Real Yield in Crypto and DeFi: Rise & Importance

Prosperous crypto space offers many opportunities to eager investors. Individuals join the ecosystem lured by the promises of huge gains and incredible yields. However, the age-old adage “If it sounds too good to be true, it probably is” couldn’t be more accurate in DeFi. That’s why experienced crypto enthusiasts are increasingly looking for real yield in crypto.

Just a few years back, the crypto sphere was plagued with unsuccessful ICOs, pyramid and Ponzi schemes, rug pulls, and other types of financial misconduct. As these misfortunate events started piling up, the need for safety, security, and stable income generation kept increasing.

Real yield in crypto emerged as a beacon of stability, promising to leverage blockchain technology in the way it was always meant to be used. In this article, we explore what that really means and what the importance of recognizing real yield in crypto is. Let’s dive in!

What Is Real Yield in Crypto?

Real yield in crypto refers to the most straightforward methods of earning yield and generating income in the realm of digital assets. It represents cryptocurrency earned through direct means, such as mining in proof-of-work (PoW) systems and staking in proof-of-stake (PoS) networks.

In proof-of-work environments, such as with Bitcoin, miners are compensated in BTC for keeping the network stable and operational. In essence, they spend energy and computing power to facilitate transactions and prevent malicious actors. For that, they get block rewards and a portion of transaction fees users pay.

The situation is similar in proof-of-stake blockchains, such as Ethereum. Cryptocurrency holders stake their assets to become validators, keep the network decentralized, and execute transactions.

There are several other types of systems and blockchains that promote decentralization by awarding anyone who participates. That represents a shift from traditional finance (TradFi), creating a sustainable and self-sufficient economy where everyone can participate and generate income.

These rewards represent the definition of real yield in crypto, but the prerequisite is for a project to have a value-driven approach and feature actual use cases. Unfortunately, many crypto projects and DeFi protocols issue coins and tokens haphazardly without underlying value backing up their value.

What Is Real Yield in DeFi?

Real yield in DeFi (decentralized finance) is a subcategory of real yield in crypto, so much so that many use the two terms interchangeably. The difference is that DeFi yield refers to more complex means of using assets to generate income. That involves utilizing various protocols to lend assets, provide liquidity, and more.

In the context of decentralized finance, generating refers to locking up assets in smart contracts and earning passive income from the fees paid by other participants who use the network.

However, not every DeFi platform and protocol offers sustainable returns. Many of these projects provide native tokens as rewards. The value of these tokens is highly speculative and rarely backed by real assets or useful services. Still, many investors are drawn by seemingly lucrative rewards, where some of the highest yields in crypto go up to 1000% APY or more.

In these situations, as more project-specific tokens are being issued as rewards, their price begins to drop due to inflation. With no real value and low demand, holders begin to sell their assets, quickly driving prices into the ground.

These processes are often referred to as dilutionary emissions since projects are depleting their treasuries without earning equal revenue back. The yields they offer aren’t considered real since they aren’t sustainable in the long run.

On the other hand, real yield in DeFi occurs when a project distributes less or equal to the revenue earned. Since this financial model is sustainable long-term, the yield is considered real.

What Is DeFi Yield Farming & How Does it Work?

DeFi yield farming is a term used to describe crypto investment strategies that involve using one or more methods of leveraging digital assets to create income. At its core, this process consists of some mechanism of staking or lending your cryptocurrency to earn rewards. These rewards can be in the coin or token used or in some other type of crypto.

The main upside to DeFi yield farming is that it relies on blockchain technology and smart contracts. That stands in contrast to TradFi methods, where centralized authorities (like banks) govern these processes and profit from them.

In DeFi, anyone with sufficient holdings in crypto can join to contribute to the network and earn from their efforts. Furthermore, the entire system is more efficient since there are no usual costs associated with running a company.

Here are the two most popular methods of yield farming:

1. Liquidity provision. Decentralized exchanges and other DeFi platforms rely on users to submit funds for their operations. Basically, crypto enthusiasts submit their assets to shared pools and get LP (liquidity provider) tokens in return, which signifies their contribution. When others use assets from these pools (to trade, borrow, etc.), they pay fees that are distributed among liquidity providers.
2. Staking. DeFi staking began as simple PoS staking to facilitate the operations of these blockchains. Nowadays, individuals can stake their assets in various DeFi protocols to do everything from project governance to asset lending.

Another crucial aspect of yield farming is DeFi compounding. That means users can simultaneously participate in multiple projects or protocols to earn yield.

For instance, you can submit assets to a liquidity pool to earn passive income and obtain LP tokens. Then, instead of letting those LP tokens idly sit in your wallet, you can stake them for even more passive income.

The Necessity of Real Yield in Crypto

Real yield in crypto is necessary to create a stable system of decentralized finance that can sustain itself indefinitely. However, this concept is also important in the short term, as it’s required to create a stable market and build investors’ trust in the system. Here are some of the key benefits that the shift toward real yield brought to the crypto sphere:

• Sustainability. The long-term viability of a financial market is essential to its success. If a system is solely dependent on growing from capital inflows and native token issuance, it is bound to reach the point where further expansion becomes impossible. After that, it’s highly likely that the system collapses.
• Value creation. Returns in TradFi come from goods and services that provide genuine value. The same is necessary in the DeFi space, where protocols need to earn yield through productive means to succeed in the long run.
• Maturity. By offering users genuine utility and creating a self-sustained system, the DeFi market will be able to reach the maturity of TradFi markets, which have existed for far longer.

Ultimately, real yield crypto projects aren’t just beneficial to their developers and users but to the DeFi space as a whole.

DeFi Protocols That Pay Real Yield

Figuring out which DeFi protocols pay real yield can be a challenging endeavor. With new projects coming out regularly, it’s time-consuming to examine all of them and figure out which one is sustainable and has long-term potential. That’s why we found three of the most popular DeFi protocols that pay real yield for your convenience. Let’s check them out.

#1. GMX

GMX (with its utility and governance GMX token) is a DeFi protocol that supports a permanent decentralized exchange of the same name. The exchange operates using a combination of the smart contract-based automated market maker (AMM) and a traditional limit order book.

Users can provide liquidity in exchange for LP tokens to earn rewards on Arbitrum or Avalanche networks. Those who submit their holdings to the GMX V1 markets get GLP tokens in return, which grant owners 70% of the generated fees. This means 5.30% APR on Arbitrum and 11.10% APR on Avalanche.

GMX V2 markets are newer, with more users, and liquidity providers are incentivized to move their assets to it. LP tokens for these pools are GM, and they offer far more lucrative rewards: 62.63% max APR on Arbitrum and 56.24% max APR on Avalanche.

#2. Synthetix

Synthetix is a liquidity-providing protocol that powers an entire group of dApps. Some of these decentralized apps include:

• Kwenta, a crypto and forex trading platform that offers advanced features, such as 50x leverage
• Polynomial, a smart wallet with trading features
• Lyra, a decentralized crypto options trading protocol
• Curve, an AMM-based decentralized trading platform
• Overtime Markets, a DeFi platform that facilitates sports betting

The rewards on Synthetix are awarded in native SNX and the platform’s stablecoin, sUSD.

#3. Dopex

Dopex stands for Decentralized Options Exchange, and it’s another liquidity-providing platform that offers real yield. As its name suggests, the main platform supports an options exchange where users can trade ETH and BTC options, sell covered ARB and DPX options, and more.

With features such as single-staking options vaults (SSOV), liquidity pools, and collateral composability, Dopex is one of the most comprehensive DeFi real yield platforms on the market. It also offers improvements in staking, borrowing, risk minimization, and pricing efficiency, making it an all-around solid choice for yield farming.

Key Takeaways

It’s clear that real yield in crypto represents a step toward the maturity and stability of the whole DeFi space. The concept seems to be much more than a passing trend. Instead, it shapes up to be a monumental shift that can propel the whole crypto sphere forward.

Still, there are plenty of challenges ahead on the road to the widespread adoption of decentralized finance. On the other hand, the real yield might just be the tipping point that persuades reluctant investors to finally join the cryptocurrency ecosystem!