Many of you probably remember or have heard of the legendary DeFi Summer of 2020. That magical time when yields were high, liquidity flowed, and everyone made ungodly money.
Unfortunately, all good things come to an end. Once the 2020-2021 bull run ended and the 2022 bear market emerged, it became clear that the ridiculous APRs we had grown accustomed to was unsustainable. In other words: they were fake.
In this article, we'll discuss what made those old yields fake, what makes these new yields real, why you should care, and wrap it up with three protocols that you can use to start immediately earning a #RealYield.
However, before we get into all that, let's quickly recap where yield farming began:
A Brief History of Yield Farming
As we established in the intro, modern-day yield farming began in June 2020 with the COMP liquidity mining program.
From its launch in September 2019 up to that fateful June, Compound was just another on-chain money market. At that time, few people were on-chain, and even fewer were using protocols like Compound. This, of course, means Compound wasn't attracting much liquidity.
The problem with this is that Compound, like all DeFi protocols, needs liquidity like people need air. The more liquidity a protocol has, the more volume it attracts, which in turn increases rewards to liquidity providers, which attracts more liquidity, and on and on it goes.
To break out of this cycle, Compound needed to bootstrap some liquidity.
Enter COMP liquidity mining.
The idea was simple: reward borrowers and lenders on Compound with COMP tokens, which would juice APRs and give people a reason to use the protocol.
It worked like a charm.
Compound's Total Value Locked (TVL) in the days leading up to and immediately following the beginning of liquidity mining.
Crypto's a copycat world, and once other protocols saw Compound's success with liquidity mining, they started native token liquidity mining programs of their own.
The result was an explosion in DeFi's TVL from ~$1B to ~$300B in just two years.
The Collapse
During this meteoric run-up, yields in DeFi were very robust. It was not uncommon to find farms with APRs in the 100s. Things really got ridiculous when the DeFi 2.0 movement spearheaded by Olympus DAO took off.
DeFi 2.0 protocols were doing very well for a while. Ohmies had (3,3) 'd OHM to a peak of ~$4000 in late October 2021, making a lot of people very rich in the process. For a split second, it looked like we were all going to make it. Then the bear market hit, and our dreams of not being poor were paused.
Now, if you look up pain in the dictionary, there's a good chance you see the charts of OHM and fellow DeFi 2.0 giant Wonderland.
Market cap of Wonderland (TIME):
What happened is that the bear market exposed the yields that were propping up these tokens for what they are: fake.
"But Sabo, what makes them fake?" Great question; I'm glad you asked. To answer that, we have to first establish where the yields were coming from in the first place.
DeFi yields were being subsidized by two things: native token emissions and native token prices. That sounds ok in theory but is utterly unsustainable in practice. Why? Because native token prices are directly related to native token emissions. Let's walk through an example to see why this is bad.
Chad comes along and sees that protocol A is handing out AToken rewards for using the protocol. The APY is a lovely 100%, so he decides to participate. Fortunately for Protocol A, Chad’s not the only one who has noticed its APR, and hordes of yield farmers come and use protocol A to earn the juicy 100% yield.
Because so many people are now using protocol A, speculators proclaim it the future of France and rush to purchase AToken while they are still 'early.' Since Chad's rewards are denominated in AToken, his yield grows as the price of AToken grows. This cycle then continues for as long as new people are willing to buy ATokens.
Where this system runs into issues is on the way down. The problem is that Chad and his fellow yield farmers are not genuine users of protocol A. Chances are they don't care about it at all. Their focus is on making money. This means there will come a point where the yield farmers are satisfied with their gains and sell their AToken rewards. This crashes AToken's price, causing a panic among the speculators, who also sell. Suddenly there's a lot more supply than demand for AToken, which further tanks its price, and, consequently, its yield.
Attempting to remedy the situation by emitting more ATokens also doesn't work. It just kicks the can down the road. Eventually, the yield farmers will sell, the token price will crash, and yields will crash along with it.
Sub out protocol A for any protocol that relied on liquidity mining, and you have their story pretty much to a T. Mercenary capital would come, farm the token, and then dump it. All the protocol would be left with is a valueless native token and no actual usage to show for it.
It's also where the infamous phrase "if you don't know where the yield is coming from, then you are the yield" comes from. If you were unaware that the yields were unsustainable and bound to burst eventually, then you were the exit liquidity for farmers who did.
TLDR: #FakeYield = yields reliant on native token emissions and prices.
Now that we know what #FakeYields are, let's talk about #RealYields.
#RealYield
#RealYield protocols are protocols where their yields are derived from revenue. Similar to traditional dividend stocks, the more money the protocol earns, the higher the rewards for token holders.
#RealYield protocols have been delivering healthy APRs and holding up relatively well price-wise throughout this bear market.
But where are the opportunities?
Three #RealYield Opportunities
So, to quickly recap, we've established that DeFi 1.0/2.0 yields were unsustainable because they were reliant on native tokens, #RealYield is sustainable because it's based on revenue, and they have proven themselves during this bear market.
Let's now talk about three different protocols you can use to immediately start earning a #RealYield.
This will be kept brief for the purposes of this article, but I will link more extensive explanations at the end of each section.
GMX
GMX is a decentralized exchange on Arbitrum and Avalanche specializing in perpetual futures. On GMX, anybody can come and leverage trade BTC, ETH, UNI, LINK, or AVAX.
Users have to pay a small fee to GMX on each trade. With GMX's volume, small fees quickly turn into something much bigger.
Of these fees, 70% is given to GLP liquidity providers, and 30% goes to GMX stakers. APRs on Arbitrum is currently at 28.41% for GLP and 21.83% for GMX. On Avalanche, these numbers are 28.63% and 21.84%, respectively. The best part? Rewards are paid in ETH and AVAX.
GLP holders receive a bigger slice of the pie because they are the house to the leveraged traders. If traders make money, their rewards are taken from the GLP liquidity pool. This makes GLP riskier than just staking GMX. Fortunately for GLP holders, just like in Vegas, the house always wins. Most traders are unprofitable, meaning GLP holders don't have to worry too much about losing money.
If you want to learn more, here, here, and here are good places to start.
UMAMI
Umami ironically began as an OHM fork, but it is now entirely focused on delivering #RealYield. Their main product to achieve this is the Delta Neutral USDC Vault. I've previously written an in-depth explanation of the USDC vault, but I'll quickly cover the main points here.
The primary risk with GLP is that its underlying assets crash, which would cause a reduction in yields. Although this risk is pretty low because GLP is composed of crypto blue chips, it is still a risk worth mentioning.
Umami addresses this through TracerDAO's perpetual pools. Tracer pools allow for the opening of perpetual leveraged positions with no risk of liquidation. Umami uses these pools to open perpetual 3x leveraged shorts on BTC and ETH (2 of the main assets in GLP), which makes their position in GLP delta neutral.
Being delta neutral ensures that the USDC vault will be profitable to the tune of a consistent 20% APR paid out in USDC, regardless of which way the market moves.
For further reading, my article and this thread are good starts.
Maple Finance
Maple Finance takes a different road for earning its revenue. Instead of operating completely on-chain like GMX and Umami, Maple makes its money from real-world entities.
The higher-ups at Maple recognized two things:
Institutional borrowers are capital-starved and are willing to pay a high-interest rate for easy access to capital.
People in DeFi are desperate for a sustainable and healthy source of yield.
You can now probably guess where this is going. Maple connects institutional borrowers with DeFi lenders, enabling both sides to get what they want. The borrowers get the accessible capital they've been searching for, while the lenders get the sustainable yield they desire (currently at 9%, paid out in USDC). Win-win.
I'm leaving out some of the details here, but that's the gist of it. If you want to learn more, I highly recommend reading the docs.
Looking Ahead
These are but just three examples of #RealYield protocols. The complete list is long and constantly growing as more and more protocols join the fray.
Yields and token prices aside, the best thing about the #RealYield trend is that they force protocols to be the best they can be. No longer can protocols just float out an inflationary token and call it a day. Instead, they have to build and continuously improve a product that people actually use, or else they won't generate any revenue.
In the world of #RealYield, not having revenue and a sustainable tokenomics model is a death sentence.
This only means good things for us, both as yield farmers and protocol users. Not only will we have sustainable yields, but we will have teams building the best projects they can to attract our business.
Just as it should be.