Is "Real Yield" the sustainable future of decentralized finance?
A new movement in the DeFi sector is raising hopes for sustainable yields and real use cases for crypto.
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A new movement in the DeFi sector is raising hopes for sustainable yields and real use cases for crypto.
In a time when centralized exchanges and other crypto services seem to be falling like flies, many are reminded of the importance of more transparency and decentralization. This is pushing the DeFi sector to regain popularity in the wake of these crashes. But DeFi is also plagued by its own unique problems. In parts of the recent bull market, the sector looked like an immature financial playground with little real value added.
DeFi: The concept of (un)real yields
The idea behind "real-yield" is simple: DeFi users earn a return based on sustainable business models and create added value. This stands in sharp contrast to the get-big-fast approach of the early DeFi era.
So far, many protocols mainly offered their own tokens in exchange for various DeFi operations. The goal of the platforms was to artificially generate high yields and lock in large amounts of liquidity as quickly as possible. User returns came solely from the issuance of these tokens. And the whole affair is only profitable as long as the token prices rise.
After several DeFi tokens fell 80 to 90 percent from their all-time highs, there was no longer a bull market. Liquidity left the sector quickly, causing yields on many platforms to plummet. Meanwhile, DeFi offerings compete with the high yields of relatively safe U.S. Treasuries.
New business models in the DeFi sector
The new generation of "real" DeFi protocols now needs to pair sustainably high yields with a real use case for decentralized finance. One such platform is GMX, the decentralized exchange on Ethereum’s Layer 2 blockchain Arbitrum.
Fees generated on the trading platform for trades and co. are distributed to GMX token holders. In addition, users provide liquidity for traders by buying GLP, a token backed by ETH, BTC, and USDC. Regardless of market direction, GMX always has a certain cash flow and can pay a dividend to users. Currently, this yields 16 percent, paid in ETH.
Borrowing also takes on a new look in a quasi-hybrid economy between DeFi and TradFi. So far, decentralized lending has been limited by over-collateralization. Users could usually only borrow about half of the amount they pledged as collateral.
Platforms like Goldfinch bridge the gap between DeFi and traditional finance. Borrowers from the real economy approach the decentralized sector to get credit more easily and efficiently. This comes from liquidity pools funded by numerous users around the world. In return, they earn a high, single-digit yield, primarily paid in ETH or USDC.
These are just a few examples of the new financial system in crypto. Lenders’ mutual insurance or even real estate financing is also already used in the new sector.
Lack of trust
The real yield movement is proof of growing demand for a real use case for decentralized credit and financing. The nascent movement, however, faces strong macroeconomic headwinds. Especially since investors are currently inclined to rely on so-called "safe" financial products.
High yields in the DeFi sector should therefore be a turn-off for some. Skepticism is high, because in the past there were protocols that offered up to 20 percent returns on stablecoins.
But the latest DeFi developments also offer prospects for the new financial world after the crisis. The sector is already starting to mature. It is the first of many steps in the emerging industry toward a serious global and decentralized lending and capital market.
