TL;DR: In this article, we will compare the real yield offered by some of the top derivatives protocols in the market, including $PERP, $SNX, $GMX, $GNS, and $dYdX. We will closely examine how each of these protocols share their fees, and what sets them apart from one another. Whether you are a seasoned investor or a new entrant in the DeFi space, this article will provide you with valuable insights on the real yield from the derivatives superpowers.
- This article compares the real yield of 5 derivatives superpowers. It should be noted that the information provided is based on the current state and is not a prediction of future performance. It is important to continually monitor the development of these protocols as it may impact their real yield in the future.
- The era of DeFi 1.0 has ended, high APR yield from token emission is not sustainable. Ultimately, it’s all about the business model that protocols will offer. Protocols with actual use cases can generate fee income and retain their user base.
- Additionally, understanding the fee structure can help investors make more informed decisions about which protocols to invest in and how to allocate their funds. It is important to note that the APR is just one aspect to consider while analyzing the performance of a protocol, the fee source and how it is generated are also key elements to contemplate. It is recommended to conduct thorough research and analysis before making any investments. As the saying goes, “If you don’t know the source of yield, you are the yield” — devboricha.
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The narrative of real yield in the DeFi space shares similarities with dividends in TradFi. When you invest in a DeFi protocol, you are essentially participating in the protocol’s revenue generation. The protocol generates revenue through various means, such as interest on loans or trading fees, and as a staker, it entitles you to a share of that revenue AKA “real yield”.
By definition, the real yields are not generated by the protocol’s token emissions, but rather are shared entirely from interest or fees in the form of $USDC, $DAI or $WETH. It’s important to note that your initial stakes are also retained, not inflated and provide the potential for further growth.
The trading of derivatives on decentralized exchanges (DEXs) is becoming increasingly popular in the DeFi space. In recent years, decentralized exchanges (DEXs) have emerged that allow users to trade derivatives without requiring a centralized intermediary
This trend is particularly noticeable following the fact that centralized platforms are becoming insolvent. This has led to the growth of the DeFi derivatives and it has become one of the most active sectors in the DeFi space.
However, the derivatives protocols are much underrated among so many DeFi protocols out there. This claim is supported by the fact that the DEX-to-CEX spot trade volume is at 15%, while the derivatives trade is still as low as 2.5%. This does not mean that the derivatives sector can experience a six-fold expansion, as the liquidity in DEX is still relatively low, making it still difficult to trade without impacting prices. The derivatives sector is likely to experience substantial growth in trade volume, as evidenced by the 24h trade volume on Binance, which is currently $28.7 billion in derivatives compared to the $13.5 billion in spot trade volume. In other word, the derivatives market has potential to grow larger and accrue more revenue.
As these platforms gain more users and trading volume, the fees generated by these platforms are becoming a significant source of revenue, making the search for yield even more important. With more users adopting these platforms, the yield generated from trading fees is becoming a crucial factor in determining the participation in their staking program. This is especially true in the context of the current market conditions, where the competition among protocols is high, and the ability to offer real yield is becoming a key differentiator among them.
According to data from DefiLlama, there are over 60 derivatives protocols with a total value locked of $1.35 billion as of February 5th, 2023. Out of those, 5 derivatives DEXs are covered in this article. These DEXs are noteworthy in their respective areas. They are good candidates to be considered for their real yield comparison. It’s important to note that these protocols are still BUIDL in the bear market, which could make them shine for the next DeFi summer. They are Perpetual Protocol, GMX, Synthetix, Gains Network and dYdX.
dYdX is the top protocol in terms of Total Trade Volume (TTV), having accumulated over $800 billion TTV since its launch. The fees for trading on dYdX are among the lowest in the industry. It is also the first mover in the industry and no surprise that dYdX’s trade volume flips Uniswap’s in some market conditions. The dYdX protocol previously paid out staking rewards to the Liquidity Pool and Safety Pool until recent community proposals. The dYdX community, through DIP 14 and DIP 17, voted to wind down both the Liquidity and the Safety Pool. By setting dYdX rewards associated with staking USDC and dYdX to zero, currently, USDC and dYdX staked in the liquidity pool are not earning any rewards.
The tokenomics model is facing some challenges. Firstly, the current use case for the token is only for discounting trading fees, with revenues being directed to traders instead of the tokenholders. This approach is similar to the strategies used by start-up companies, as they often need to focus on acquiring customers quickly and efficiently to establish their presence in the market. Secondly, there is a high level of inflation and upcoming token mega-unlocks. $dYdX has circulating supply around 148 million from the total supply of 1 billion. The token is still on a vesting schedule, with emissions not completed until 2026!
GMX is a spot & perpetual DEX on Arbitrum and Avalanche. GMX has a total value locked (TVL) of over $530 million as of February 5th, 2023, making it the highest TVL in this sector. The daily trade volume on GMX was at its highest on November 10, 2022, reaching $1.2 billion. Currently, the daily trade volume on GMX is around $150 million. The trading fees generated on GMX are allocated to GLP holders (70%), who act as liquidity providers, and to GMX stakers (30%). When a staker stakes GMX, they will receive escrowed GMX (esGMX), multiplier points, and rewards in ETH/AVAX, depending on the chain they are staking on.
The GMX’s staking program offers benefits to long-term stakers through rewards. Stakers have the option to either vest their esGMX for a certain period of time or to compound it for higher multiplier points, leading to a higher annual percentage rate (APR). The vesting program continually releases GMX over a period of one year. The esGMX’s compounding effect and vesting period work together to decrease the selling pressure, resulting in a high staking ratio up to 79% of circulating supply. For staking without a multiplier point, the current rate is about 19%.
Synthetix is a pioneer DeFi platform that offers liquidity pools and decentralized perpetuals on both Ethereum and Optimism. With nearly $120 million in total value locked (TVL) on Optimism, Synthetix accounts for 19% of the total TVL on the network. Synthetix earns fees through trading of one synthetic asset for another. This fee is usually between 0.1% and 1%, with an average of 0.3%. The fees are collected in a pool for SNX token holders to claim through staking on a weekly basis.
Staking on Synthetix is unique when compared to other DeFi Dapps. By staking $SNX, stakers help collateralize the protocol in exchange for borrowing sUSD. Stakers are rewarded for their collateral of the system through a share of the trading fees generated. As a result, there is a risk of liquidation. Stakers can unstake anytime by returning (burn) sUSD and unstaking their $SNX collateral from the debt pool at any time. On a weekly basis, stakers who meet the target c-ratio can claim sUSD from protocol revenue and Escrowed SNX (esSNX) that will be locked up for 1 year in proportion to their collateral. The current staking ratio is approximately 65%, and stakers receive a yield of 4% — 15% APR paid in sUSD.
Gains Network (GNS) is a decentralized synthetic leverage trading platform live on Polygon and Arbitrum. It offers a diverse range of trading pairs across various asset classes, including cryptocurrency, foreign exchange, equities, Exchange-Traded Funds, and commodities. Recently, the platform reached 10,000 Daily Active Users (DAU) with a daily trade volume exceeding $150 million, thanks to the wide variety of assets available for trading.
GNS introduced a single side staking pool (SSS) v6.2, allowing stakers to earn revenue sharing in $DAI. The trading fees are generated from market order (0.08%), limit order (0.08%) and closing order (0.06%). The fees are distributed to liquidity providers (22%), the governance fund (19%), the dev fund (19%), and $GNS stakers (40%). As of February 5th, 2023, 23.5 million $GNS have been staked out of the 30.4 million $GNS in circulation, accounting for a 77% staking ratio. The annual percentage rate (APR) for staking is 6% on the Polygon network and 9% on the Arbitrum network.
Perpetual Protocol (Perp) is a perpetual DEX on Optimism. It is among the top Dapps with the most active users. Since the launch of Perp v2 on Optimism in December 2021, it has achieved more than 21,000 daily transactions from over 50,000 weekly active users. The protocol charges a 0.1% fee on all trades. Fees are allocated 80% to liquidity providers, 5% to the treasury DAO, and 15% to PERP stakers. One of the key strengths of Perp is composability. The permissionless nature of Perp’s protocol enables anyone to create DeFi apps, which can drive increased usage and, as a result, higher fee revenue in the long run.
Perp’s revenue sharing program is also known as Lazy River 2.0. The stakers can participate in the program by locking PERP. Stakers can increase their share of rewards by staking more tokens and/or by locking them up for the longest period of 52 weeks. Currently, there are bonus vote-escrowed PERP (vePERP) distributed to stakers, equal to 10% of the weekly trading fees and with a cap at 25,000 PERP per week. As of February 5, 2023, 15.1 million of PERP have been locked for weekly fee distribution, around 22.9% of the circulating supply! The APR from weekly USDC distribution ranges from 5% to 30% and depends on the lock-up period.
Many protocols have similar incentivized token emission practices. They offer rewards in the form of vote-escrowed tokens, which supplements the real yield. This type of tokenomics, vote-escrowed tokenomics, reduces the circulating supply over the long horizon and aligns tokenholder interests with the success of the protocol in the long run.
Other than that, the above tokenomics from the 5 superpowers show that not all tokens are built the same way. We have observed protocols that incentivize users through trading rewards with the aim of acquiring traders. On the other hand, some protocols distribute the entire trading fees only to their stakers, with the stakers assuming the accompanying risk of liquidation. Additionally, some protocols allocate a portion of the trading fees to all stakeholders, including liquidity providers, stakers, and DAOs.
Perpetual Protocol endeavors to achieve a right balance between the benefits for all stakeholders through its DAO governance mechanism. The allocation of trading fees between liquidity providers, stakers, and the DAO was determined by a voting process. Hence, it is sufficient to meet the needs of all parties. However, in the future, a vote could be held to direct a higher percentage towards vePERP holders through the governance process. The community holds the power to revisit this parameter after it has generated sufficient revenue for the treasury DAO.
As the Perpetual Protocol introduces new markets and expands its ecosystem with new vault offerings to passive traders, this will drive more volume, resulting in increased fees and more USDC rewards for vePERP holders. Make sure to visit Perp’s blog to gain more understanding about the path they are building to realize the true potential of derivatives DEXes.
Disclaimers: This article is for informational purposes only and should not be considered financial advice. The information provided is based on data and research gathered from publicly available sources and should not be taken as a guarantee of future performance. Always do your own research and consult a financial advisor before making any investment decisions.