The crypto market has long been a hub for high-yield investment opportunities, with investors eager to jump on the bandwagon and profit from various projects and schemes promising quick returns. In pursuit of the highest yield, many investors overlook the underlying differences between different types of yields, which can be classified into two main categories: emission-based yield and revenue-based yield.
Understanding the difference between these two types of yields is crucial when evaluating the quality and sustainability of an investment opportunity. In this article, we will explore the importance of comprehending these fundamental differences and how they can impact your investment decisions. Whether you are a seasoned investor or a newcomer to the crypto space, this article will provide valuable insights into the different types of yields and their implications for your investment portfolio.
Terms and Definitions
- (protocol) revenue
In traditional finance, yield refers to the amount of return or profit generated on an investment, typically expressed as a percentage of the amount invested. In the context of crypto investments, yield is often used to refer to the interest or rewards paid out to investors for holding (or staking) a particular crypto asset.
APR, or Annual Percentage Rate, is a measure of the yearly interest rate earned on an investment, without taking into account compounding. It is often used to compare the returns offered by different investment opportunities. APR can be calculated by multiplying the periodic yield by the number of periods in a year.
In the context of crypto investments, revenue typically refers to the amount of income generated by a protocol or platform, often through transaction fees or other forms of revenue-generating activities.
Emissions refer to the release of new tokens or coins by a protocol or platform into the circulating supply. Emissions are often used as a way to bootstrap protocol or platform usage by incentivizing users to do so. However, emissions can also dilute the value of existing tokens, if not compensated by sufficient buying pressure.
Emission-based yield is not for free
While emission-based yield may appear attractive to investors looking to maximize their returns, it’s important to understand the potential drawbacks of this type of yield. Token emissions, or the creation and distribution of new tokens, can increase the circulating supply of a token. This, in turn, can have a negative impact on the token’s price.
The token’s market capitalization, which is often used as a measure of a project’s overall value, is calculated by multiplying the token’s current price by the amount of tokens in circulation. Subsequently, the token’s price can be calculated by dividing the market cap by the circulating supply. An increase in the circulating supply, while the market cap stays constant, leads to a decrease in the token’s price.
This mechanism is similar to inflation in traditional finance. When central banks supply the market with additional currency, the value of the currency decreases compared to the goods and services that could be purchased with it previously. In the case of emission-based yields, the increase in circulating supply may dilute the value of existing tokens, leading to a decrease in the token’s price.
Therefore, emission-based yields may not necessarily make investors richer and may even lead to a decrease in their overall returns. It’s important to carefully evaluate the emissions schedule of a project and consider the potential impact on the token’s price before investing in a project that offers emission-based yield. In summary, while emission-based yield may be attractive in the short term, it’s important to consider the potential long-term impact on the token’s value and overall investment returns.
While emission-based yields may be subject to inflationary pressures, real yield is based on the actual revenue generated by the underlying protocol. Through various fee-sharing mechanisms, investors can receive a share of the revenue generated by the protocol, without being subjected to token inflation.
In this case, investors receive a real yield, similar to a dividend, based on the revenue generated by the protocol. There are different ways that revenue can be distributed to investors, including buy-back and burn mechanisms, buy-back and distribute mechanisms, and fee share distributions in the revenue’s currency.
Buy-back and burn mechanisms involve the project buying back tokens from the market and burning them, effectively reducing the circulating supply and increasing the value of existing tokens. This can lead to an increase in the token’s price and provide investors with a real yield based on the increase in value.
Buy-back and distribute mechanisms involve the project buying back tokens from the market and distributing them to investors as a form of reward. This can also lead to an increase in the token’s price and provide investors with a real yield.
Fee share distributions in the revenue’s currency involve the project sharing a portion of the revenue generated by the protocol with investors in the form of the same currency used to generate the revenue. This can provide investors with a stable real yield based on the revenue generated by the protocol, without being subjected to token inflation.
In summary, real yield provides investors with a stable return based on the actual revenue generated by the underlying protocol. Through various fee-sharing mechanisms, investors can receive a real yield without being subjected to token inflation. The different methods for distributing revenue to investors can be evaluated based on their potential impact on the token’s price and overall investment returns.
There are several examples of how real yield and emission-based yield are used in different cryptocurrency projects.
Bitcoin miners, for example, earn both transaction fees (real yield) and block rewards (emission-based yield) for their efforts in processing transactions and securing the Bitcoin network.
Ethereum node operators also earn a real yield by collecting the priority fee, also known as the “tip,” while the base fee is burned. This fee-sharing mechanism ensures that node operators are rewarded for their efforts in processing transactions, while also reducing the supply of Ethereum.
When providing liquidity in automated market makers (AMMs), liquidity providers earn trading fees as a real yield. In some cases, the liquidity providers can also earn an emission-based yield by staking their liquidity tokens. For example, Sushiswap’s success factor was an emission-based reward mechanism that rewarded liquidity providers for staking their SUSHI tokens, which allowed them to earn a share of the trading fees generated by the protocol.
In the world of cryptocurrencies, yields are an important factor that investors consider when evaluating different projects. However, it’s important to understand that not all yields are created equal. In this article, we’ve examined the fundamental differences between emission-based yield and real yield.
Emission-based yield, also known as inflation, is based on the creation of new tokens, which increases the circulating supply and potentially dilutes the value of each token. Real yield, on the other hand, is based on the revenue generated by the protocol and can be distributed to investors through various fee-sharing mechanisms.
Understanding the difference between these two types of yield is essential for investors to make informed decisions about their investments. By focusing solely on emission-based yield, investors may be drawn into projects that offer high APRs, but ultimately may not be profitable in the long run.
Real yield, on the other hand, represents a more sustainable and transparent way for investors to earn returns on their investments. By investing in projects that generate real revenue and share that revenue with investors through various mechanisms, investors can earn a fair share of the profits generated by the protocol.
Overall, it’s important for investors to conduct their due diligence and understand the mechanisms behind different types of yields to make informed investment decisions. By doing so, they can mitigate risk and maximize their returns in the fast-paced and constantly evolving world of cryptocurrencies.