Can Real Yield Alone Define the Sustainability of a Protocol?

6 min readSep 21, 2022

Archimedes Explains!

Archimedes is an experimental protocol and carries significant risks: Smart contract risk, economic model risk, risk that the protocols Archimedes introduces and many other types of known and unknown risks. Archimedes’ team never provides investment advice. This article is NOT financial advice. DYOR. Participate at your own risk.

‘Real Yield’ is the latest buzzword that has been making headlines for the past months in DeFi and chances are you’ve heard it several times in different places.

The term real yield displays an appetite for new crypto investment opportunities that can outlast any short-lived explosive market cycles. In 2022, the crypto bear market has been wild in terms of volatility. To overcome this, long-term proponents of DeFi are in search of projects that generate ‘real yields’.

Cool. But what exactly is ‘Real Yield’?

Alright, let’s get into it!

‘Real yield’ refers to the profits made by the liquidity provider that is paid by the protocol in tokens other than their native governance token. Typically these rewards are paid out via platform revenue, trading fees, profits, and more.

It replaces ‘short-term high APRs and unsustainable yields’ with ‘long-term sustainable and predictable yields’. The concept is to ‘capture fee revenue on swaps, liquidations, or earnings and share it between the token holders, and the protocol’. This approach is in contrast to the widely used ‘Ponzinomics’ concept where returns are widely fueled by projects’ native tokens, distributed at unsustainable rates to attract more liquidity. Sounds great right? Sorta, kinda…

While many investors consider this a beam of hope, others remain skeptical about this whole concept — and even making a meme out of it.

When can ‘Real Yield’ Be A Problem?

Most platforms walk into the gray zone of tokenomics where they try to fulfill token holders demand with higher output — or else they will move funds to the project with the next best APY, causing speculation over governance tokens.

For early-stage projects, using ‘Real yield’ as a marketing tool to attract users might benefit platforms with an instant boom but in the long-term, it might also cause a collapse if real yield is not present! New projects are being pressed to define and determine their token payout policy to showcase that their project actually makes money and is not a Ponzi scheme.

If liquidity continues to come in purely to fulfill the token holders’ demand for high APY, the protocol may suffer with sustainability issues: sustaining that high APY against bigger projects will be challenging and if the protocol fails to sustain, it will cause liquidity to dry up quickly. Keeping the money in-house ( cash is ALWAYS king) to fund new developments will serve them better in the long term.

What other metrics and factors to look into when defining the sustainability of a protocol?

Cash flow is undoubtedly the most important aspect to ensure the sustainability of a protocol. But is it the only factor that makes a protocol trusted and relevant among users?

Well, to answer this question, Archimedes has come up with a brief explanation of the underlying drivers, metrics, and key indicators that help analyze the sustainability of a protocol. Let’s go through them!

1. TVL (Total Value Locked) and Fees

TVL defines the overall value of assets locked in a DeFi protocol. It could be staked or borrowed tokens or liquidity pools. It is one of the crucial metrics to measure the growth and performance of a DeFi protocol.

TVL is usually dependent on two factors — the price and the number of tokens locked in. Based on these factors, users can analyze the growth in TVL over time to measure the sustainability of a protocol.

Along with TVL, fees will be an indicator of the protocol’s revenue / trade volume and health.

2. Value to Liquidity Providers

Liquidity providers are the ones who build the protocol’s balance sheet. Liquidity providers get value from the economic incentives baked into the key proposition of a protocol such as — trading fees, interest rates, token grants, etc.

Offering greater value to liquidity providers typically drives a lot of value for the protocol: growing liquidity is king (cash!!) in financial markets.

3. Appropriate Incentives

The crowd is attracted to the platforms that offer a good risk/reward balance in their crypto assets — we wish — they really look at the reward potential only and oftentimes forget about the risk.

Some protocols anchor on the “wrong balance”, either making the risk/reward ratio too high or too low. The latter will cause sustainability issues for the protocol and early users may make bank, but the former will make great protocol revenue to the detriment of its user’s position health.

The risk/reward ratio is most critical to borrowers and a good example of “wrong balance” for high ratio is user liquidation, with which the predatory protocols profit in the short term, but lose users in the long term.

Strong incentives really look into balancing the risk/reward ratio healthily where both protocols and users can benefit from it. The stronger the incentives are (better ratio balance), the stronger and longer term (1) the relationship with the users and (2) the protocols’ balance sheet.

4. User growth

Other than maintaining the growing liquidity and attractive incentives, the protocol must also deliver stability, user experience, functionality, and security to its users.

Security is a huge deal as we have witnessed in the past years! Capital will flee in the presence of buggy smart contracts or security exploits.

To attract new users and retain the old ones, a protocol must be able to gain their confidence through sustainable token incentives, otherwise users will jump to competitors.

5. Token Price

As you have seen, there are several value drivers in the DeFi space to create and capture value. Due to the nascent maturity of the ecosystem, many of the protocol value drivers are intangible today. Doxxed Teams, co-founders, and their backgrounds are a few most critical intangible key indicators defining the sustainability of the protocol.

But if the protocol’s governance token price — really it is market cap — outperforms other DeFi competitors and the crypto market index, it is a strong sign of sustainability. We at Archimedes expect to have strong token performance given the way our Leverage Engine works:

  • Borrower’s will need ARCH to pay for access to leverage.
  • If we offer too much leverage and our pool becomes unbalanced, we will increase the cost of leverage to re-balance demand and supply.
  • We expect demand for Leverage to be relatively high, and arbitrage opportunities will exist for those who can exploit them.

Closing Thoughts

Archimedes is an experimental lending and borrowing platform offering a seamless and efficient lending experience for investors. Products like our leverage engine do not rely on Ponzinomic incentive schemes to generate yields. Instead, it utilizes sustainable on-chain revenue streams.

If you look at all 5 metrics listed above and if they are trending in the right direction, it is a good indicator that the protocol is doing something very good. As the ‘real yield’ initiative runs its course, we hope that those interested in long-term sustainability take notice of our commitment to becoming the most widely adopted leverage engine — a true pillar of DeFi.

To learn more, follow us in Twitter, join us in Discord and in Telegram. Make sure to read our documentation on our Website.

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