DeFi abandons Ponzi farms for ‘real yield’ – Cointelegraph Magazine

Decentralized finance is beginning to embrace a hot new phrase: “real yield.” It refers to DeFi projects that survive purely on distributing the actual revenue they generate rather than incentivizing stakeholders by handing out dilutionary free tokens.

Where does this real yield come from? Are “fees” really a sustainable model for growth at this early stage?

It depends on who you ask. 

The DeFi ponzinomics problem is our natural starting point.

Ponzi farming

DeFi started to arrive as a concept in 2018, and 2020’s “DeFi summer” saw market entrants — DeGens — piling headfirst into DeFi to early mind-blowing returns of 1,000% a year for staking or using a protocol. Many attributed the real explosion of interest in DeFi to when Compound launched the COMP token to reward users for providing liquidity. 

But these liquidity mining models were flawed because they were based on excessive emissions of protocols’ native tokens rather than sharing organic protocol profits.

Liquidity mining resulted in unsustainable growth, and when yields diminished, token prices dropped. Depleting DAO treasuries to supply rewards programs — or simply minting more and more tokens — for new joiners looked like a Ponzi scheme. Known as “yield farming” to some, others preferred to call it “ponzinomics.”

While recognizing these returns were unsustainable, many sophisticated investors became enthralled with staking (locking up tokens for rewards). One VC told me they paid for their lifestyle by staking tokens during 2020–2021 — even knowing it was akin to a Ponzi scheme about to collapse. 

The dangers of unsustainable yields were seen in mid-2022, when the DeFi ecosystem and much of the rest of crypto were gutted in a handful of days. Terra’s DeFi ecosystem collapsed with grave contagion effects. Its founder, Do Kwon, is wanted by South Korean authorities and is subject to an Interpol “red notice” but says he is “not on the run.” High-profile hedge fund Three Arrows Capital (3AC), which heavily invested in Terra, was liquidated in June 2022.

The reality is that “returns based on marketing dollars are fake. It’s like the Dotcom boom phase of paying customers to buy a product,” says Karl Jacob, co-founder of Homecoin.finance of Bacon Protocol — a stablecoin backed by United States real estate. 

“20% yield – how is…