Anyone who has been in the DeFi space for the past two years will have been exposed to a variety of yield-generating opportunities. From receiving variable interest rates from lending platforms, to staking in treasury-backed protocols in order to receive high APY.
Most of us have realized that these returns are directly linked to the performance of the wider crypto market which is itself correlated with traditional markets. Swix is introducing property revenue yields to the DeFi realm, backing token rewards and protocol value with real world generated values.
Before we dive into how these yields should provide greater sustainability and less dependency on crypto market forces, it’s useful to give a brief overview of the current yield generating opportunities in the market.
Lending protocols
Lending protocols offered the first yielding opportunities in DeFi. Investor assets are deposited into a lending pool, from which a borrower can borrow money, while paying a fee. Depositors receive a share of the fee proportional to the share of the pool they own. In addition, they can take out an over-collateralized loan using the deposit as collateral. The variable interest rate yield offered is typically modest and stable.
Liquidity Providing
Decentralized Exchanges introduced the concept of liquidity providing. Users deposit their assets in the DEXes AMM’s (Uniswap, Sushiswap, Balancer etc) liquidity pools and earn fees from others swapping in those pools. This has unlocked superior capital efficiency for crypto assets, as investors now dispose of an additional revenue stream beyond capital appreciation and profit distribution (if any).
The greater the volume of swaps in the pool in which you have deposited your funds into, the greater the fees you earn, proportional to your share of the pool. In order to be profitable, the fees should be greater than the impact of the impermanent loss which LP’s are subjected to by maintaining the funds deposited in the pool.
Yield Farming
Decentralized Applications create incentive systems which go by the industry name of “liquidity mining incentives” in order for users to bring value onto their platforms and provide liquidity to their token trading pairs.
By staking the requested tokens on their platform, users who participate in these liquidity mining programs can claim a share of the allocated token rewards, which is proportional to the size of the liquidity provided. The rewards are minted at an arbitrary rate, often fully controlled by the protocol, and the APRs are only sustainable if the market is at a constant uptrend.
By compounding these rewards, users can enhance the ROI. Some of these protocols, as well as aggregators, offer automatic compounding and pooling of funds to combat the high impact which gas fees can have on individual position compounding.
Value Backed Rewards
In these more recent innovative schemes, each newly minted token is backed by an underlying value of risk-free assets. There are two main strategies of participation with such protocols — staking and bonding.
Staking is a passive strategy, where users can stake their tokens in order to receive a portion of automatically rebasing rewards which are periodically minted by the protocol and distributed proportionally to all stakers. The reward rates are decided on by the policy makers. Token rewards are backed by a portion of risk free value locked in the treasury.
Bonding is a more active strategy — a user can deposit any asset requested by the protocol, e.g. LP tokens, reserve assets (ETH) or risk-free-value assets (DAI, FRAX), in order to purchase a protocol’s native token at a discount. These tokens are vested linearly for a period of 5 days.
The funds owned and accumulated by the protocol treasury are often allocated in lending protocols in order to earn interest as shown in Figure 1.
Bringing Real World Revenue On-chain
Swix DAO is built on top of the value-backed rewards model. While keeping the on-chain bonding and staking system, we will use a portion of the initially raised funds to bootstrap a real world property rental business.
The funds will be used to purchase residential property lease agreements, which will be furnished in accordance with the Swix guaranteed quality standards, and successively made available for rent through the Swix platform.
The generated lease premium value will be used to expand the business, and a portion of them will be used to back the token rewards which are distributed to stakers through rebases and purchased through bonding, as shown in Figure 2.
In conjunction with the value-backed reward system, the integration with a real world business will ensure a steady capital inflow to the protocol, mitigating crypto market volatility through exposure to the property market.
Previously unmet seamless merger of the on-chain and real world components, will provide a proof-of-concept for DAOs implementation in the existing real world market structures.
For more information check out our Docs or join the discussion on Discord.
