In today’s newsletter, I’ll be breaking down the rise of ‘real yield’ in crypto, and how it compares to IRL dividends.
Recently the term ‘Real Yield’ has been echoed across crypto twitter, in podcasts, articles, and research reports alike.
But what exactly does this term entail?
‘Real Yield’ is used to describe sustainable staking yield, often paid out in stablecoins, or the native networks’ gas token.
The concept was most notably popularized by GMX, a popular on-chain DEX with leveraged trading, which pays out ~40-50% of staking rewards in either AVAX or ETH, depending on whether you are using the protocol on Avalanche or Arbitrum.
While this sustainable yield is paid out to stakers of the actual GMX governance token, it is perhaps most known for being used to incentivize users to purchase GLP, a basket of assets typically deemed ‘blue-chips’, including BTC, ETH, USDC, LINK, & more.
As crypto prices continued to climb lower throughout 2022, many deemed holding GLP (which automatically pays out rewards without the user having to stake) to be a smart move; it gave them a way to hold assets with a strong lindy effect, with no impermanent loss. Most notably, investors can receive sustainable rewards, 40-50% of which is paid out in ETH or AVAX.
With many DEX governance tokens down 95% or more, the concept of earning AVAX or ETH seems even more compelling.
While AVAX and ETH have experienced their fair share of devaluation, people are much more confident in these assets, especially ETH.
Some people refer to staked ETH as a sort of ‘internet bond’, an idea popularized by former BiMEX CEO Arthur Hayes. If you subscribe to this belief, then receiving yield in ETH is perhaps akin to receiving an ‘internet dividend’. While Arthur might not approve, this concept can be extrapolated to AVAX rewards as well.
If you’re more traditional, and still prefer USD over volatile crypto, multiple protocols have introduced staking structures that pay rewards out in stablecoins.
Umami Finance, an Arbitrum yield vault protocol, pays out protocol revenue to UMAMI governance token stakers in WETH.
ProtoFi, a DEX on Fantom, distributes dividends in DAI to users who deposit ELCT, an untradable version of the protocols governance token.
Trader Joe, the leading dApp on Avalanche, pays protocol fees to JOE governance token stakers in USDC.
While ‘real yield’ rose to popularity in response to the bear market, many suspect that this trend is here to stay, and will thrive in the bull market. Protocols across numerous chains are planning on implementing some sort of sustainable rewards model into their tokenomics.
We can’t say with certainty if this will become the go-to rewards model of the future, we can look to the past for some ‘real yield’ comparisons; most notably, dividends.
Dividends are basically what the protocols listed above provide, but paid out by IRL companies.
These payments usually are in the form of cash, though companies can distribute them in the form of additional shares if they wish.
Companies can also stop paying out dividends, or reduce dividend payments at any time.
So why do companies pay dividends?
Well, for the same reason onchain protocols do; they offer a way to share revenue with investors, and entice them to purchase governance tokens, or in this case, company shares.
Typical dividend stock investors are those who already have a well-sized portfolio and want to generate a safe, conservative yield while holding shares of large, well-established companies that generate lots of revenue.
This is the opposite of most crypto investors, who are looking for outsized returns on their initial investments, and often are investing in protocols that have very little revenue.
If you wanted to stake JOE to earn USDC dividends, you would have to pay a 1% pool deposit fee. With current protocol revenue, it would take several months to recoup this fee, which discourages many from entering this pool, as crypto is full of people who want fast money.
This degenerate attitude, while most pronounced in crypto, is not exclusively on-chain. Markets at large have become much more fixated on growth than on the value investing style that favors dividend stocks.
Many real estate investors are much more concerned about the appreciation of the property than on the APR they can receive in rental income. This is especially true with the rise of ‘flipping’.
Many of the biggest stocks today, especially those in the tech sector, have opted to pay little dividends or forego the practice altogether.
There are two main reasons for the fall of the dividend:
Rise of growth stocks
Inflation
Rise of Growth Stocks
The last 20 years have seen technology and internet-based companies completely take over the indexes, with crypto being the extreme tail-end epitome of this rise in growth.
Many prominent investors claim that up until recently, it has never been easier for startups to raise money. Many startups, crypto-related or not, make decisions purely to attract VC investors, rather than customers.
It has become easier to raise money than to create a great product. Uber and Airbnb are the most blatant examples of this: they were valued very highly, even when they weren’t profitable.
Market participants have begun looking further ahead, and valuing assets based on their potential.
Facebook, Amazon, Google, and even Berkshire Hathaway do not pay dividends: they reinvest this money into expanding the business.
Despite not receiving a dividend, investors still view these stocks as correlated to their performance, even though the values are primarily driven by speculation. Because of this, they have continued to perform very well.
Inflation
As you probably know, inflation has only continued to rise over time, especially in the last 40 years.
Aside from market resets every now and then, this has put markets in a perpetual growth trend.
A constant flow of new money into markets raised stock prices, outperforming the yield that dividend-paying stocks offered and mitigating their edge.
Average S&P 500 dividends
So, dividends have gotten less and less popular over time. Why does crypto care so much about them right now?
If crypto’s end goal is to replace the financial system, achieving this would mean ending the mass inflation that contributed to the fall of the dividend.
While this is an interesting idea to play around with, it is doubtful that anyone is thinking this far ahead.
A more realistic explanation for the rise of ‘real yield’ is that in a world of volatility, some stability may prove to be invaluable.
We have seen many trends over the past cycle: Uniswap forks, OHM forks, tomb forks, NFTs, and more.
Some of these trends had merit, others not so much. Either way, these trends were taken to their absolute limit, devolving into completely unsustainable, flash-in-the-pan trades towards the end of their lifecycles.
It seems like crypto participants, what’s left of them, have decided the time for these games is up, and that they want something sustainable, they want real yield.