You are reading an excerpt from our free but shortened abridged report! While still packed with incredible research and data, for just $20/month you can upgrade to our FULL library of 50+ reports (including this one) and complete industry-leading analysis on the top crypto assets.
Becoming a Premium member means enjoying all the perks of a Basic membership PLUS:
- Full-length CORE Reports: More technical, in-depth research, actionable insights, and potential market alpha for serious crypto users
- Early access to future CORE ratings: Being early is sometimes just as important as being right!
- Premium Member CORE+ Reports: Coverage on the top issues pertaining to crypto users like bridge security, layer two solutions, DeFi plays, and more
- CORE report Audio playback: Don’t want to read? No problem! Listen on the go.
Token-agnostic Yields
Token-agnostic yields are independent of the presence of a project token and are derived from direct exchanges of value between parties. This is similar to cash flows in traditional web 2.0 systems. On the other hand, token-specific yields must be issued directly from a project treasury and are subject to the structure determined by holders or founders. These yields contribute to an ongoing circulating supply that dilutes holders and cannot be controlled or distributed without a token. This is analogous to marketing and customer acquisition costs in web 2.0.
There are four main types of token-agnostic yields: network staking fees, lending, liquidity provisioning, and counterparty liquidity. Network staking fees are generated by delegating tokens to or running validators that secure and moderate blockchain middleware. Lending yields are generated by providing a token and allowing others to borrow it. Liquidity provisioning yields are generated by providing token(s) and allowing others to trade or utilize them. Counterparty liquidity yields are generated by taking one side of a trade, such as shorting volatility, and earning yield or losing principal depending on the outcome.
It is important to note that liquidity provisioning carries a high degree of principal price risk, as impermanent loss amplifies the potential for principal value loss. Additionally, the total return potential for liquidity provisioning is capped as liquidity providers (LPs) tend to purchase the cheaper asset as the other one grows in price. The yield return ceiling is typically lowest with lending. However, they are easier to predict, and lenders are less susceptible to borrower default. Additionally, LPs and those acting as counterparty liquidity are at risk of having a portion of deposited principal acquired by arbitrageurs or profitable counterparties.
The rate of yield for token-agnostic yields is determined by demand and supply, with higher rates for capital deployers when there is greater demand for access to a use case. The yield-earning mechanism is not unique and is similar across various platforms. Additionally, yield rates are also broadly similar across platforms. Token-agnostic yields are realized over events or epochs and can be accessed by either directly being a capital deployer or holding a project token that has claim to protocol cash flows.
Components of Net Yield: the Principal and the Yield
To further understand yield in crypto and DeFi, it is essential to consider two critical components: the principal asset and the yield earned. In general, there are two types of principal assets and two types of yield. The principal assets can either be in the form of crypto assets or cash, and the yield can either be in the form of interest or appreciation in the value of the principal asset.
Liquidity mining, for example, can be considered a use case that generates yield through interest on cash deposited into protocols and pools as a liquidity provider or lender. On the other hand, yield farming can be considered a use case that generates yield through appreciation in the value of crypto assets deployed passively or productively.
Overall, the use cases within the DeFi ecosystem provide a range of opportunities to generate yield through various strategies and deployment of capital. Understanding the underlying mechanics and potential risks associated with each use case is crucial for effectively generating real yield in the DeFi space.
In the decentralized finance (DeFi) ecosystem, there are two main types of principal assets that can be deployed to generate yield: price-stable and price-fluctuating.
