The rise of decentralized finance (DeFi) introduced a decentralized and more trustless premise for financial systems, it brought the promise of freedom from centralization, combined with jaw-dropping returns that would make even the most seasoned investors sit up and take notice.
Remember the early days of DeFi Summer 2020? It felt like the Wild West—protocols were offering sky-high APYs (annual percentage yields) that routinely stretched into the thousands of percent. Liquidity providers (LPs) and Degens alike aped into projects, chasing 1000%+ returns with no questions asked.
It was a golden era of crazy returns, but like all golden eras, it wasn’t built to last.
Behind the scenes, most of these yields weren’t coming from actual revenue or profits. Instead, they were often funded by inflationary token emissions, where protocols minted their native tokens to keep users hooked on rewards. These so-called ‘High Yields’ were great for short-term gains but left long-term investors stranded when the token values inevitably crashed.
A Recap....
Let’s be honest: it was fun while it lasted. In 2020, early DeFi adopters—affectionately known as Degens—poured into protocols. These projects offered astronomical yields, attracting billions in total value locked (TVL).
APYs were soaring to over 1000% for staking or liquidity provision.
Compound kicked off the craze with its COMP token, rewarding users for providing liquidity and launching the concept of liquidity mining.
Degens played the game hard, hopping from protocol to protocol, squeezing out rewards, and cashing in quickly.
But the problem? Not all these yields were sustainable. Protocols were essentially printing money through token emissions to fund rewards. When the demand for these tokens didn’t keep up, prices crashed. Many tokens dropped 80-90% in value, and users were left holding the bag.
The result? Inflated token supplies, collapsing prices, and unsustainable APYs.
By mid-2022, the bubble burst. Protocols like Anchor and Terra Luna collapsed erasing $60 billion in value and shaking the DeFi world to its core.
So, what is Yield in DeFi?
In DeFi, yield refers to the returns you earn on your assets, typically paid out in crypto. You can think of it like earning interest on a traditional savings account—except the yields in DeFi are often much higher (and riskier). These returns are usually generated through:
- Staking: Locking up your tokens to help secure a blockchain in exchange for rewards.
- Lending/Borrowing: Providing liquidity for others to borrow and earning interest in return.
- Liquidity Pools: Depositing tokens into a decentralized exchange pool to facilitate trading and earn a share of the trading fees.
- Incentivized Yield Farming: The wild child of DeFi, where protocols reward users with new tokens to provide liquidity, often leading to unsustainable APYs.
It sounds like WOW, right? Well, not so fast.
The devil is in the details. While some DeFi yields are sustainable and driven by real protocol revenue, others are built on token emissions—essentially printing more tokens to reward users, leading to inflation and a collapse in value.
Now, let’s dive into the details of the DeFi Yield Dilemma and its intricacies.
DeFi Summer 2020: The Hype of Unsustainable Yields
DeFi Summer was defined by flash-in-the-pan protocols offering mind-blowing APYs. Protocols raced to outdo each other with incentivized liquidity pools, where native tokens were handed out like candy to attract liquidity providers. The higher the yields, the more money poured in, creating a seemingly unstoppable wave of investment.
However, this unsustainable race led to inevitable consequences, as noted in a X thread:
- Tokens fueled yields: Many protocols were dependent on the rising value of their native tokens to keep APYs high, a dangerous bet during market downturns.
- Ponzinomics: The high yields were, in essence, built on a house of cards, requiring constant inflows of capital to remain viable. Without new money coming in, the yields would collapse, exposing the protocol’s weaknesses.
This strategy led to quick liquidity influxes but failed to build long-term stability. When the bull market slowed, the weaknesses of these business models became all too clear.
Anchor Protocol & Terra Luna Collapse
One of the most prominent examples of unsustainable yield farming was the Anchor Protocol, which promised an eye-popping APY on UST, a stablecoin pegged to the US Dollar. For a time, this worked like magic—investors flocked to Anchor, locking billions in UST deposits. But the promise of high, stable returns couldn’t last forever.
As DeFi Cheetah tweeted on March 15, 2022, cracks started showing:
- Runway dwindled: Anchor’s ability to pay depositors from its yield reserve was running out fast, with only 121 days of runway left at the time, according to calculations.
- Massive losses: Anchor was losing over 1.29 billion UST annually just to maintain its yield, a figure that spelled disaster unless the situation improved rapidly.
When UST lost its peg to the US Dollar, the entire ecosystem around Terra Luna collapsed. Investors lost $60 billion, making it one of the most devastating failures in DeFi history.
Excessive Token Emissions
The problem with many of these high-yield protocols was that their rewards were paid out in newly minted tokens. This method, known as dilutionary emissions, floods the market with tokens, causing inflation and devaluing the rewards over time. The more tokens that are issued, the less they’re worth creating a vicious cycle where the rewards themselves lose value.
Here’s how it worked in many protocols:
- Token drops: After launching their token, protocol saw its price drop by 80% within months as emissions flooded the market.
- Inflation kills value: While early investors were able to lock in high yields, those who came in later were left with devalued tokens and diminished returns.
As a X user points out, this phenomenon is akin to “creating money out of thin air”—tokens that don’t represent any real value but inflate the market cap and temporarily boost TVL (Total Value Locked).
Market Cycles
Like any other market, DeFi is also cyclical. In bull markets, TVL skyrockets as high yields attract capital, but during bear markets, the ecosystem contracts rapidly.
- Bull Market Peak: DeFi TVL reached an all-time high of $250 billion in 2021.
- Bear Market Collapse: By the following year, TVL had dropped 75%.
It's important to note that bull and bear markets are part of any financial ecosystem, but what really stunned everyone during the 2022 DeFi crash was the sheer scale of the collapse and what triggered it. Rug-pulls, protocol devaluations, and hollow promises shook the very foundation of trust in space, hitting hardest on projects built purely on hype.
The crash of 2022 wasn’t just a market correction—it was a wake-up call. It forced DeFi leaders to step back and rethink how sustainable businesses should operate, leading to the birth of what we now call "Real Yield."
Real Yield: The DeFi Solution We’ve Been Waiting For
In decentralized finance (DeFi), "real yield" refers to the return generated from genuine protocol activity, as opposed to temporary incentives, inflationary rewards, or unsustainable tokenomics. These yields typically come from protocols offering revenue streams based on transactional fees, borrowing/lending interest, trading fees, or other sustainable sources.
Here’s a breakdown of how Real Yield works:
- Revenue Share from Real Activities: Participants in the ecosystem, such as liquidity providers or stakers, earn a share of the actual revenue generated by the protocol. This could come from trading fees on a DEX, lending interest on a decentralized borrowing platform, or other cash-generating services.
- Cash-Generating Assets: Protocols that offer real yield are tied to real-world business activities that produce income. The revenue generated from these activities is distributed to stakeholders, creating a reliable and steady source of yield.
Why Real Yield Matters for DeFi's Future
Real Yield brings DeFi closer to the stability of traditional finance while maintaining its decentralized ethos. Here’s why it’s crucial for the future of the space:
- Sustainability: Without the reliance on new token emissions, Real Yield models can function through bear and bull markets alike. They aren’t dependent on market hype or new users to keep returns flowing.
- Incentive Alignment: Real Yield aligns incentives between users and protocols. When a protocol generates real revenue, everyone wins. It encourages long-term participation rather than quick exit strategies.
Zeebu Protocol: Bringing DeFi to the Real World, Embracing Real Yield
Zeebu, a decentralized payments and liquidity protocol that leverages blockchain technology to revolutionize the telecom industry’s invoicing and settlement processes. Zeebu is a prime example of how Real Yield can be achieved by tapping into real-world business operations, in this case, telecom settlements. Within 14 months of its launch, over $4B+ of settlements processed on the platform settling 84k+ invoices and is used by 135 institutional clients across the globe.
After successfully proving its model, Zeebu is now entering its next growth phase with the Zeebu Protocol. This protocol is designed to scale the platform’s capabilities, allowing it to serve even more institutional clients and expand into new industries.
The protocol is composed of multiple roles—On-Demand Liquidity Providers (OLPs), Deployers, and Delegators—each contributing to and benefiting from the platform's operations. OLPs provide liquidity for cross-border settlements, earning 0.80% rewards per settlement cycle from real fees. Deployers and Delegators play governance and staking roles, helping secure the network and receiving a portion of the protocol’s revenue in return.
The Zeebu Protocol waitlist is live – Sign up now!
How Zeebu Generates Real Yield?
Zeebu is bringing real-world applications of DeFi into the telecom industry, which has long been plagued by inefficient cross-border settlements. By focusing on telecom invoice processing, Zeebu generates real yield through actual business activities. The protocol processes billions in telecom settlements, providing stable and predictable returns driven by real transaction revenue.
The yield is sustained through a decentralized network of protocol participants. OLPs contribute liquidity for settlement cycles and earn rewards directly from the actual transaction fees generated, while Deployers and Delegators secure the network and manage governance, earning a share of protocol revenue.
This revenue-sharing model ensures that all participants benefit from the growth of the platform and transactions processed through platform, combining the best of traditional finance and decentralized technology to offer long-term, reliable returns.
Final thoughts
As more protocols embrace Real Yield, the DeFi ecosystem is evolving into a more sustainable and reliable financial system. By grounding yield generation in actual revenue, these protocols are not only building trust but also laying the foundation for the long-term success of DeFi as a whole.