The DEX Brief No. 14

Top of Mind at Shipyard:

The latest hashtag in DeFi is #RealYield. While a concrete definition is still in flux, there seems to be an emerging consensus that it refers to DeFi protocol yields paid out in ETH (or another blue-chip coin) rather than the protocol’s own governance token. While an improvement from inflated ponzi yields, fueled by the unsustainable emission of protocols’ native tokens, this emerging definition presents a lost opportunity. The problem with reported yields isn’t that they’re paid out in a token that yield farmers dump. The real problem is that yields are typically reported as a revenue number that disguises costs (specifically impermanent loss), which misrepresents both LPs’ earning potential and a protocol’s financial health. At the end of the day, the point is profits. #RealYield fails to convey this. 

Strangely, DeFi doesn’t even have a term for LP profits net of cost–how strange is that?! The reason is straightforward: most DeFi yields originate from Constant Product Market Makers (CPMMs) and, unfortunately, CPMMs often aren't profitable net of impermanent loss. Fortunately, impermanent loss is not an inherent property of all AMMs, just CPMMs. There are plenty of AMM designs outside of CPMMs that don’t experience impermanent loss at all (though that doesn’t eliminate all other types of potential losses). It’s a shame that leading AMM platforms seem to be more interested in cross-chain and vertical integration into wallets than innovating on their core competency to ensure sustainable success. 

Shipyard Insights: 

• Profit Yield: The Real LP Standard: The conversation over real yield is a step in the right direction. But for DeFi to reach peak capital efficiency, LP yields must be based on profit, not misleading revenue figures. Better benchmarking, better LP allocation choices.

• DeFi abandons Ponzi farms for ‘real yield’: Cointelegraph demystifies the emerging concept of “real yield”, with Mark weighing in on what the term really encompasses and why it matters. 

• What Traders Need to Know About DEXs: This episode of WTF, Crypto is a little different. Shipyard’s Chief of Staff Angie Malltezi joins Mark and flips the script to get his insights on all things DEXs and how traders (and liquidity providers) can get the most out of them. 

• ‍Solving the Usability Problem with Web3: In this episode of WTF, Crypto, Omer Sadika of Odsy network dives into the biggest usability issues Web3 users face, why they also make things difficult for builders, and how we can solve these issues without compromising decentralization or security.

DEX Headlines That Caught our Attention:

• SushiSwap considers new DAO structure that uses non-transferable “shares”.
• Uniswap V3 to deploy on privacy-focused ZK rollup zkSync. 
• Uniswap Labs raises $165M Series B; shifts attention to NFTs and Web3.

What We're Reading:

Impermanent loss is seemingly ubiquitous in DEX liquidity pools (at least those that utilize a CPMM). There are different ways to combat impermanent loss (including the use of different AMM designs) and one promising approach is a new method called directional liquidity pooling. This piece explains how this method changes the traditional liquidity pool model by allowing LPs to choose a price direction and earn additional returns if they choose correctly. This innovation notably broadens the options available to LPs, as they’re no longer locked into the standard sideways market bet.

‍Clipper Updates: 

• Adventure 3: Building Clippertopia: Clipper is back with another Adventure, this time the focus is on coming together to create a lasting and prosperous pirate nation: Clippertopia! This means more storytelling, more world building, and more rewards. The Adventure officially kicks off Monday, November 14th and participation is capped at 35,000 pirates, so be sure to secure your spot ASAP. Check out the blog post for details and links to register.