DeFi’s Dirty Little Secret: Why Token-dependent Yields are Doomed to Fail

TL;DR — DeFi protocols dependent on tokens to generate the majority of their yield are doomed to fail. Bonsai Strike generates real, sustainable, DeFi yield.

Decentralized finance, or DeFi, has gained popularity in recent years as an alternative to traditional finance. One of the key attractions of DeFi are the high yields that users can earn by lending or staking their crypto assets on various protocols. However, these yields are not as sustainable as they seem.

Most of the juicy yields in DeFi are generated through token incentivization. This means that DeFi protocols mint their own tokens and distribute them to users who put their assets in the protocol. For example, when Compound Finance first kicked off the DeFi Summer of 2020, the annual percentage yields (APYs) were in the triple digits, as they were distributing their tokens to users who deposited their funds with them, and their token price was high. Many DeFi protocols subsequently used this method to bootstrap their TVL. However, this approach is not sustainable in the long term.

Today, lending USD on Compound earns only around 3%, and its token, which at one point was worth $800, is now only worth $40. Many other DeFi protocols are in this same state. The reason for this is that DeFi farmers have to sell the tokens to realize the high APY, which adds a continuous selling pressure to the market. Eventually, the tokens run out or the price of the tokens drops due to being inflated away and sold off, and the protocol drops back to its base yields.

To get an idea of these base yields, let’s examine ETH on the major DeFi primitives. Lending and borrowing rates for ETH are around 2% APR on AAVE and staking ETH yields 4–5% APR. LPing ETH/USDC on Uniswap provides between 5–13% APR depending on trading volume (but comes with its own set of risks, which we will cover in a later post).

On the other hand, selling a 10-delta call option on ETH earns between 15–25% APR (depending on volatility in the current market). This yield does not rely on any form of token incentive, as it comes from the price you are paid for selling a call option contract. Options are a tried and tested instrument in traditional financial markets, being used to trade billions of dollars in value across all kinds of assets daily for hundreds of years, and are contracts which give the buyer the right to buy or sell an asset at a predetermined price.

While it is possible to sell 10-delta calls yourself using exchanges such as Deribit, their interfaces can be confusing to amateur traders, and managing your margin is another can of worms to deal with. This is where Bonsai Strike comes in. Bonsai Strike removes all the hassle of dealing with arcane interfaces, margining, counterparty risk, and automates the process of selling these 10-delta call options for yield.

In summary, DeFi yields that are dependent on tokens to generate the majority of their yield are doomed to fail sooner or later. Selling options generates real, sustainable, and most importantly, outsized yield without the need for token incentives, and Bonsai Strike makes it easy for anyone to sell options without the hassle of dealing with confusing interfaces and managing margins.

If you enjoyed this article, drop us a follow as we continue to explore what options are and how you can use them to grow your coin holdings. In our next post, we will explain why you should stop providing liquidity on your favorite decentralized exchange (DEX) and start selling options through Bonsai Strike instead.