Demystifying DeFi: the hunt for organic revenue
Introduction
The latest DeFi rise (and fall) has been a harsh lesson for many investors. Ponzi economics plagued most of the protocol’s governance as deemed more lucrative than healthy, ‘organic’ cashflows. Hyperinflationary tokens on protocols with no actual revenue shifted the community’s attention away from healthy and self-sustainable systems. But now, we believe DeFi is moving away from a speculative-only trading environment and heading to a more fundamentals-based market. Investors demand tokens not only to be speculative assets or governance tokens, but also capable of generating steady cash flow for holders.
This article aims to drive the community’s attention to protocols that generate organic cash flow to token holders. We aim to analyze how two exceptional protocols use their governance token as a revenue-sharing token (RST). We will investigate how GMX and Synthetix protocols distribute cash flow to its primary stakeholders: the token holders. We believe the future of DeFi is in the hands of autonomous protocols that design their token as a dividing paying stock on top of being a tool for governance.
Just a side-note before continuing: we are looking at yields generated by staking/holding governance tokens, NOT by liquidity providers (supply-side liquidity). This is a crucial distinction. To prove their usefulness, we believe governance tokens need to accrue profits generated on their respective protocols… else, their existence is economically worthless. We are not the first to think this way, Peter Thiel in Zero to One quotes:
“Creating value is not enough — you also need to capture some of the value you create.”
Therefore, we aim to answer a few questions:
- How do protocols generate organic yield to token holders? What are the risks?
- How much value has been paid to token holders historically?
- What rates and ratios (e.g. P/E) are these tokens trading at? Is the market pricing these ratios, or it’s still too irrational?
- How are revenue-sharing tokens (RST) performing against the broader market?
- Could we see RST tokens as a new “high dividend” blockchain-based asset class?
GMX
GMX is a decentralized exchange that focuses on perpetual and spot markets. The exchange dynamic works with a single liquidity pool (represented by an index token called GLP) that allows for both perp and spot trading of ETH, BTC, UNI, LINK and AVAX. This architecture enables efficient management of liquidity that does not suffer from Impermanent Loss, because trades are executed at oracle prices. GMX is deployed on Arbitrum and Avalanche.
Most importantly, 30% of fees generated from swaps and leverage trading are converted to ETH / AVAX and distributed to staked GMX tokens; the rest are paid to GLP liquidity providers. GMX token economy gives stakers a steady cash flow, directly correlated to GMX utilization and market volatility (higher volatility, more trading fees, and liquidations). The fees are distributed in a 1-week retroactive schedule set by governance.
Ok, so now we know #GMX has real cash flow… what yields are we talking about?
Given that GMX is deployed on two chains, we will look at both chains as separate trading venues.
GMX was initially deployed only on Arbitrum; in May 2022, it was then deployed on Avalanche. The fees and revenue sources are different, mainly because of the partnership the team could secure per chain. On Avalanche, GMX is integrated with 1Inch, increasing the swap fee revenue proportion. On Arbitrum, instead, the protocol is more prevalent among margin traders. Therefore the majority of revenue source comes from leverage trading and liquidations. Arbitrum L2 blockchain is more suitable for leverage trading too due to lower transaction fees, lower transaction confirmation time, and almost perfect uptime.
Given that 30% of the overall protocol fees go to GMX stakers, we can easily derive the ratio “Price to Earning per token staked.” For simplicity and better understanding, the ratio will be called the forward P/E ratio from here on. This is calculated by:
Thanks to Apollo and GMX analytics data, we fetched the following historical data:
First, when comparing the forward P/E ratio to ETH performance, it does not seem to be affected by market fluctuations. Its revenue source can oscillate between swap fees in bull markets to liquidations and leverage trading in bear markets.
On Avalanche mean P/E ratio is 1.61; on Arbitrum, it’s 15.98. The x10 difference in the ratio is due to GMX’s delayed Avalanche deployment — therefore, less GMX is staked on Avalanche even though volumes are relatively higher. To keep liquidity ‘sticky’ to the chain, governance artificially keeps yields at similar rates (around ~10%). As GMX’s volumes increase and the two markets normalize, the P/E ratios will normalize and converge to similar rates.
An interesting note is that Avalanche P/E trades at extremely low levels, not just for crypto standards but for any industry. For example, on 06–07–2022, GMX was trading at annualized P/E ratio of 0.14. On that day, the protocol produced $18,4025.50 of revenue for stakers, and 411,045.76 GMX were staked at the time. This is an outlier, but annualizing the ARR that day would have been >700%.
Overall, to make a simple comparison, one of the industries that trade at the lowest P/E, Agricultural Chemicals, trades at x3 times GMX’s average P/E on Avalanche (currently 1.7). On Arbitrum, P/E is currently 2.7, similar to coal mining multiples.
Now, let’s focus on Earnings per share. This is calculated by annualizing the daily earnings per staked GMX — dollar dominated.
On Arbitrum, over the last year, the average EPS has been $2.7, average GMX price has been $28, meaning the token has been able to generate an average yield of 10.2%…. from pure organic revenue. GMX price volatility has been drastic, and hypothesizing an entry price in the 25% quantile($21.39), the yield would rise to 13%.
On Avalanche, GMX stakers benefit from much higher returns. EPS mean has been $25 with an average GMX price of $27 over the same period. This makes an average yield of 94%. As mentioned earlier, on Avalanche, GMX’s governance is artificially lowering the actual yield to stakers as the market consolidates and normalizes. Still, this shows the potential of the GMX token structure, capable of accruing substantial protocol cash flow and redistributing it to stakers.
Given all the good news, we would expect GMX to at least outperform the overall market:
When comparing GMX performance against ETH, we see that the coin has outperformed its benchmark by over 300%. The relative appreciation has been steady but more pronounced during bear periods. Last month, the token gained around ~30% vs. ETH.
Our conclusion here is that GMX is set to redesign crypto trading. GMX is bringing derivatives trading on-chain while focusing on decentralization and transparency. Here all stakeholders clearly understand the current state of the exchange in terms of OI, leverage, and returns. Counterparty risk is limited to smart contract hacks; there is no chance that a Voyager 2.0 can happen… as all data is public and readable.
The token, #GMX has been designed as a tool to accrue value generated from the protocol cash flow without absurd dilution (e.g. degen inflationary policies). This simple yet rare design makes #GMX a market outperformer, and we believe it to continue doing so in the future. At current prices, GMX would be trading at a discount for crypto standards and in the TradFi world. This proves that the crypto market is still highly inefficient regarding price assets in pure fundamental terms.
Synthetix (SNX)
Synthetix is a decentralized synthetic asset issuance protocol built on Ethereum and Optimism. These synthetic assets are collateralized by the Synthetix Network Token (SNX), which, when locked in the contract, enables the issuance of synthetic assets (Synths). A unique feature of Synthetix is that token stakers are the sole liquidity providers. This means that protocol revenue does not have to be shared between supply-side liquidity and token stakers, as is the case with GMX.
SNX holders are incentivized to stake their SNX tokens thanks to exchanging fees generated whenever someone exchanges one Synth for another. This trading volume comes from numerous integrations, such as Kwenta, Lyra, and Curve. Each trade generates an exchange fee in sUSD (their synthetic stablecoin) that is sent to a fee pool, available for SNX stakers to claim each week. This fee is between 10–60 bps (0.1% — 0 .6%, though typically 0.3%).
Let’s look at the protocol’s performance on both Ethereum and Optimism, using data from the year so far. Daily protocol revenue is up there with the blue-chip protocols and on par with GMX (specifically these last few weeks):
On Ethereum, the week of June 25th paid SNX stakers around $2.6M sUSD, while the week before that on Optimism was the highest earning week with over $2M sUSD.
Looking at the number of trades made each week, we can also see that its move to the Optimism L2 allowed for a much higher frequency of trading, even though the trading volume isn’t greater than on mainnet. This would imply that the whales are still more comfortable making their trades on the mainnet, but people with less capital can trade comfortably on Optimism without having to worry about mainnet fees:
Accounting for the fact that all of this revenue goes to SNX stakers, we get the following historical staking APR:
With volume picking up these last few weeks, the APRs went vertical. These rates are something you expect to see with inflationary rewards factored in, and the fact that this is purely from organic revenue attests to the elegance of the Synthetix platform.
If we take a look at the weekly P/E ratio of SNX, we see that it fluctuates wildly:
These last few weeks, it has gotten down to levels you don’t see anywhere else in DeFi. P/E is currently between 2 and 3, proving how discounted the token is given the revenue it’s capable of accruing. The SNX price has been hovering around $2.5 USD these last few weeks, while trading volume and revenue stayed consistently very high. This resulted in a very low P/E ratio.
The EPS ratio is the following:
Here we can see the same story playing out, with the top EPS week at $1.2 USD, accounting for an APR of over 50% in organic revenue.
Let’s now look at the price performance in a benchmark against ETH:
As we can see, the SNX price did not perform as well as GMX compared to ETH, even though SNX has a very low P/E ratio. This is likely because Synthetix has a more aggressive incentive program, thereby inflating the SNX price. We can see more resiliency in the last few weeks, with SNX stakers unwilling to sell because of high APRs.
As we’ve said before, Synthetix has a very interesting token model in that it doesn’t have to share revenue between supply-side liquidity and token holders. This results in very low P/E ratios and high APRs, which should be a price catalyst for the token itself. The only reason we see that SNX hasn’t been performing better is because of the inflationary rewards.
ps. we made all the data and notebooks used in this article public — you can find them at the following link :)
https://github.com/chainbound/profit-sharing-protocols-research.git
And if you wanna fetch more data yourself, check APOLLO — Chainbound's tool to query, filter, transform and save EVM chaindata based on a schema.
REPO: https://github.com/chainbound/apollo
DOCS: https://apollo.chainbound.io/
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There is no guarantee that investment objectives, or risk or return targets discussed in this material will be achieved. The data provided is for information purposes only. This material is not intended to be read in isolation and may not provide a full explanation of all the topics that are presented and discussed. Information contained in this material has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. Furthermore, there can be no assurance that any trends described in this material will continue or that forecasts will occur; economic and market conditions change frequently. This material should not be considered a recommendation or offer to purchase or sell any particular investment. Investors should consult a financial advisor/financial consultant before making any investment decisions.
