What is yield?
Yield generally refers to the earnings, income, interest or profits generated and accrual to capital from an investment, expressed as a percentage of the investment's cost or market value.
With stocks, yield comes from dividends, which is a portion of the company’s profits distributed to shareholders.
When it comes to decentralized finance(DeFi), the term “yield” is common when discussing a DeFi solution called “Yield Farming” but it's been at least over a year now since anyone really talked about yield farming in a way that “mattered”, effectively begging the question: is yield farming dead?
What even is yield farming?
Yield farming is a strategy used in decentralized finance (DeFi) to earn rewards—typically in the form of cryptocurrency—by lending or staking your crypto assets.
Think of it like putting money in a high-yield savings account, but riskier, with higher potential returns—and it all runs on smart contracts instead of banks.
Well, that's a pretty basic definition from ChatGPT and not really reflective of what yield farming when it comes to DeFi is really about.
Short answer: yield farming within decentralized finance 80% of the time is about what has nothing to do with actual yield.
DeFi investment product income mostly came from token inflation(emissions) and printing new tokens to reward stakers or liquidity providers ≠ yield, that's the literally definition of issuing debt and unless you've got a system in place to generate revenue that matches or supercedes the value distributed through said debt tokens, your DeFi project is flawed and will eventually crash into nothingness.
I think we've seen many examples over the years to know that this is true and they all had the same problems as described above.
High interests and low to no real revenue with zero risks to native protocol tokens in an instance of liquidation.
Stablecoins to the rescue: redesigning yield for stability
One thing that traditional finance lacks is a national store of value that can be used to measure the true growth and value of its economy.
Sure, we have the GDP, which is not a very accurate assessment of any economy by the way, but let's pretend that this isn't the case. With GDP, all we have is the data, there is no way to invest in the country without acquiring a 100% share of its liabilities.
An asset that can act as a store of value and essentially a representation of the value of an economy solves the debt problems of traditional economies.
Of course, not on its own, and this is where I'll bring in a concept I've been talking about occasionally, in recent articles.
Dual-token systems
Yes, for us to be able to build sustainable economies, we need to function on a dual-token system and this is something I see happening with most blockchains and projects in future. In fact, some will opt for three token systems or more, happen to have already seen a project doing this but I'm yet to do some reading on how it all works for now.
What's important at the end of the day is that there's a stablecoin in the mix of this system and the value of this is that it aids economies to better manage debt.
Instead of investing in USD and essentially being 100% in debt, you invest in Hive for instance knowing that 8.5% of your investment is into its debt.
8.5%, where is this number from?
Hive has a unique opportunity to be a leader in DeFi because it already has a dual-token system with Hive and HBD.
Now, that doesn't answer the question of where I got the figure 8.5% and how it's connected to any of this.
That is true. If you visit https://www.hbdstats.com/ you'll find the current debt ratio of HBD to Hive's market capitalization being 8.5%
The system is designed to ensure that HBD’s supply never exceeds 30% of Hive's market capitalization. What happens is that if HBD’s supply, essentially its market capitalization exceeds 30% of Hive's marketcap, then Hive enters into a bad debt situation because a mass conversion would significantly inflate Hive's supply and could have serious consequences for Hive's market value.
But at the moment, buying Hive means you risk losing just 8.5% of your investment value to Hive's debt. In essence, the cost of your investment is 8.5%, theoretically.
Now the fun part is that you can earn back said cost within a year of staking and curation as that yields 13.17% interest annually.
The problem however, is that like most crypto projects right now, there isn't significant revenue to justify most of these yields.
The solution is not a one side fits all, what works for a simple DeFi app would likely not work for a L1 blockchain, but both can benefit from having a stablecoin.
Why? Instead of printing the native token, print a stablecoin for yield to investors that lock up through staking or lend their assets to the protocol or network, this way, a significant rise in the price of the native asset does not lead to mass exit to dump for profits.
Think about every DeFi project you've ever known, if they all printed and issued their yield as debt tokens, their native assets would not have suffered depreciation as it did.
Of course, said stablecoin has to gain adoption for payments and other use cases and also attract deep liquidity to other stablecoins to ensure that holders and earners can leverage them as is, without wanting to convert to native assets of a protocol or network.
That said, I also imagined that we can create an auction system that allows large holders of debt tokens to sell their tokens at a discount to new holders.
Of course, the protocol or network is responsible for the incentives of the discount sale, meaning that the seller gets the full value, the buyers just earn additional static yield that makes the purchase discounted, in essence.
This means that a buyer can pay $90 but receive $100 worth of said stablecoin. The $10 is the discount and it is considered a static yield because it's assured but the condition could be that said purchase will be locked up over a period of time to which the protocol or network would have earned enough revenue and attracted fresh liquidity to handle a swap.
Having a stablecoin to push a Protocol’s debt onto whilst also having a native asset that represents the economy of the ecosystem is something that crypto projects need to explore and adopt as it is the easiest way to attain sustainability and it would not suffer the same flaws of traditional economies as it has the native store of value whose market value sets a hardcap on its debt.
When protocols earn revenue, it goes towards deepening liquidity for its store of value token and stablecoin, ensuring that its debt trends downward as the project grows.