Sources of Yield
Not all yields and farms are created the same. Knowing this, how would one differentiate good yield from the bad? How do you know if the yield farm you are in is bountiful like the former picture below, or if the farm token price prints the latter[1], like the fate of many high-yielding predecessors before it? To understand the quality of the crops (yields), we have to examine the different seeds (sources) that make up the farm.
There can be many permutations and derivatives of fund flows, but most generally, yield comes from a few sources:
1. Demand for Leverage
Because of the reflexivity of crypto markets and the fact that DeFi enables secular hypothecation, demand for leverage constitutes a majority source of yield, especially during bull markets.
In centralized exchanges, this manifests in the form of funding rates for perpetual swaps (perps)[2], where funding rates are positive: buyers pay sellers for the privilege to be leveraged long when markets are bullish. During bear markets, funding rates are negative (as seen below), and bears pay bulls for the opportunity to be leveraged short. As of 3/9, shorts were paying longs 24.9% a year ...Reports you may have missed
BRC-20 FEVER Ordinal transactions on Bitcoin have skyrocketed in the last few months, leading to an all-time high for daily transactions and pushing Bitcoin network fees to 2-year highs. The activity throttled BTC’s network so much that Binance was forced to temporarily shut down withdrawals and implement Lightening Network to service outflows without paying excessive fees. There are currently two types of Ordinal transactions on the network: 1) Ordinal NFTs...
FIGURE: PEPES WEARING CONES TO CELEBRATE NEW CURVE ECOSYSTEM PROTOCOL INVESTMENT THESIS Out of the numerous tokenomic designs that emerged (and failed) last cycle, the vote-escrowed model proved objectively most ‘feasible’, as evidenced by Curve’s dominant position in TVL amongst DEXs. Control over a protocol’s gauge emissions made sense to many, assigning real value to governance tokens. The second-order expectations that liquidity would follow did as well. However, maximizing yield...
FIGURE: PEPE UNSHETH-ING ITS ETH TO SOLVE MULTIPLE DEFI PAINPOINTS Since the Beacon Chain launch in Dec 2020, Ethereum users could stake bundles of 32 ETH to secure the network in exchange for priority fee rewards. While these staked ETH[1] are ‘productive,’ many have opted against staking given its operational complexity and illiquidity. Liquid staking projects solve for this by managing validator uptime and offering liquid staking derivatives (LSDs) to...
FIGURE: PEPE LEARNING ABOUT GHO AFTER BEING RUGGED BY UST Source: Fundstrat INTRODUCTION Founded by Stani Kuchelov, Aave (formerly LEND) is the largest DeFi lending market by TVL (~$8b across v2 and v3) and the fifth largest dApp overall. The protocol is currently live across five networks and 11 markets, hosting more than 30 assets across its platform. In July ‘22, Aave announced that they are launching their native stablecoin,...
