Crypto Yield

Crypto Yield

April 26, 2023
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One of the main goals for crypto users in DeFi is the pursuit of yield. Crypto has succeeded in democratizing yield opportunities for the average retail user allowing them to access financial tools that may have otherwise been reserved for select individuals, particularly those with high net worth. However, with great yield comes great responsibility.  Especially in crypto, users are ultimately fully responsible for their funds with little room for recourse in the event of hacks, scams, or rug-pulls. Education is paramount as there is little hand-holding in this space. In this report we will dive into:

  • The categories of crypto yield
  • Proof of Stake vs Proof of Work
  • Real Yield
  • Liquid Staking Tokens
  • Yield discovery tools


  • Crypto yield is the investment return a user receives for providing a service with their tokens.
  • Categories of crypto yield include: Staking, Lending, Liquidity provision
  • Yield farming“Real yield"Staking involves locking up tokens to validate transactions and secure the network through Proof of Stake, with stakers earning rewards for providing a service to the chain.
  • Lending involves earning interest on tokens lent out, compensating lenders for opportunity cost.
  • Liquidity provision allows users to earn fees by acting as market makers in DeFi applications.
  • Yield farming is an additional incentive on top of liquidity provision, allowing users to earn additional tokens by locking up their positions.
  • "Real yield" refers to yield generated from real revenue the protocol is generating, rather than inflationary token incentives.
  • Proof of Stake requires users to hold a certain amount of cryptocurrency to validate transactions and create new blocks, while Proof of Work uses computational power to solve complex mathematical equations.
  • Yield farming was born during DeFi Summer in 2020, but the market downturn has revealed that these strategies are unsustainable over the long term.
  • Token incentives need to be balanced by real demand and revenue in the long run, aka “Real Yield”.
  • Dashboards like Token Terminal track key metrics and ratios to provide insight into how profitable protocols and DAOs are.
  • Liquid staking tokens improve capital efficiency by allowing holders to stake their tokens while utilizing a receipt token that represents their stake in DeFi, removing the opportunity cost associated with staking.Liquid staking offers increased liquidity, more yield opportunities, composability, and decentralization of stake across a number of validators, improving the security of blockchains.
  • There are several liquid staking providers in DeFi today, including Lido, Stride, Rocket Pool, Coinbase, Frax, and others.
  • De.Fi and DeFiLlama's Yields Dashboard provide tools to discover and monitor yield opportunities in DeFi.
  • Understanding where the yield comes from and security of funds are crucial considerations for users.


What is crypto yield?

Crypto yield can broadly be defined as the investment return a user receives for providing a service with their tokens. These user activities are generally grouped in the following categories:

  • Staking: Staking generally involves locking up tokens in exchange for rewards. While the tokens are locked up, they are used to validate transactions and secure the network through a consensus mechanism called Proof of Stake. Stakers are earning rewards for providing a service to the chain.
  • Lending: Much like traditional finance, crypto lending involves earning interest on the tokens lent out.  As lenders are providing a service to borrowers, they are being compensated through interest payments. As lenders are foregoing returns they could have otherwise earned had they not lent their capital out, interest payments are compensating them for opportunity cost.
  • Liquidity Provision: Users can earn fees by providing liquidity in DeFi applications, e.g., AMMs like Uniswap. As the liquidity provider is acting as a market maker, they are compensated by users that are trading the assets in their respective pools in the form of a small per transaction fee.
  • Yield Farming: This is often an additional incentive on top of the aforementioned liquidity provisioning. Users are able to earn additional “yield” by locking up their positions in order to earn additional tokens. These are often referred to as inflationary rewards as they are dilutive to token holders. Protocols that employ this method are essentially using tokens as a customer acquisition strategy.
  • “Real Yield”: A burgeoning crypto narrative has been “real yield”. This is essentially any yield that comes from real revenue the protocol is generating, i.e., not inflationary token incentives. Thus, aforementioned categories, e.g., staking, lending, and liquidity provision can be included in this category, but it refers more broadly to any kind of revenue shared with the user.

Yield trends across protocols tracked on DefiLlama

Staking and the differences between Proof of Stake and Proof of Work

While both Proof of Stake (PoS) and Proof of Work (PoW) generate “yield”, the mechanisms involved and the recipients of the yields are distinct.

The core mechanism that powers PoW consensus is the use of computational power, i.e., electricity, in order to solve complex mathematical equations to verify transactions and create new blocks. In exchange for performing this work, miners are rewarded with newly minted coins, also called a block subsidy, as well as transaction fees.

In contrast, PoS requires users to hold a certain amount of cryptocurrency to validate transactions and create new blocks.  Instead of using computational power to secure the network, cryptoeconomic stake is used. Therefore, the larger the amount staked, the more secure the networks is as the cost to attack it increases proportionally. Much like PoW, in return for staking their crypto and securing the network, validators are typically rewarded with a block subsidy and transaction fees.

The key distinction between these two systems is that in PoW you are not required to hold the native token in order to receive yield while this is not the case for PoS. In PoW, a miner is directly performing work to earn yield, which increases the barrier to entry as mining difficulty increases due to competition, which increases hardware requirements. Meanwhile in PoS the process is more passive. Systems like Delegated Proof of Stake (DPoS) and liquid staking democratize staking so that virtually any participant can earn yield without being restricted by hardware requirements. Stakers can essentially defer to service providers to handle the logistics by foregoing a small portion of their yield for the service

The Emergence of “Real Yield”

When DeFI Summer took off in 2020, and yield farming was born, users were able to earn extraordinary APYs through dilutive token incentives. The market downturn has revealed that these strategies are unsustainable over long time-frames, as they often place persistent downward pressure on the native token. This leads to decreased morale for token holders, potentially leading to an exodus, which spurs a vicious cycle. Incentives become worth less and APYs dwinde.

While token incentives can be an effective bootstrapping tool to garner attention and usage of a dApp, they generally need to be balanced by real demand and revenue in the long run, aka “Real Yield”.

Dashboards like Token Terminal are valuable in providing insight into how profitable protocols and DAOs are by tracking key metrics and ratios:

  • Fees: The total fees earned by the protocol. This includes fees paid out to the supply-side, i.e., service providers. These would be fees paid to e.g., liquidity providers on a DEX or interest earned by lenders on a lending protocol.
  • Revenue: This is the amount, if any, earned by the protocol treasury or token holders, after the supply-side has taken their cut. This can be in the form of e.g., an additional fee charged on a DEX or an origination fee on a lending protocol.
  • Token Incentives: These are tokens given out to either end customers or the supply-side providing value and liquidity to a protocol. They are akin to marketing expenses for a start-up in its early days aiming for growth before reaching a state of positive cash flow. They are dilutive to the primary stakeholders of the protocol so they need to be carefully and strategically managed for maximum effectiveness. These incentives can be beneficial in that they distribute the token to the users actually using the protocol instead of a small group of investors. They are also vulnerable to mercenary capital, i.e., users that will simply dump the token in order to extract maximum “yield’ and move on to the next opportunity.
  • Earnings: This can be calculated by subtracting token incentives from revenue to come to a rough estimate of a protocol’s profitability. While not a perfect estimate (protocols often have other operating expenses such as employee salaries and DAO overhead costs), they provide a solid glimpse into a protocol’s long-term sustainability at its current state. This metric is often used to measure “real yield”.
  • Price/Earnings: A metric borrowed from the TradFi realm, the Price/Earnings ratio measures the market cap of a protocol divided by its earnings. This gives an indication of how the market is valuing a protocol’s “cash flows”. As crypto and DeFi is still a relatively nascent industry, it is unsurprising that many of these ratios are quite high. As protocols are often thought of as autonomous enterprises driven largely by smart contract logic, many believe that earnings can grow significantly at scale by cutting much of the overhead costs associated with traditional businesses.It’s also important to remember that tokens are not a perfect corrolary to stocks. Tokens often have utility and incentive mechanisms, e.g., tokens may be core to a protocol’s design as collateral or may give a user access to certain token-gated services. This is another factor that may drive the premiums we see on P/E ratios.

Token Terminal

Liquid Staking Tokens

A burgeoning DeFi narrative has been Liquid Staking Tokens (formerly known as Liquid Staking Derivatives). These improve capital efficiency by allowing holders to stake their tokens while utilizing a receipt token that represents their stake in DeFi. This removes the opportunity cost associated with staking as holders no longer need to make the choice of locking up their capital for long periods of time (unbonding periods often last weeks) in order to earn staking rewards. They can now earn those rewards while stacking additional yield on top by using them in DeFi, e.g., lending their staked tokens or providing liquidity for them.

Liquid staking offers the benefit of increased liquidity, more yield opportunities, composability, and decentralization of stake across a number of validators. Due to the attractiveness of liquid staking, it serves to improve the security of blockchains by increasing the amount staked that otherwise wouldn’t have.

There are a number of Liquid Staking providers in DeFi today:

  • Lido: The dominant ETH liquid staking provider while also supporting Polygon, Solana, Polkadot, and Kusama. They currently have around $9B staked on their platform with 286K stakers. They are integrated with a number of major DeFi protocols including AAVE, Curve, MakerDAO, and Uniswap. Lido collects a 10% fee on staking rewards, which is split between node operators and the DAO treasury.
  • Stride:  The first fully permissionless, Cosmos-native staking solution with over 50K users. Currently supports a number of Cosmos tokens including ATOM, OSMO, JUNO, STARS, EVMOS, and LUNA. Like Lido, Stride collects a 10% fee on staking rewards for liquid staked tokens. Recently, a proposal was passed to distribute these rewards to Stride stakers, allowing holders to earn real yield.
  • Rocket Pool: This is primarily a competitor to Lido as liquid staking provider for Ethereum. They currently have 425K ETH staked on their platform worth around $600M at the time of writing. Stake is diversified over a set of nearly 2200 node operators whom are incentivized to provide the protocol’s native token, RPL, as collateral in the form of slashing insurance. The DAO does not take a cut of staking fees, but node operators can charge a comission varying from 5-20%
  • Coinbase: Coinbase has also entered the liquid staking arena by issuing a utility token, cbETH (Coinbase Wrapped Staked ETH), to ETH stakers on their platform. This allows users to sell their position or move a representation of their staked ETH off the platform. As this is a token issued by an exchange, there is no underlying governance token to share fees with. They are the 2nd largest provider of staked ETH with 16% market share.
  • Frax: Also a newer entrant into liquid staking, Frax has issued two tokens, frxETH and sfrxETH representing a stablecoin pegged to ETH and its staked version respectively. sfrxETH has become a competitive option as it has been able to offer higher staking yields than alternatives. This is because the protocol stakes ETH redeemed for frxETH, but not all frxETH holders will convert to sfrxETH. This means sfrxETH holders are able to earn the additional yield foregone by those holders.
  • Others: There are additional liquid staking providers, e.g., Quicksilver serving the Cosmos ecosystem, and others supporting a variety of chains including Binance, Polygon, Fantom, Avalanche, and Polkadot, e.g., ankr and pStake.

Dune Analytics


Finding Yield Opportunities

As there are so many complex ways that users can earn yield in DeFi, it can be overwhelming to know what the most optimal and safest options are. This is the issue that dashboards like De.Fi and DefiLlama’s Yields Dashboard address by providing tools that allows users to discover and monitor these opportunities in one place.

De.Fi: Provides unified data for the most popular DeFi protocols via an intuitive interface or flexible API. They have coverage of nearly 400 protocols, 40+ chains, and 140K+ tokens. Their tool also provides users insight into their centralized exchange holdings as well as DeFi. With their dashboard you can track your balance summaries, staked amounts, and any assets held in liquidity pools. Their Portfolio tool allows you to view all your assets as well as a detailed report monitoring price, profit/loss, and transactions history.

Their Explore tool allows users to explore yields across all their supported chains and protocols. This allows users to sort and filter for the highest yield opportunities across chains. They include filters for Single Token staking, LP staking, Lending, and Stablecoins. Their “REWARDS”  column indicates which, if any, inflationary token rewards are included in the APR figure, which is helpful for users that want to distinguish between real yield and inflationary yield.

Another useful feature of their dashboard is their Scanner tool, which significantly mitigates DeFI risk through “rapid smart contract audits”. This tool quickly checks for known vulnerability and generates comprehensive audit PDFs. Their Audit Database includes 4K+ audits of DeFi protocols, and their Rekt Database includes detailed reports on vulnerabilities of past and present exploits. As exploits have become commonplace, the latest one being the $200M Euler Finance hack, this knowledge is becoming vital for users to weigh the risks of participating in yield opportunities.

Explore Yields on De.Fi

DeFiLlama: The Yields section on DeFiLlama is another tool that allows users to search for yield opportunities. It tracks over 8400 pools on around 280 protocols on over 50 chains. It also distinguishes between Base APY, i.e., real yield, and Reward APY, i.e., token incentives. Additionally, it includes other attributes to filter by, e.g., whether the protocol is audited (Audited), the stability of the yield (Stable Outlook), and the confidence level of the yield outlook (High Confidence).

The tool also includes Strategy Finders for users looking to deploy various yield strategies, namely Delta Neutral, Long-Short, and Leveraged Lending strategies. The Delta Neutral strategy allows users to input a collateral token, and the finder will discover opportunities across protocols where users can earn a yield from lending tokens as well as incremental yield by depositing borrowed tokens in farms. The “Delta” indicated represents the additional yield the user is able to earn by using the strategy vs the supply APY they would earn by depositing their collateral token in a lending protocol.

The Long-Short finder is similar to the former although it looks for strategies across perpetual-swap markets including CEXs. For example, a user could long stETH (staked ETH) by purchasing spot stETH or minting it via Lido while simultaneously shorting ETH on an exchange. By doing this they would earn the “Farm APY”, which in this case is ETH staking rewards, while also earning the “Funding APY”, which is the yield paid to shorts by longs and vice versa. This yield is delta-neutral because the user doesn’t have any exposure to directional price movements.

Finally, the Leveraged Lending tool allows users to find opportunities where they can loop their collateral token to boost their yields. A user would deposit their collateral token in a lending pool, borrow the same token against their collateral token at the maximum Loan to Value (LTV) allowed by the protocol, and deposit this borrowed token as collateral, repeating the process to the desired degree of leverage (looping). DeFiLlama displays both the “Loop APY” and the “Boost”, which indicate the additional yield earned using this strategy vs the supply APY.

Delta Neutral Strategy Finder on DefiLlama

Kado and the search for yield

One of the most important considerations for users looking for yield opportunities is to truly understand where the yield is coming from. As the adage goes, if you don’t know where the yield comes from, you are the yield. Another crucial aspect is the security and ownership of your funds. Many of the high profile crypto failures of the past year have involved users losing funds to opaque black boxes like Celsius and Voyager where advertised “yields’ were simply hidden leverage.

Kado, on the other hand, is fully aligned with the Web3 ethos of self-custody. By onboarding users directly to their self-custodial wallets and DeFi protocols, users are always in full control of their funds and not subject to the whims of a few decision makers at the helm of centralized entities. With Kado, users are able to go to direct sources of yield straight from fiat, whether that be staking with a Cosmos validator, depositing with a liquid staking provider, or using the variety of options available in DeFi.  By empowering users with the full tranparency of crypto rails, users can make more informed decisions about where and how they want to deploy their funds.


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