DeFi profitability: protocol revenue vs token emissions for DEXs and lenders
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Applies TradFi-style profitability analysis to DeFi, comparing protocol revenue to token emission costs. Sushi comes out profitable, Curve pays far more in emissions than it earns, and Uniswap is a special case with no protocol fee.
Key claims
Sushi: about $11m annualized protocol revenue vs $9.9m emissions
Curve: $17m protocol revenue vs $236m emissions
Uniswap earned $156m in 90 days, all supply-side
0/ like #TradFi companies, #DeFi protocols should be profitable & generate more revenue than cost (token emissions), while accruing value to token holders馃搱
base your investment decisions on fundamental analysis!馃摎馃攳
馃У investor's guide on #DeFi profitability (0/45)馃搳馃憞
1/ #DeFi has grown to become a multi-billion-dollar industry, consisting of a multitude of highly specialized blockchains and entire ecosystems of composable, decentralized finance protocols that are built on top of various smart contract blockchains
2/ like traditional financial services companies, these protocols provide users with a broad array of financial services. #DeFi services today range from payments and non-custodial swaps to lending & on-chain derivatives and are continuously expanding
3/ but while instead of owning part of a company, investors own part of a protocol, while they don't hold shares but tokens and don鈥檛 earn dividends but rather a share in protocol revenue...
4/ ...fundamentally, the way how investors should make investment decisions does not change. In many ways, #DeFi protocols can be assessed just like #TradFi companies, for example in terms of profitability (revenue vs. cost)
5/ while there are also other, more crypto-specific factors that need to be considered (e.g. community, tokenomics, etc), fundamental analysis with regards to adoption (nr of users, volumes, TVL) and profitability are essential for making successful #DeFi & #Web3 investments
6/ I have performed a similar analysis on the substrate-based L1 chain @MoonbeamNetwork ( $GLMR ) last week:
x.com/expctchaos/status/1567469610605092865
7/ but today, we'll have an in-depth look at these new generation of finance companies, a.k.a. #DeFi protocols in the $ETH ecosystem
we will analyze:
- how the protocols generate revenue
- how much they earn (protocol fees)
- how much they pay (token emissions/cost of growth)
8/ in total, we'll have a look at 6 protocols:
DEX:
- @Uniswap - $UNI
- @SushiSwap - $SUSHI
- @CurveFinance - $CRV
Lending:
- @AaveAave - $AAVE
- @compoundfinance - $COMP
Liquid Staking:
- @LidoFinance - $LIDO
9/ but before we dive in, let's quickly clarify some terminology. Using @tokenterminal's definition, we break down revenue as follows:
- protocol revenue: share that goes to the protocol (token holders)
- supply-side revenue: share that goes to liquidity providers/stakers
10/ since we want to assess protocol profitability what we care about in the context of this analysis is hence protocol revenue
11/ on the cost side, we consider the cost of token emissions that incentivize users to interact with the protocol (e.g. liquidity mining programs) retrieved from moneyprinter.info
12/ so lets get started! As a #DEX, Uniswap generates revenue through trading fees generated by users trading on #Uniswap liquidity pools
as the only major DEX, @Uniswap does not have any protocol fees. Hence all the revenue generated is supply-side revenue & accrues to LPs
23/ in the past 90 days, #Uniswap has generated $156m in revenue, averaging $1.7m in daily revenues
14/ on the cost side stand $UNI incentives for LPs (through liquidity mining rewards). 20m $UNI tokens were distributed in #Uniswap's initial liquidity mining program to bootstrap liquidity
15/ moreover, 430m $UNI were initially allocated to the community treasury (also to potentially fund additional liquidity mining programs). However, there are currently no ongoing liquidity mining programs and no token emissions
16/ but there will be a perpetual inflation rate of 2% per year starting 4 years after TGE, ensuring continued participation and contribution to Uniswap at the expense of passive $UNI holders
17/ with the absence of protocol revenue and token emissions, $UNI is a special case. But with 20m tokens ins liquidity mining incemtives so far, one could say that since inception, Uniswap has incurred a cost of roughly $131m (at today's $UNI price) to generate $2.3bn in revenue
18/ if like in @SushiSwap's case, $UNI had a protocol fee of 0.05% (as a component of the 0.3% trading fee), the protocol (and hence token holders) would have earned $383m in protocol revenue
19/ because the fact that LPs earn the full 0.3% trading fee on Uniswap makes it more attractive for LPs, one could almost say that the sacrificed protocol revenue currently takes the incentivization role token emissions take in other protocols
20/ however, with hypothetical annualized protocol revenue of $105m (assuming 0.05% fee & based on avg. daily revenue in last 90d) vs. the cost of the future 2% annual emission that amounts to $131m at current prices...
21/ ...@Uniswap would currently not be profitable. But keep in mind that we're in a market phase with comparably low DEX volumes (and hence low revenue). If we take hypothetical protocol revenue in the past 365d as a reference ($192m), $UNI would be profitable
22/ this is different with @SushiSwap. While $SUSHI has a much lower volume ($299m vs. $7.3bn on $ETH), it is the most profitable DEX on #Ethereum (in terms of protocol revenue generated)
in the last 90 days, $SUSHI generated a total revenue of $16.3m
source: @tokenterminal
23/ due to the 0.05% protocol fee (total fee of 0.3%), 16.67% of this revenue ($2.7m) has accrued to the protocol (token holders), while $13.6m accounts for supply side revenue (liquidity providers)
source: @tokenterminal
24/ on the cost side stand $SUSHI emissions that currently amount to $27k per day. On an annualized basis this means:
- protocol revenue: $11m (based on avg. daily protocol revenue in past 90d)
- cost: $9.9m (based on current daily issuance)
@SushiSwap is a profitable business
25/ @Curvefinance, the leading decentralized stable-asset exchange on $ETH, has generated $8.4m in revenues during the past 90 days
source: @tokenterminal
26/ with 50% of revenue accruing to the protocol (token holders), @CurveFinance has earned $4.2m in protocol revenue during the past 90 days
source: @tokenterminal
27/ daily $CRV emissions on the other hand amount to $647k per day. On an annualized basis this means:
- protocol revenue: $17m
- cost: $236m
hence, @CurveFinance pays more for liquidity (through token incentives) than it earns through fee revenue
28/ picture gets slightly better if we use protocol revenue in the past 365 days as a reference ($54.2m) but not substantially as cost of emissions remains significantly higher
source: @tokenterminal
29/ next up is lending protocols. How do lending protocols like $AAVE earn money you ask?
basically a bit like Uber but with loans, not rides:
x.com/tokenterminal/status/1566025975980253186
30/ $AAVE has generated a total revenue of $33m in the past 90 days, averaging $0.37m per day
source: @tokenterminal
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