Angle Explains: Breaking down Angle and other DeFi protocols revenues

Governance tokens are still hard to evaluate, and some are even deemed “worthless” by a lot of actors. Yet, in The Token Endgame, Marco Manoppo states that such tokens could capture a lot of value by becoming enhanced version of equities.

Whether we like it or not, most of the “intrinsic” value of DeFi governance tokens in the long-run should rely on their governance powers, and rights on protocol revenues. In the end, DeFi protocols are a new type of companies that still need to generate some kind of revenue and be profitable.

Analyzing how much revenue a protocol generates, and how it redistributes is far from obvious.

Today, we will look at a few protocols, see how they generate revenue, and the impact it has on their token holders. Hopefully, you will get a clear idea of how this works within Angle, and its potential future revenue generation.

Using revenues: cost, reserves, and redistribution

Most protocols generate revenues, but it’s very difficult to know how that impacts the protocols themselves, and their token holders.

In general, a business revenues serve three purposes:

• paying costs (operational, growth, community …)
• building reserves
• redistributing a profit

In a DAO, this is supposed to be decided by token holders. However, revenue distribution can be very difficult to calibrate because of misalignment between different token holders, and protocol stakeholders (private investors, team, short-term buyers, long-term buyers, users, …)

Additionally, some protocols rely on their token for needs that others fulfill using protocol revenues: CRV paying versus Uniswap.

There doesn’t seem to be a winning standard yet, but it’s interesting to look at what exists already and see their advantages and disadvantages.

• How much revenue is generated by the protocol
• How much needs to be spent to maintain the protocol functioning
• How much is kept by the protocol as reserves and/or redistributed to token holders

We won’t go into the details of each protocol here, but will try to get a broad idea of how some of them do this.

Stablecoins

In most stablecoins protocols, revenues come from interest rate, liquidation fees, and minting or burning fees.

Other stablecoin protocols performing a lot of algorithmic market operations like Frax also earn revenue in other protocols governance tokens incentivizing those pools, like CRV or CVX.

Maker

Total 1y protocol revenue: ~ $76M, mainly coming from borrowing interest and liquidation fees.

In Maker’s case, the revenue is shared between:

• operational costs (team paychecks)
• surplus buffer
• MKR buybacks which are burned

In Maker’s case, there are very small operational costs outside of oracles maintenance, meaning that the protocol can function normally with very little financial support.

It’s interesting to note that the token holders decided to pay a hefty price to have a very large number of contributors (12 Core units) working continuously to maintain the protocol. The teams and their operations cost around ~50M DAI /y, close to this year’s protocol revenue.

After funds are put aside in Maker’s surplus buffer, MKR token holders get the remainder of the profit through tokens buybacks which are burned. However, a drawback of buybacks is that it rewards present and future token holders with past revenues equally.

Maker & MKR summary

• Important operational costs for growth, but not much for daily protocol operations
• No token holders dilution
• Token holders rewarded with profit through buybacks

In my opinion, buybacks are not a good way to redistribute a share of profits to token holders as they reward present and future token holders with past revenue. MKR price history also shows that it hasn’t been very effective so far.

AMMs

AMMs like Curve or Uniswap charge trading fees to users, which are redistributed in different ways.

Curve

Total 1y protocol revenue: ~ $56M

Curve charges a fee on each trade. This revenue is shared 50/50 between:

• LPs
• locked token holders

Additionally, an important cost is incurred by token holders through new token emissions distributed to LPs as incentives for their liquidity. This can be considered as growth expenses for the protocol, though not covered by revenue but by token holders. In my opinion, it is not clear yet if Curve could attract as much liquidity and volume without these incentives.

This is a key aspect, as an increasing supply distributed like that gives a constant sell pressure on the token. This could limit Curve’s ability to finance LPs in the future depending on the token price action.

Curve and CRV summary:

• protocol growth cost (liquidity) paid with new token emissions
• 50% of revenue redistributed to locked token holders

Uniswap

Uniswap redistributes all the revenue generated to LPs. We can interpret that as using 100% of revenues for operational costs (i.e. paying suppliers, which LPs are). There is a potential “fee switch” that hasn’t been activated yet.

The Uniswap team chose a very different trade-off than Curve. UNI token holders don’t have any recurrent operational cost to pay, as it is self-maintained by protocol revenue. On the other hand, they don’t receive any revenue generated from trading fees. As such, they are a lot less diluted by operational costs than CRV holders.

However, UNI token holders are still diluted by a 2% yearly issuance after year 4, that should be used by the DAO treasury for community initiatives.

• protocol growth costs (liquidity) self-maintained by trading fees
• no revenue capture or distribution to token holders yet
• 2% yearly token emission after year 4 for external operational costs (community)

The interesting thing to notice about Uniswap revenue distribution is the relentless discussions coming back about activating the “Fee Switch” (redirecting a portion of revenues from LPs to UNI holders as profit). This is another testimony of misalignment between token holders interest and key protocol stakeholders (in this case traders and LPs). Another aspect in this debate is the potential qualification of tokens distributing protocol profits as securities under US law. This explains the patience of the team to move forward with the fee switch.

Pros and cons of the different approaches for token holders

Pros

• No token holders dilution (Maker, Uniswap)
• No or low protocol operational or growth cost (Maker, Uniswap)
• Direct profit redistribution to aligned (locked) token holders (Curve)

Cons

• No or indirect profit redistribution (Uniswap, Maker)
• No token holders alignment (Uniswap, Maker)
• Important token holders dilution to cover operational costs (Curve)

Angle

How does revenue generation and redistribution look for Angle?

Revenue generation and distribution

In 8 months, Angle has generated approximately $6.5M millions in revenue, redistributed approximately in the following way:

• 15% to locked token holders (veANGLE)
• 35% to SLPs (operational cost, though they could be reduced significantly)
• 50% as reserves

More generally, after looking at revenues in DeFi we see there are three main sources: interest from borrowing, trading fees, and yield generated by strategies (like Angle or Yearn).

As it happens, Angle is positioned to tap into these three revenue sources simultaneously:

• trading fees & strategy yield from the Core module
• borrowing interest from the Borrowing module

Combining these three revenue sources effectively and the revenue coming from AMOs could make of Angle a very powerful protocol not so far in the future.

Operational cost & token holders dilution

Most operational costs for Angle rely on attracting HAs to hedge the protocol, and SLPs to over-collateralize it. Both are currently partially subsidized by new ANGLE emissions, but proposals to shift the system to more sustainable incentives are already being discussed.

With the revenue it generates, the protocol could easily sustain this cost as these incentives currently represent only ~12% of ANGLE emissions, and even reduce it with further design improvements.

Conclusion for Angle

Angle already has a direct profit redistribution mechanism to “aligned” (locked) token holders, and much lower operational expenses than other protocols. Part of the new token emissions are used to pay for operational expenses, but these could be covered by revenues in the future as ongoing discussions suggest.

The most promising aspect of Angle in terms of revenues is its potential to tap into different sources, while limiting token holders dilution if needed and fully covering protocol expenses with revenues.

Having a self-sustainable protocol that generates revenues without diluting token holders is likely the most important aspect for giving “intrinsic” value to a token, and Angle seems to be oriented in that direction.

Looking at Angle revenue versus MkCap & TVL

To conclude with, I’ll leave you with a comparison between Curve, Maker, and Angle earnings with the fully diluted valuations of their tokens, and their TVL.

A few comments:

• P/E computed from current price + past year revenue, different from TokenTerminal formula which computes it with the daily annualized revenue.
• E/TVL ratio tells how much revenue a protocol generates from its TVL (an average of the TVL from the past 12 months was used).
• The big difference between Maker and Curve P/E ratio comes from the very high CRV emissions.

Disclaimers

This announcement is not intended to provide legal, financial or investment, or other advice and we recommend that you do not rely on, and do not make any financial or other decision based, on this announcement.