The year 2022 will be seen as a pivotal year for web3 and DeFi. It will be looked back on as the year that web3 left behind most of its scams and ponzi based systems, and moved into real value generation with sound token models.

At LSD, we’re working to accelerate that move to provide real value for a real economy on web3. We think this is the next billion dollar opportunity in DeFi.

But first, how did we get here, and why did it take so long?

In February 2014 MtGox exchange abruptly shut down operations and declared bankruptcy. Tens of thousands of bitcoin early adopters lost a total of over 100,000 BTC to a hack, a total loss of $3 billion today’s prices. Bitcoin’s reputation was hurt, and many of those users swore off bitcoin.

The bitcoin community responded appropriately. “Not your keys, not your crypto” became a popular catch phrase to encourage safe handling of private keys. New exchanges with better security emerged. Cold storage techniques improved, and some exchanges deployed proof of custody systems. While many exchanges have been hacked since MtGox, none have reached the scale of the MtGox collapse. The temporary setback was a net positive for bitcoin.

A similar thing has happened eight years later in DeFi. The collapse of the so-called stablecoin UST and the associated ponzi scheme LUNA erased over $50 billion in market cap over a one week period, $18 billion of it on the stablecoin side. This massive ponzi promised too-good-to-be-true yield of 20%. The collapse damaged DeFi’s reputation, hurt investors, and fed into concern troll narratives. The DeFi community should respond appropriately.

2022 will be a turning point for DeFi protocols, as investors and community members will be more skeptical of high returns and consider tail risk more carefully. Protocols and services offering conventional returns and realistic yields will be viable. The end of the bull market has sent low risk yields below 2%, making room for investment opportunities in the 5-10% range to compete.

Every whitepaper and protocol project dedicates a section to “Tokenomics.” Tokenomics is all largely bunk, and investors will wise up to this, and the complicated schemes will go away. The majority of tokenomics schemes are a way to return value to token purchasers in an obfuscated way. MakerDAO, rather than directly sending stability fees to MKR token holders, instead grants them access to surplus fee auctions. JPEGd allows holders of JPEG token access to NFT auctions. Chainlink’s LINK token is used for accessing the protocol, in theory increasing demand for the token and consequently its price.

These schemes are bad for two reasons[1]. First, they are overly confusing and make it difficult for investors to understand what their ROI is. What is the value of being able to participate in surplus auctions? It depends on complicated game theory, and may or may not be related to the overall success of the MakerDAO protocol. Second, they are non-standard, preventing a liquid capital market from emerging around them. Imagine if every stock on the NASDAQ had “Stock-e-nomics” to provide value to its shares.

Investors are growing tired of complicated tokenomics, and we will return to the logical method of returning value to investors: ROI.

Going back four hundred years to the Dutch East India Company, the investor-company relationship has been defined by ROI, and the associated risk. An investor invests capital in an enterprise, and in return he expects a profitable return on his capital. The more risky the endeavor, the higher the potential payoff. DeFi has a lot of potential, but it will not reinvent the basics of economics.

We can assume that as the DeFi ecosystem matures, protocols will standardize on a simple way to distribute profits to investors, and measure their own success: how much capital was invested in the company, and did it produce a profit?

This means a return to PE measurements and, consequently, tokens that generate direct yield for services rendered.

Token projects are emerging every week with sound tokenomics based on real yield. These projects pay token holders on a daily or weekly basis a proportion of the fees generated by their platforms. A couple examples are LooksRare, which pays out ETH to holders of the LOOKS token twice a day, and GMX, which pays out ETH to holders of the GMX and GLP tokens once a week. Both these platforms have token mechanics to encourage platform engagement, but, critically, these token mechanics are complementary to the distribution of real yield. The tokenomics are a delicious side dish to the main course of real yield.

These types of tokens are the future. We should also note their superiority to traditional finance models: a traditional dividend model pays out at most four times a year, but in many cases never at all. When was the last time Amazon paid out “real yield” or any yield at all?

While the move to “real yield” is an encouraging trend, there are problems to be solved. First, real yield payouts are associated with a project’s governance token. These governance tokens have significant volatility, which means anyone seeking to get steady real yield will have their gains overshadowed by 2x up and down price movements. Second, real yield payouts take place over many different protocols, and on many different chains and L2’s. It is difficult to compare and shop for reliable real yield. Finally, pricing the risk on real yield is difficult. How do we compare 1 ETH of real yield from LooksRare to 1 ETH of real yield from GMX?

We are building LSD to solve all these problems. Here’s a quick overview of our approach.

1. Separate yield from the generator. Our core protocol is a way to denominate, transfer, and sell blocks of future yield. Unlike existing protocols, LSD specializes in tokens where the yield is paid in a different token than the underlying generator (for example LOOKS generating ETH). Also, again unlike existing protocols, LSD is asynchronous and does not have a concept of “terms”.

2. Concentrate yield markets on L1. More and more applications are moving to L2 protocols, or app chain protocols like Cosmos. This makes sense: the application level details of a perpetuals exchange do not need to be on an L1. However, trading real yield is different. Real yield transactions are low volume, and it is important to compare to other yield opportunities, and to be able to compose them with other DeFi primitives. For this reason, LSD works on L1 Ethereum mainnet, and provides bridges to real yield generated on L2’s and appchains.

3. Price future discount using market forces. Real yield across apps is not fungible. The real yield from one source may be more risky than another: perhaps the app is facing new competition, or maybe it is seeing a surge in demand from a new feature. A real yield protocol needs to provide pricing. LSD solves this problem with a unique AMM design that adjusts the future discount based on available liquidity and locked real yield on a per-app basis.

We are launching our real yield protocol soon, and we are excited to help web3 move out of the woods of ponzinomics and into the wide world of delivering real value.

If you would like to learn more about LSD or partner with us to sell your future real yield, reach out to us on Twitter or Discord.

The year 2022 will be seen as a pivotal year for web3 and DeFi. It will be looked back on as the year that web3 left behind most of its scams and ponzi based systems, and moved into real value generation with sound token models.

At LSD, we’re working to accelerate that move to provide real value for a real economy on web3. We think this is the next billion dollar opportunity in DeFi.

But first, how did we get here, and why did it take so long?

In February 2014 MtGox exchange abruptly shut down operations and declared bankruptcy. Tens of thousands of bitcoin early adopters lost a total of over 100,000 BTC to a hack, a total loss of $3 billion today’s prices. Bitcoin’s reputation was hurt, and many of those users swore off bitcoin.

The bitcoin community responded appropriately. “Not your keys, not your crypto” became a popular catch phrase to encourage safe handling of private keys. New exchanges with better security emerged. Cold storage techniques improved, and some exchanges deployed proof of custody systems. While many exchanges have been hacked since MtGox, none have reached the scale of the MtGox collapse. The temporary setback was a net positive for bitcoin.

A similar thing has happened eight years later in DeFi. The collapse of the so-called stablecoin UST and the associated ponzi scheme LUNA erased over $50 billion in market cap over a one week period, $18 billion of it on the stablecoin side. This massive ponzi promised too-good-to-be-true yield of 20%. The collapse damaged DeFi’s reputation, hurt investors, and fed into concern troll narratives. The DeFi community should respond appropriately.

2022 will be a turning point for DeFi protocols, as investors and community members will be more skeptical of high returns and consider tail risk more carefully. Protocols and services offering conventional returns and realistic yields will be viable. The end of the bull market has sent low risk yields below 2%, making room for investment opportunities in the 5-10% range to compete.

Every whitepaper and protocol project dedicates a section to “Tokenomics.” Tokenomics is all largely bunk, and investors will wise up to this, and the complicated schemes will go away. The majority of tokenomics schemes are a way to return value to token purchasers in an obfuscated way. MakerDAO, rather than directly sending stability fees to MKR token holders, instead grants them access to surplus fee auctions. JPEGd allows holders of JPEG token access to NFT auctions. Chainlink’s LINK token is used for accessing the protocol, in theory increasing demand for the token and consequently its price.

These schemes are bad for two reasons[1]. First, they are overly confusing and make it difficult for investors to understand what their ROI is. What is the value of being able to participate in surplus auctions? It depends on complicated game theory, and may or may not be related to the overall success of the MakerDAO protocol. Second, they are non-standard, preventing a liquid capital market from emerging around them. Imagine if every stock on the NASDAQ had “Stock-e-nomics” to provide value to its shares.

Investors are growing tired of complicated tokenomics, and we will return to the logical method of returning value to investors: ROI.

Going back four hundred years to the Dutch East India Company, the investor-company relationship has been defined by ROI, and the associated risk. An investor invests capital in an enterprise, and in return he expects a profitable return on his capital. The more risky the endeavor, the higher the potential payoff. DeFi has a lot of potential, but it will not reinvent the basics of economics.

We can assume that as the DeFi ecosystem matures, protocols will standardize on a simple way to distribute profits to investors, and measure their own success: how much capital was invested in the company, and did it produce a profit?

This means a return to PE measurements and, consequently, tokens that generate direct yield for services rendered.

Token projects are emerging every week with sound tokenomics based on real yield. These projects pay token holders on a daily or weekly basis a proportion of the fees generated by their platforms. A couple examples are LooksRare, which pays out ETH to holders of the LOOKS token twice a day, and GMX, which pays out ETH to holders of the GMX and GLP tokens once a week. Both these platforms have token mechanics to encourage platform engagement, but, critically, these token mechanics are complementary to the distribution of real yield. The tokenomics are a delicious side dish to the main course of real yield.

These types of tokens are the future. We should also note their superiority to traditional finance models: a traditional dividend model pays out at most four times a year, but in many cases never at all. When was the last time Amazon paid out “real yield” or any yield at all?

While the move to “real yield” is an encouraging trend, there are problems to be solved. First, real yield payouts are associated with a project’s governance token. These governance tokens have significant volatility, which means anyone seeking to get steady real yield will have their gains overshadowed by 2x up and down price movements. Second, real yield payouts take place over many different protocols, and on many different chains and L2’s. It is difficult to compare and shop for reliable real yield. Finally, pricing the risk on real yield is difficult. How do we compare 1 ETH of real yield from LooksRare to 1 ETH of real yield from GMX?

We are building LSD to solve all these problems. Here’s a quick overview of our approach.

1. Separate yield from the generator. Our core protocol is a way to denominate, transfer, and sell blocks of future yield. Unlike existing protocols, LSD specializes in tokens where the yield is paid in a different token than the underlying generator (for example LOOKS generating ETH). Also, again unlike existing protocols, LSD is asynchronous and does not have a concept of “terms”.

2. Concentrate yield markets on L1. More and more applications are moving to L2 protocols, or app chain protocols like Cosmos. This makes sense: the application level details of a perpetuals exchange do not need to be on an L1. However, trading real yield is different. Real yield transactions are low volume, and it is important to compare to other yield opportunities, and to be able to compose them with other DeFi primitives. For this reason, LSD works on L1 Ethereum mainnet, and provides bridges to real yield generated on L2’s and appchains.

3. Price future discount using market forces. Real yield across apps is not fungible. The real yield from one source may be more risky than another: perhaps the app is facing new competition, or maybe it is seeing a surge in demand from a new feature. A real yield protocol needs to provide pricing. LSD solves this problem with a unique AMM design that adjusts the future discount based on available liquidity and locked real yield on a per-app basis.

We are launching our real yield protocol soon, and we are excited to help web3 move out of the woods of ponzinomics and into the wide world of delivering real value.

If you would like to learn more about LSD or partner with us to sell your future real yield, reach out to us on Twitter or Discord.