Improving Asset Yields in a Macro Bear Market
As at time of writing, the cryptocurrency market cap has reclaimed $1 trillion (source: CoinGecko), a relief for many participants in the industry. Although we are continue to see a growing number of protocols bringing innovation into the space, we remain a distance away from the $2.9 trillion peak in November 2021.
DeFi is no exception to the broad market downturn. Being in a macro bear market, with rapid interest rate increases driving tightening financial liquidity and economic conditions, it is especially important for DeFi as an industry to deliver sustainable yields from real asset utilizations.
In this blog post, we dive into the relatively short, yet highly innovative, history of DeFi and yield farming, observe how yields have changed along with the public perception and structural improvements, and analyze how protocols can improve crypto asset yields in a bear market.
DeFi and the Evolution of Yield Farming
The DeFi revolution started as early as 2020, when protocols like Compound, Uniswap and Aave distributed tokens as rewards for (i) users who have used their protocols and (ii) users who provide liquidity on their protocols.
These token rewards, generously distributed to DeFi users in the form of as utility retrospective airdrops or liquidity incentive programs, was a major driver behind the first wave of public DeFi adoption.
Along with zero interest rates and money printing programs, the crypto market bottomed and subsequently ran up exponentially, delivering rapid growth in global TVL across 2020 and 2021.
Yield farming soon became an integral part of DeFi, enabling DeFi protocols to easily bootstrap liquidity by offering highly attractive yields that typically start at over 1,000%.
In an effort to retain TVL, protocols are pressured to offer high yields. While DeFi users benefit from this yield-for-TVL model during the bull market, it is ultimately not a sustainable financial cycle when market structure changes.
Structural Market Changes Across 2022
In late 2021, the US Federal Reserve announced its plan to hike interest rates and tighten the monetary supply in order to combat inflation. This took place since the beginning of 2022, and is expected to continue into 2023.
The interest rate hikes took a toll on risk markets and market liquidity. As a repercussion, global TVL has dropped over 50% compared to 2021, and currently sit at April 2021 levels.
In particular, for the DeFi industry that relies heavily on token rewards, yields have shrank substantially, and protocols that over-emit token rewards to replace yield are caught in a downward cycle of price pressure and the need for even greater emissions to maintain the same yield.
Powering through a Challenging Macro Economy
The current state of the market has shown us that, under the guise of accelerated protocol growth, those methods of scaling and yield farming are not realistic in the long term.
Protocols eventually have to turn off the faucet on those returns unless they find more sustainable ways to achieve real yields. At LeverFi, we focus on improving the utility and quality of yield for our users.
Lenders can deposit assets into lending pools on LeverFi to earn interest from traders who borrow to leverage trade. Unutilized liquidity are deployed to third party protocols such as Aave to generate a base yield.
Borrow fees on assets lent to traders are always higher than the base yield. This way, lenders receive the base yield at low utilization, and improved yield at high utilization. This also means that lenders on LeverFi stands to enjoy above-market yields as compared to other platforms.
If the crypto winter we are in has taught us one thing, it is that we need to look for better ways to utilize our crypto assets. Stripping our reliance on reward tokens, and building a foundation on utility-derived yields is definitely a more sustainable way for a protocol (and its users) to grow.
The Future is LeverFi
We hope this blog has helped you understand the changing landscape and how LeverFi empowers sustainable yields. LeverFi is a game-changer in the leveraged trading space. And we are excited to have you onboard our journey!
Our unique product offerings enable increased reliability for lenders and traders alike. We cannot wait to hear what you think of LeverFi, so keep engaging with us!
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