values, and then connect people's behaviors.

So it is necessary to track the narrative in the market in time, which is why we discuss Real Yield. Behind it is the interpretation and translation based on numbers, so that such stories can mobilize people's emotions to participate in investment and transactions.

Robert Shiller, author of "Narrative Economics", also said,

" At the end of the day, large groups of people who are not well-informed are making decisions that lead to economic volatility ... and their decisions drive overall economic activity. So there must be compelling narratives driving those decisions.”

The theory of narrative economics exists, but if you want to be a good researcher and investor, you need to further interpret the narrative and distinguish the reasonable point and debatable logic.

This is why we revisited Real Yield.