#Realistic yield: Separating the wheat from the chaff
0x6D2B
September 17th, 2022

Liquidity mining programs to bootstrap adoption were popularized through 2020 with great success and contributed to shed light into the potential of Decentralized Finance.

It was a cost-efficient way to incentivize liquidity providers & users and it has extensively being used across the board to the point that almost every protocol out there has used it or continues to do so.

Main problem this model presents is that inflationary assets tend to trend lower overtime due to the constant sell pressure and magical internet coins are not an exception to the rule.

As such, investors have a preference for yields being paid in majors (BTC/ETH/stables) than protocol native tokens that allows them to estimate with a bigger degree of certainty the return of their strategies.

In this context, a good deal of projects have launched in the past year distributing part of the protocol profits in majors to token holders/stakers/lockers and the #RealYield narrative was coined with a great welcome among retail investors as clearly is beneficial for them that the money goes to holders instead of VCs.

Recently, some legitimate pushback has been done arguing that most of these protocols are not even net profitable if the value of their emissions are discounted as costs and as such this real yield is neither realistic nor sustainable.

I agree with this stance so I would like to follow up on my previous article and analyze how common is for projects to be profitable and later we will check how many of these projects actually distributes any of their profits among token holders.

1. How profitable crypto protocols really are?

In order to do this, we will check the 20 biggest dapps by protocol revenue featured in Token Terminal (last 7 days) as it is probably a good enough proxy to understand how often protocols in crypto are profitable once we have discounted emissions.

I would even argue that the share of profitable protocols is even lower if we analyze every protocol out there, as market leaders in every vertical (lending, exchange, NFTs etc) are included in this Top 20, and underdogs will have to incentivize their adoption more aggressively to reduce the gap.

Only includes the protocol revenue, excluding supply side revenue
Only includes the protocol revenue, excluding supply side revenue

We aim to calculate how profitable each protocol is so we will use the following equation:

Net revenue = Protocol revenue - Market value of protocol emissions

This equation clearly is not taking into account all the costs of a protocol, only the costs of protocol emissions and as such, without taking into account others as team salaries, infrastructure… we cannot calculate whether a protocol is fully profitable or not, that is why we will refrain from using the profits word and use Net revenue instead.

In protocol emissions we will include all those emissions that contribute directly to incentivizing the usage of the protocol and thus boost the protocol revenue (p.e. additional rewards for lenders, borrowers, traders, liquidity providers etc)

We will take the last 7 day period and data is fetched from the following sources:

  • Moneyprinter.info for Curve, Synthetix, Convex, Lido, AAVE and Sushiswap

  • Official docs from each protocol for dYdX, LooksRare, X2Y2 and PancakeSwap

  • Protocol analytics page for GMX and Euler

  • Maple Finance is not included due to the lack of data (tried my best to secure it data but it was simply not possible)

  • This article of bankless on the 28th July is a good approximation of how Maple Net Revenues may look like -→ https://newsletter.banklesshq.com/p/which-defi-protocols-are-profitable

Market value of emissions - Top 20 crypto dapps
Market value of emissions - Top 20 crypto dapps

Taking a glance at this graph we can conclude the following:

  • 11 out 19 protocols incentivize the protocol usage with native currency

  • 2 out of the 8 protocols that do not incentivize have no token yet (Opensea & MM)

  • Top 3 protocols generate 75% of the market value inflation ($CAKE, $CRV, $SNX)

Now we have all the data needed to answer the original question

Which protocols within crypto are actually net profitable?

Weekly profitability of top crypto protocols
Weekly profitability of top crypto protocols

Looking closely we arrive at the following conclusions:

  • 12 out of 19 protocols have a positive net revenue

  • Only 4 out of the 12 protocols that incentivized have a positive net revenue

  • Aggregated weekly net revenue of the protocols is -7,3M$

Lastly, we will introduce a new metric to detect more clearly how profitable protocols are and be able to compare themselves more fairly

Dimensionless Net Revenue = Net Revenue / Protocol Revenue

This way protocols can be clustered in three groups:

  • DNR = 1 -→ Protocols that have 0 emissions

  • 0 < DNR < 1 -→ Protocols that have a positive net revenue & have emissions

  • DNR < 0 -→ Protocols with negative net revenue. The more negative, the less profitable

DNR for top crypto protocols
DNR for top crypto protocols

Crunching data Curve number seemed too negative so I checked the protocol revenue numbers for the last 30 & 180 days to find out how much lower this last week revenues were compared to other weeks and found out that generally Curve DNR while quite negative, is way better than currently:

  • Average daily protocol revenue was 2 times higher than this week (30 days)

  • DNR (30 days) = -25,2

  • Average daily protocol revenue was 8 times higher than this week (180 days)

  • DNR (180 days) = -5,5

This makes sense given that Curve volumes have a huge variability due to experiencing big spikes in volume in certain weeks (p.e. LUNA dump, hackers cashing to stables…) and remaining not too crowded in others like this one. So in short, taking a whole year probably Curve DNR number would be close to Pancakeswap.

Having said this, let’s advance to the second objective of this article, how much of this net revenue is distributed to token holders?

2. How much #realyield does each protocol distribute?

Actually only 6 protocols out of the 19 top protocols distribute yield in majors to token holders, and the quantity each protocol distributes is shown below

Profits distributed to token holders
Profits distributed to token holders

Perpetual protocols like Synthetix & GMX take the lead at the moment, followed closely by NFT marketplaces like LooksRare & X2Y2.

Convex & Curve close the cashflow protocols list.

This is a nice graph as it allows us to understand more in detail in which protocols you should invest if you want to earn yield in non-native tokens, but we can do even better, how about we combine the two analysis to find the real gems that will provide you solid yields AND are profitable protocols.

3. #Realisticyield protocols

In order to do that we will plot both previous variables and end up with the following graph:

#RealYield Protocols
#RealYield Protocols

As you can already imagine, most desirable protocols are those that are on the positive side on both variables (protocols that do not distribute yield have been removed for the sake of clarity)

In this category we only find GMX and X2Y2, with LooksRare almost joining the pack.

So we conclude that only 2 out of the top 20 protocols by revenue fit the sustainable #realyield narrative.

10% of the total. No more, no less.

Hopefully more and more protocols join this trend and start distributing rewards in majors and strive for profitability soon enough in their roadmap.

The former is probably easier even though there are regulatory & stakeholder concerns that must be taken care of.

In this analysis we have seen there are a good deal of projects that are already “profitable” so turning the switch on is probably a matter of time on some of them.

The latter might be tricker, but I am sure that more and more protocols will join the #realyield ranks soon enough.

Thanks for reading, hope you enjoyed it!

Cheers!
Cheers!
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