Bankless: Which DeFi protocols have been profitable in the past 6 months?

Preface

One clear theme about the 2022 bear market is the growing focus on the fundamentals of cryptocurrencies across the board, especially DeFi .

As prices fall, unbridled spending habits coupled with the lack of a sustainable business model become a concern. While many blue chip DeFi protocols have been praised for their ability to generate revenue, not many people are paying attention to whether they are actually making money.

Let’s take a look at the past 6 months’ profitability for 6 of the market’s leading blue chip protocols, digging into the broader implications: Uniswap, Aave, Compound, Maker, Maple, and Lido.

Defining Profitability

Before we begin our analysis, it is necessary to clearly define whether a protocol is profitable or not. We lack a clear consensus on profitability.

While all DeFi protocols generate revenue to compensate participants, such as lenders and liquidity providers, for the risks they incur, very little of the value captured by the protocols themselves is captured in these revenues, without exception.

Furthermore, there is often little discussion of the initial costs of generating this revenue. In many business models, protocols “need to spend money before they can make money.” The largest and most common business expense is token distribution, regardless of the business.

Tokens are a powerful tool that can be used to incentivize users of various behaviors and are most widely used in DeFi to incentivize the use of liquidity mining.

Our analysis will also keep these concepts in mind, and we will use the definition of profitability proposed in the article “Comparing Profitability of DEXs” discussing Fight Club.

In the article, the author defines profitability (net income) as follows: Net income = agreement income - distribution

While the authors refer to protocol revenue as taking into account fees incurred by token holders, we will expand this definition to include all DAO revenue, whether it is revenue from token holders that accumulates the native treasury or revenue used for other purposes.

Distribution refers to tokens distributed to participants in the protocol, such as through liquidity mining or promotional programs. This definition does not include team or investor token unlocking.

While it does not capture all operational expenses, such as compensation, this definition gives us a good idea of ​​how profitable it is for a particular DAO to run a protocol.

Profitability

Along with looking at net revenue, we also cover profitability, a valuable metric that allows us to see how efficiently each protocol captures the value of the portion of gross revenue it generates, allowing for a more nuanced comparison of profitability.

We will use two ratios, namely "Agreement Profit Ratio" and "Profit Ratio"

The protocol profit margin measures the protocol’s revenue rate, or what percentage of the total revenue generated goes to the DAO. The protocol profit margin is calculated by dividing protocol revenue by total revenue.

Results Table

**Indicators for the past 6 months (January 27 - July 27)**

Profitable Agreement

Maker

Maker Protocol Revenue

Maker generates revenue by charging interest to borrowers (called a stability fee) and by taking a share of protocol settlements.

During this 6-month period, the protocol generated a total revenue of $28.61 million, all of which went to the DAO. Because Maker has no token distribution, this allows the protocol to have a profit margin and margin of 100%. Nonetheless, it is worth noting that Maker and other DAOs are watching their operating expenses, even though the protocol has remained profitable during this period.

Unprofitable Agreement

Aave

Aave Protocol Revenue

Aave generates revenue by taking a commission on interest paid to lenders on the platform.

Over the past six months, Aave has generated a total revenue of $101.41 million, of which $90.48 million was paid to lenders (supply-side revenue) and $10.92 million flowed to the protocol, bringing its protocol profit margin to 10.8%.

However, Aave spent $74.89 million on token distribution to incentivize users, causing the protocol to lose $63.96 million.

Compound

Compound Protocol Revenue

Compound generates revenue by taking a commission that is used to pay interest to lenders (although it is currently used to buffer the protocol reserves).

Compound generated $42.31 million in revenue, of which $4.8 million went to the protocol. The protocol’s profit margin was 11.3% — 0.5 percentage points higher than its main competitor on Aave.

Despite the higher profit margin, Compound still lost $21.36 million in the past 6 months (although smaller than Aave’s loss).

Maple Finance

Maple Finance Protocol Revenue

Maple generates revenue from loan origination fees on loans issued by liquidity pool representatives, which are entities that manage the platform’s liquidity pools. Currently, the fee is 0.99%, of which 0.66% goes to the protocol (split evenly between the DAO treasury and xMPL stakers) and the remaining 0.33% goes to the liquidity pool representatives.

In the past six months, Maple generated $2.15 million in protocol revenue, while spending $25.74 million on MPL incentives to encourage users to deposit in various liquidity pools, which caused Maple to lose $23.58 million during this period.

Lido Finance

Lido Agreement Revenue

Lido generates revenue by taking 10% of the staking rewards earned by validators on the Beacon chain as a commission.

Lido generated $15.64 million in protocol revenue in this regard, but distributed a total of $48.98 million in LDO by incentivizing liquidity on exchanges such as Curve and Balancer, as well as through Voitum bribes and protocol promotion programs.

That means Lido lost $33.34 million during this period.

Potentially Profitable Agreement

Uniswap

Uniswap Supply-Side Revenue

Uniswap has brought in $458.5 million in revenue to liquidity providers in the past six months. However, no revenue has flowed to the protocol because Uniswap has not yet turned on the "fee switch", after which the DAO will earn 10%-25% of the liquidity pool LP fees.

It is not yet known what impact the fee switch will have on Uniswap’s liquidity, and reducing fees for liquidity providers may cause them to migrate to other platforms. This may hurt trade execution and reduce trading volume on competitive DEX exchanges.

Uniswap’s saving grace is that it has spent zero on token distribution over the past 6 months, making it a very likely profitable protocol if the fees were turned on.

Summarize

We can see that MakerDAO is the only one of the 6 protocols that is profitable based on our definition.

This is understandable. The vast majority of early-stage startups are not profitable—and DeFi protocols are certainly early-stage projects.

In reality, the above protocols and many others are simply following the Web2 playbook and operating at a loss to support growth, a strategy that has proven very successful for various startups and companies.

Nonetheless, issuing tokens is of course a fundamentally unsustainable strategy. Money is not infinite, and liquidity mining schemes are highly reflexive, becoming less effective and efficient the longer they last due to the selling pressure placed on the issued tokens. Furthermore, selling pressure on issued tokens often deprives the protocol of its ability to invest in itself, with DAO treasuries often concentrated in the protocol’s native token.

Perhaps more worrisome than the lack of profitability is the extremely narrow profit margins on these blue-chip deals.

For example, the profit margins of lenders such as Aave, Compound and Maple are only 10.8%, 11.3% and 6.7% respectively. Lido has a market share of 89.9% in the field of liquidity pledge, and its profit margin is only 10%.

Given the fierce competition in the DeFi stranglehold, these protocols cannot really increase their profit margins, otherwise they will put themselves at risk of losing market share or being forked.

If these protocols are to achieve profitability, the real solution may be to think outside the box and create higher-yield profit streams.

This is of course challenging, and we are seeing DAOs taking the first steps down this path, such as Aave issuing its own GHO stablecoin, which has a similar business model to Maker (which has high profit margins that it is proud of and has not relied on token incentives to date).

Original link: https://newsletter.banklesshq.com/p/which-defi-protocols-are-profitable