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Whether the asset is productive may not matter, the most important thing is the basic product and its growth.
Original title: “The Way of DeFi丨 Are productive DeFi assets more worth holding? Data tells us the answer
Written by Lucas Campbell, Bankless Analyst Compilation: Porridge Overnight
Today, there are two main categories of DeFi tokens: productive and non-productive.
Non-productive DeFi tokens are classic “valueless” governance tokens that we all know and love. Tokens like UNI and COMP are perfect examples, although they have generated hundreds of millions of dollars in revenue since their inception. But these tokens only represent the right to participate in governance, without the right to cash flow.
On the other hand, we have also seen the emergence of productive DeFi tokens like SUSHI and AAVE. These are the holy grails of crypto capital assets because they represent the right to governance and cash flow on the chain at the same time. Unlike non-productive tokens, they allow holders to receive passive income returns in the form of agreement fees (in some cases inflation rewards).
For Aave, holders can pledge in the security module, and their funds will be used as the final collateral. In return, they receive rewards from ecosystem reserves and agreement fees. Similarly, SUSHI holders can choose to pledge their tokens and obtain xSUSHI, in order to obtain 16.6% of all expenses incurred by Sushiswap.
Intuitively, we would think that productive assets have more advantages—that is, they are always better choices for investors. But this may not be the case. In the final analysis, the most important thing for investment is market performance.
Like traditional finance, the most important thing may not be whether the token has cash flow rights. On the contrary, what drives valuation is the growth of fundamentals, such as transaction volume, revenue, and users.
This article uses some quantitative evidence to support this claim. Therefore, we will use two sets of similar agreements, one with productive assets and the other with non-productive assets.
The two sets of agreements are (1) Uniswap and Sushiswap and (2) Compound and Aave.
Comparison of apples and apples
Uniswap and Sushiswap
Of course, the key indicator to understand any DEX token (such as SUSHI and UNI) is trading volume. This is a basic indicator to measure the adoption and success of decentralized exchanges. Higher transaction volume means that the protocol generates more fee income, which will drive the value of these DeFi tokens.
In terms of transaction volume, Uniswap has an advantage. According to Token Terminal data, Uniswap’s average daily transaction volume at the beginning of 2021 is about 733 million U.S. dollars. With the launch of Uniswap V3 last month, Uniswap’s average daily transaction volume has increased. Increased to 1.4 billion U.S. dollars, doubling from the beginning of the year. In contrast, the average daily transaction volume of Sushiswap at the beginning of the year was only slightly less than US$400 million, and now it has grown to US$560 million. In the past six months, Sushiswap has grown moderately by 42%.
Transaction volume and fees are directly related, so it is not surprising that the daily income chart is the same as the transaction volume chart above. But these revenues have a key difference in the meaning of the two agreements. As mentioned earlier, SUSHI holders can pledge their tokens and obtain xSUSHI, which actually represents the right to obtain 16% of all income generated by the agreement. On the other hand, UNI does not have such income, and the income generated by the agreement goes to the liquidity provider (LP).
In addition, Uniswap’s year-to-date revenue growth rate reached 72%, and LP’s daily revenue reached $3.3 million. In contrast, Sushiswap’s revenue this year has only increased by 42%, and LP’s daily income is US$1.6 million (xSUSHI holders can earn approximately US$250,000 a day).
Note: If Uniswap adopts the same scheme as Sushiswap, then “xUNI holders” are expected to earn more than $220 million in fees this year! If the pledge rate is the same as Sushiswap, it means that UNI pledgers will get an annualized return of 7.55%, which is almost the same as Sushiswap.
In the final analysis, there is only one indicator that is important to investors: price performance. Every investor wants to bet on the fastest horse, and the market is the ultimate judge in this regard. Although UNI does not have cash flow rights, and even it is a relatively static governance ecosystem, it still outperforms SUSHI.
After some digging, we can see that this makes sense. UNI surpassed SUSHI in the key area driving DEX (transaction volume and revenue) valuation. However, we should also emphasize an important aspect that may directly affect the performance of the two this year: the token supply schedule.
Sushiswap experienced a large-scale SUSHI token unlocking in late March, and it continued to provide liquidity mining rewards for LPs on a weekly basis. Uniswap has no plan to put tokens into the market. A large number of tokens are in the hands of the team and investment institutions. This may be a key factor in SUSHI’s decline in March-April.
Having said that, both agreements have experienced a bumper year. Since the beginning of this year, the price of SUSHI tokens has risen by more than 189%, while UNI has risen by 378%.
Winner: “Valueless” Governance Token
Compound and Aave
Between Compound and Aave, there is a similar contrast relationship with Uniswap and Sushiswap. Compound represents a slower-moving lending agreement supported by US VCs, while Aave is the opposite. Its team and community have adopted a “fast-moving” route, and at the same time, it has given Aave token cash flow rights by introducing Aavenomics.
But what is the comparability of these? Similar to DEX and transaction volume, a key issue that a lending agreement needs to focus on is the growth of borrowing volume.
More borrowing volume translates into better interest rates for LPs, thereby attracting more capital, thereby increasing the borrowing capacity of the agreement. Although Compound has long been a leader, since Aave launched its liquid mining program in May 2021, Compound’s position has been surpassed.
After the launch of Aave’s liquidity mining plan, the market’s demand for lending to the agreement surged. Relevant data can be given here. At the beginning of 2021, Aave only had $500 million in outstanding debt. Compared with Compound at the time, this figure was inconspicuous (Compound’s data at that time exceeded $1.7 billion).
Since the beginning of the year, Aave’s loan volume has increased by 1700%, and its processed loans have exceeded 10 billion U.S. dollars, while Compound’s data has increased by more than 200%, and the processed loans have reached 5.3 billion U.S. dollars.
Due to the surge in borrowing, Aave has also taken the lead in daily revenue, which is good news for Aave holders.
Currently, Aave’s daily income is less than $1 million, and most of it goes to LP. At the same time, Compound’s daily income for LP is only 550,000 US dollars.
Interestingly, Aave’s revenue this year has increased by more than 360%, while Compound’s growth rate has remained flat at 2% after the recent reduction.
Let me repeat it again: For investors, the most important thing in the final analysis is the performance of the application. What investors want to see is the rise in numbers.
With the explosive growth of Aave this year, it is not surprising that it outperformed Compound. Overall, these two assets have grown by more than 123% this year, but AAVE won with an annual growth rate of 255%.
Winner: productive DeFi token
Although Uniswap (UNI) is a non-productive asset, it performs better than productive assets, and Aave, as a productive asset, outperforms its non-productive competitor Compound. What does this mean? Whether the asset is productive may not matter, the most important thing is the basic product and its growth.
If the fundamental exists and it is growing, the market will react to it, regardless of whether the token has a value accumulation mechanism.
I don’t intend to offend the holders of UNI (I am one of them), but I still want to point out that it has no cash flow rights and almost no governance at all (I admit that it has more governance activities recently).
But guess what? Uniswap is still the dominant force in the DEX field, and no other protocol can approach the transaction volume and fees it generates, as can be seen from its market share of more than 60% and the year-to-date triple-digit growth rate.
The same is true for Aave. Its borrowing volume and income are more than its rivals, and due to the good timing of the liquid mining plan, its growth this year has significantly exceeded that of Compound. I bet that this will hold true if AAVE is an unproductive, unprofitable governance token. The productive feature of AAVE is just the cherries above.
My argument is that it doesn’t really matter whether the token is productive or non-productive. The important thing is that the product fits the market and the growth rate of the product. So yes, although having a value accumulation mechanism that holders can rely on and point to is a good supplement, in the end this does not guarantee that the number will rise, nor does it mean that it will be superior to similar protocols with non-productive tokens. .
We see that this also applies to traditional finance. Amazon and other high-tech growth stocks have never paid dividends, and I have never seen anyone who actually participates in shareholder governance.
But this month, how many items did you order from Amazon?