What Is DeFi Liquidity Mining?

Through liquidity mining, users can earn cryptocurrency rewards by locking their assets in yield pools. These opportunities for liquidity mining come in various forms, including liquidity pools, native network staking, and lending protocols. The commonality among them is that users' funds are put to work, generating returns for the users. Liquidity miners typically opt for protocols that maximize their yields, known as yield optimizers, and shift their funds in the market to seek the best returns.

With the rise of DeFi, many protocols have begun offering generous rewards to attract stakers. However, this often leads to artificially high and unsustainable annual percentage yields (APY), with some projects boasting APYs exceeding 1000%. When these APYs decline due to a reduction in the project's liquidity pool, users rush to sell their accrued tokens, causing significant drops in token prices. It has been shown that the demand for such tokens is primarily driven by their issuance rather than their actual utility.

In the DeFi space, faced with common high APYs, how can one assess a project's true value and its potential for generating returns? One approach is to focus on the project's real yield in cryptocurrency terms.

Sustainable Real Yield and Dilution

When we discuss a project's "real" yield, we are essentially talking about the sustainability of that yield. If a project's revenue can cover the amount of tokens distributed to stakers, its liquidity pool will not deplete. Theoretically, if a project's revenue remains stable, it can indefinitely provide users with the same high APY.

However, dilution is relatively common, especially in projects that allocate APYs in a long-term unsustainable manner, ultimately leading to the depletion of their liquidity pools. If a project's revenue does not increase, it cannot maintain the same level of APY. In such cases, the APY often comes from the project's native tokens, which are plentiful and easily accessible.

Stakers may sell the tokens they mine on the open market, resulting in a decline in token prices. This can create a vicious cycle, forcing projects to distribute more native tokens to users to maintain the same APY, thereby accelerating the depletion of their liquidity pools.

It is worth noting that while issuing "real yield" in the form of blue-chip tokens is an optimal choice, some projects that issue native tokens can also provide real yields in a sustainable manner.

What Is the Real Yield in Cryptocurrency Metrics?

The real yield metric in cryptocurrency is a quick way to assess the returns a project offers relative to its revenue. Through this metric, users can understand the proportion of diluted rewards in the project's incentives or determine whether the project primarily relies on token issuance rather than actual revenue for its financial support. For example:

In one month, a project issued 10,000 tokens at an average price of $10, totaling an issuance value of $100,000. During the same period, the project's revenue was $50,000. Since the revenue was only $50,000 while the issuance reached $100,000, the project's real yield deficit stands at $50,000. Thus, the APY offered by this project clearly relies heavily on dilution rather than actual growth. Although this simple example does not take operational costs into account, it remains a reasonable rough estimate when evaluating yields.

You may find that the concept of real yield is similar to dividends in the stock market. If a company pays dividends without corresponding revenue support, it is clearly unsustainable. For blockchain projects, their revenue primarily comes from service fees. For automated market makers (AMMs), their income may mainly derive from transaction fees within liquidity pools, while yield optimizers might share performance fees with their governance token holders.

How to Ensure the Authenticity of DeFi Yields?

First and foremost, selecting a reputable project is crucial, as it lays a solid foundation for achieving sustainable returns. Next, it is essential to focus on the project's yield potential and the specific ways users can participate. You may need to provide liquidity to the protocol or stake governance tokens in a liquidity pool. Additionally, locking native tokens is also a common participation mechanism.

Many yield-seeking users prefer to receive rewards in the form of blue-chip tokens, as these assets typically exhibit lower volatility. If you discover a promising project and understand its operational mechanics, be sure to use the formula mentioned earlier to verify the project's real yield. For instance, we can illustrate how to utilize the real yield metric discussed in this article by examining a yield model that integrates real yield into its tokenomics.

Automated market maker (AMM) protocols provide yields in two ways: on one hand, they distribute rewards to holders of governance token ABC; on the other hand, they allocate rewards to holders of liquidity provider token XYZ. According to the design, 10% of the platform's revenue is stored in a treasury, while the remaining income is evenly distributed between the holders of these two tokens, paid out in BNB to their respective reward pools.

Assuming you calculate that the project generates $200,000 in revenue each month, based on the tokenomics, the reward pools for ABC and XYZ will each receive $90,000 in BNB as rewards. We can calculate the real yield as follows:

200,000−(90,000×2)=20,000

The calculation shows a surplus of $20,000, indicating that the project's yield model is sustainable. This type of tokenomics ensures that the token issuance will never exceed actual revenue. By choosing a DeFi project with a sustainable distribution model, users can effectively achieve real yields without having to navigate complex data themselves.

Does Relying on Real Yield Make DeFi Better?

In simple terms, not necessarily. There have indeed been projects in the past that attracted users by increasing token issuance, but these projects often gradually reduced token issuance and shifted towards more sustainable models. The belief that seeking real yields is a better option while relying on dilution is completely unsustainable is not entirely accurate. In the long run, the revenue models of DeFi projects need to align with real use cases to ensure their viability.

Conclusion

By learning from past DeFi cycles, we can see that if more protocols successfully implement features that increase adoption and promote sustainable revenue generation, the DeFi space will greatly benefit. Additionally, understanding the nature of token issuance becomes particularly important: users should be clear about the essence of token issuance and its role in expanding the project's user base and achieving potential sustainability.

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