Why “real yield” matters, and how the market values it
By Daniel Gardeñes, marketing responsible at Vottun.
Introduction
In the web 3 ecosystem, especially in DEFI (decentralized finance), we are used to seeing astronomical yields, exceeding 10%, some of them even without apparent risk at first glance. Of course, the vast majority of these situations are due to projects with characteristics of a Ponzi scheme or, in the worst cases, fraudulent.
In any case, if the yield received by investors who, for example, lock a token in staking within a layer 1 blockchain comes from emissions of the token itself, it is playing tricks on oneself. This is because on one hand you receive an APR, but on the other hand, your tokens devalue due to inflation caused by the emission.
In other words, there is no real flow towards this financial asset, so any APR you receive from it is nothing more than a mirage.
In this article, we will explore how the “real yield” works and why projects implementing this mechanism in their tokens have much more potential for long-term economic sustainability.
For example, at Vottun, we have implemented this system for our future token, $VTN, something we will delve into in a more advanced section of the article.
How does real yield work?
Firstly, what is the real yield in the context of the web3 sector?
It involves offering holders or stakers of a token income from a source of real value in an APR format. For example, the stakers of $GMX, the governance token of one of the most prestigious protocols on the Arbitrum network (where we will launch our token, $VTN), receive a portion of the returns generated by the DApp.
In this case, it is a Decentralized Perpetual Exchange that allows users to leverage their trades. 70% of the fees go to the liquidity providers of the protocol (LP), and the remaining 30% goes to the $GMX stakers, the governance token, providing them with a 4.3% APR of real yield at the time of writing this article.
In other words, there is a flow of real value to the token stakers from users who pay fees to use a platform that provides them with a service.
As we have discussed in the introduction, this system is extremely important for the long-term economic sustainability of web 3 projects. If the holders of a token are only rewarded with the issuance of new tokens, the project becomes solely dependent on demand. If demand stagnates or decreases, the value of the crypto asset will decline over time.
The importance of narratives in the web 3 market
Another element that we must consider regarding the real yield is not only its economic impact but also the fact that, as of today, introducing a real yield mechanism in tokens is a quite powerful narrative in the sector.
In other words, many projects have a “premium” for being part of a specific narrative, and the real yield is undoubtedly one of them. This could be one of the reasons why, in many cases, we observe projects with an excessively high P/E ratio.
A clear example is what happened with Uniswap after the proposal to start sharing a portion of the fees with token holders was announced. I believe the chart we will see next says it all.
UNI, the Uniswap token, following the announcement of the real yield implementation, saw a market cap increase from $4.26 billion to $6.92 billion, a 38% rise, or in other words, a $2.63 billion increase in market cap in only 15 minutes.
It seems that the crypto market positively values the real yield.
Financial modeling and P/E Ratio.
On the other hand, thanks to the real yield, we can start applying financial modeling techniques from traditional finance to crypto assets. The most obvious case is the P/E ratio, which is a financial metric representing the relationship between a company’s stock price and its earnings. In other words, it indicates how much investors are willing to pay for each dollar of earnings generated by the company.
In Web 3, these techniques can be applied to various protocols, including blockchains and DApps. Let’s explore some examples:
- Ethereum:
In the case of Ethereum, I have conducted two calculations. One for Ethereum stakers (in this case, solo stakers), and another for people who simply hold Ether. While a significant portion of the staking yield comes from emissions and therefore is not real yield, as Ethereum is a layer 1 blockchain and not a company or a DApp, I have allowed for its inclusion in the calculation by summing all staking rewards and subtracting emissions.
The main reason I made this decision when calculating the P/E is that, at least as of today, the annual inflation is offset by the burning of ETH.
For the stakers:
Calculation → Staking Yield + Burn — Emissions = 4.9% + 1.2% — 0.74% = 5.36%
APR → 5.36%
P/E → 18.6
For the holders:
Calculation → Burn — Emissions = 1.2% — 0.74% = 0.46%
APR → 0.46%
P/E → 217.39
In this particular case, the high P/E ratio for holders could be justified, primarily because Ether is more than just a yield-bearing asset. It possesses characteristics such as potentially serving as the internet bond and having a monetary premium. However, delving into these aspects is a subject for another day.
- GMX
In the case of GMX, to calculate the P/E, I have utilized only 30% of the fees directed towards the token stakers instead of all earnings from the protocol. The remaining 70% is allocated to the LP (Liquidity Providers), which I consider as an operational expense.
Annual fees for $GMX stakers = 55 million
Market cap of $GMX = 553.61 million
P/E = 10.05
- Rollbit
Rollbit, a web3 casino, employs a different method to distribute real yield: a buyback and burn system (we will discuss the differences with directly distributing profits later on). In this case, when calculating the P/E, I only considered the fees used to burn tokens, not the total earnings of the company.
Although I’m not a fan of this type of business, I believe it is the best example we currently have in web3 to observe how a buyback and burn mechanism operates.
Fees burned = 113.64 million
Market cap = 441 million
P/E = 3.88
Buyback and Burn: An Alternative System for Distributing Real Yield
As we have seen with Rollbit, direct profit distribution is not the only way to provide real yield to token holders. Buyback and burn involve using the profits generated by the protocol to buy tokens from the market and destroy them, sending them to a “burn address.”
There is much debate about whether this system is economically efficient in terms of adding value to the token. In my opinion, while not as effective as direct profit distribution, it does offer certain advantages in some cases.
For example, in applications like Synthetix that operate across multiple blockchains (such as Ethereum and Optimism), profit distribution poses a “political” issue within the DAO. If the majority of fees are generated on Ethereum, should $SNX stakers on Ethereum be the ones to receive these earnings, or should it be distributed to all stakers in general? Opting for the latter option introduces complexity by requiring cross-chain fund transfers, a challenge that the industry has not yet fully addressed.
That’s why, in this particular case and in many others, a buyback and burn system is much simpler and fairer for all token holders.
Conclusion
As we have seen, distributing real yield in one way or another among the holders and stakers of a crypto asset is crucial for retention and long-term value capture.
That’s why at Vottun, when designing $VTN, we have implemented a profit distribution mechanism through staking and a buyback and burn system, both using a portion of the revenues generated by the Vottun ecosystem.
While this doesn’t guarantee 100% success for the project or positive token price behavior, it is undoubtedly a positive element and, in my opinion, necessary.
