Real-Yield DeFi Protocols: A Paradigm Shift in the Decentralized Finance Space

The decentralized finance (DeFi) space has seen tremendous growth over the past few years, attracting users, developers, and investors from all corners of the world.

In the realm of decentralized finance (DeFi), a new wave of protocols is emerging, shifting away from inflationary token models and ushering in an era of real-yield mechanisms. This marks a departure from the traditional approach, where many DeFi protocols relied on distributing large quantities of native tokens as rewards for participation.

As a result of this practice, concerns arose regarding the sustainability of such rapid token creation and its potential to lead to devaluation of the token’s value over time. However, a new generation of protocols is now pivoting towards a more enduring approach.

This article delves into the inner workings of real-yield DeFi protocols, exploring how they differ from inflationary models and examining the strategies employed by platforms like GMX and Gains Network to generate real yield for their users.

We also highlight the advantages and risks associated with these protocols and discuss their potential to shape the future of DeFi.

Key Takeaways

What Are Real-Yield DeFi Protocols?

In contrast to relying on inflationary issuance of native tokens, real-yield DeFi protocols distribute rewards based on the actual revenue generated from the platform's activities.

In traditional inflationary DeFi models, tokens are minted and distributed as rewards, often leading to a situation where the supply of tokens outpaces demand, causing inflation and, in some cases, devaluation.

In contrast, real-yield protocols generate revenue through activities such as:

A portion of this revenue is then shared with liquidity providers, stakers, or token holders in the form of real yield, meaning that the rewards come from the platform's operational income and not from inflationary token issuance. This creates a more sustainable and potentially lucrative environment for participants, as rewards are tied directly to the protocol's economic activity.

Key Features of Real-Yield Protocols:

How GMX Uses Revenue-Sharing for Real-Yield Rewards

Among the most prominent platforms to adopt the real-yield model is GMX, a decentralized perpetual contract trading platform that allows users to trade with leverage while also providing liquidity to earn rewards.

GMX's revenue-sharing mechanism has garnered attention for its ability to provide sustainable yields without relying on the creation of inflationary tokens.

GMX's Business Model

Multiple streams contribute to GMX's revenue generation:

Revenue Distribution and Real-Yield Rewards

A portion of the fees generated from trading and liquidity provision is distributed to GMX token holders and liquidity providers in the form of real yield. The GMX protocol employs a multi-tiered distribution system:

By relying on trading fees and liquidity provision rewards, GMX ensures that its yield generation is tied directly to the platform's activity. This approach eliminates the need for inflationary token issuance and promotes long-term sustainability for the project.

Gains Network’s Revenue Model and Real-Yield Structure

Another leading platform in the real-yield DeFi space, Gains Network operates as a decentralized platform for leveraged trading of various assets, including cryptocurrencies, stocks, commodities, and more.

Much like GMX, Gains Network provides users with the opportunity to earn revenue by contributing liquidity to the platform or trading on it.

Gains Network's Business Model

Gains Network generates revenue through:

Revenue Sharing and Real-Yield Distribution

Gains Network utilizes a revenue-sharing model that rewards liquidity providers and token holders. The revenue generated by the platform is distributed as follows:

By linking rewards to actual revenue generation and trading volume, Gains Network aligns the interests of users with the platform's success, ensuring that rewards are sustainable and come from real economic activity.

Advantages of Real-Yield Protocols

1. Sustainability of Tokenomics

Unlike inflationary models, where rewards are often paid out through new token issuance, real-yield protocols distribute rewards generated from actual economic activity. This creates a more sustainable model because the rewards are tied to the platform's ability to generate revenue. The risk of token inflation and devaluation is significantly reduced.

2. Attractive for Long-Term Investors

Real-yield protocols offer more predictable and reliable rewards for liquidity providers and token holders, making them attractive for long-term investors. Instead of relying on speculative growth in token prices, users can earn a share of actual revenue generated from platform activity.

3. More Stable Token Prices

Since rewards are tied to revenue, real-yield protocols tend to exhibit more price stability in their native tokens compared to inflationary models. With fewer tokens being minted and distributed as rewards, the overall supply of tokens remains more controlled, reducing the risk of excessive dilution.

4. Transparency and Trust

Real-yield protocols often operate on decentralized platforms with transparent revenue models, where participants can directly observe how funds are generated and distributed. This transparency increases trust among users and encourages participation in liquidity provision and staking.

Risks and Challenges of Real-Yield Models

1. Revenue Volatility

The revenue generated by real-yield protocols depends on the platform's trading volume, liquidity, and other factors. Market conditions can cause trading volumes to fluctuate, leading to variability in the rewards distributed to participants. During market downt