Thread by @expctchaos

0/ like #TradFi companies, #DeFi protocols should be profitable & generate more revenue than cost (token emissions), while accruing value to token holders📈

base your investment decisions on fundamental analysis!📚🔍

🧵 investor's guide on #DeFi profitability (0/45)📊👇

1/ #DeFi has grown to become a multi-billion-dollar industry, consisting of a multitude of highly specialized blockchains and entire ecosystems of composable, decentralized finance protocols that are built on top of various smart contract blockchains

2/ like traditional financial services companies, these protocols provide users with a broad array of financial services. #DeFi services today range from payments and non-custodial swaps to lending & on-chain derivatives and are continuously expanding

3/ but while instead of owning part of a company, investors own part of a protocol, while they don't hold shares but tokens and don’t earn dividends but rather a share in protocol revenue...

4/ ...fundamentally, the way how investors should make investment decisions does not change. In many ways, #DeFi protocols can be assessed just like #TradFi companies, for example in terms of profitability (revenue vs. cost)

5/ while there are also other, more crypto-specific factors that need to be considered (e.g. community, tokenomics, etc), fundamental analysis with regards to adoption (nr of users, volumes, TVL) and profitability are essential for making successful #DeFi & #Web3 investments

6/ I have performed a similar analysis on the substrate-based L1 chain @MoonbeamNetwork ( $GLMR ) last week:

https://twitter.com/expctchaos/status/1567469610605092865

7/ but today, we'll have an in-depth look at these new generation of finance companies, a.k.a. #DeFi protocols in the $ETH ecosystem

we will analyze:

- how the protocols generate revenue
- how much they earn (protocol fees)
- how much they pay (token emissions/cost of growth)

8/ in total, we'll have a look at 6 protocols:

DEX:

- @Uniswap - $UNI

- @SushiSwap - $SUSHI

- @CurveFinance - $CRV

Lending:

- @AaveAave - $AAVE

- @compoundfinance - $COMP

Liquid Staking:

- @LidoFinance - $LIDO

9/ but before we dive in, let's quickly clarify some terminology. Using @tokenterminal's definition, we break down revenue as follows:

- protocol revenue: share that goes to the protocol (token holders)

- supply-side revenue: share that goes to liquidity providers/stakers

10/ since we want to assess protocol profitability what we care about in the context of this analysis is hence protocol revenue

11/ on the cost side, we consider the cost of token emissions that incentivize users to interact with the protocol (e.g. liquidity mining programs) retrieved from moneyprinter.info

12/ so lets get started! As a #DEX, Uniswap generates revenue through trading fees generated by users trading on #Uniswap liquidity pools

as the only major DEX, @Uniswap does not have any protocol fees. Hence all the revenue generated is supply-side revenue & accrues to LPs

23/ in the past 90 days, #Uniswap has generated $156m in revenue, averaging $1.7m in daily revenues

14/ on the cost side stand $UNI incentives for LPs (through liquidity mining rewards). 20m $UNI tokens were distributed in #Uniswap's initial liquidity mining program to bootstrap liquidity

15/ moreover, 430m $UNI were initially allocated to the community treasury (also to potentially fund additional liquidity mining programs). However, there are currently no ongoing liquidity mining programs and no token emissions

16/ but there will be a perpetual inflation rate of 2% per year starting 4 years after TGE, ensuring continued participation and contribution to Uniswap at the expense of passive $UNI holders

17/ with the absence of protocol revenue and token emissions, $UNI is a special case. But with 20m tokens ins liquidity mining incemtives so far, one could say that since inception, Uniswap has incurred a cost of roughly $131m (at today's $UNI price) to generate $2.3bn in revenue

18/ if like in @SushiSwap's case, $UNI had a protocol fee of 0.05% (as a component of the 0.3% trading fee), the protocol (and hence token holders) would have earned $383m in protocol revenue

19/ because the fact that LPs earn the full 0.3% trading fee on Uniswap makes it more attractive for LPs, one could almost say that the sacrificed protocol revenue currently takes the incentivization role token emissions take in other protocols

20/ however, with hypothetical annualized protocol revenue of $105m (assuming 0.05% fee & based on avg. daily revenue in last 90d) vs. the cost of the future 2% annual emission that amounts to $131m at current prices...

21/ ...@Uniswap would currently not be profitable. But keep in mind that we're in a market phase with comparably low DEX volumes (and hence low revenue). If we take hypothetical protocol revenue in the past 365d as a reference ($192m), $UNI would be profitable

22/ this is different with @SushiSwap. While $SUSHI has a much lower volume ($299m vs. $7.3bn on $ETH), it is the most profitable DEX on #Ethereum (in terms of protocol revenue generated)

in the last 90 days, $SUSHI generated a total revenue of $16.3m

source: @tokenterminal

23/ due to the 0.05% protocol fee (total fee of 0.3%), 16.67% of this revenue ($2.7m) has accrued to the protocol (token holders), while $13.6m accounts for supply side revenue (liquidity providers)

source: @tokenterminal

24/ on the cost side stand $SUSHI emissions that currently amount to $27k per day. On an annualized basis this means:

- protocol revenue: $11m (based on avg. daily protocol revenue in past 90d)

- cost: $9.9m (based on current daily issuance)

@SushiSwap is a profitable business

25/ @Curvefinance, the leading decentralized stable-asset exchange on $ETH, has generated $8.4m in revenues during the past 90 days

source: @tokenterminal

26/ with 50% of revenue accruing to the protocol (token holders), @CurveFinance has earned $4.2m in protocol revenue during the past 90 days

source: @tokenterminal

27/ daily $CRV emissions on the other hand amount to $647k per day. On an annualized basis this means:

- protocol revenue: $17m

- cost: $236m

hence, @CurveFinance pays more for liquidity (through token incentives) than it earns through fee revenue

28/ picture gets slightly better if we use protocol revenue in the past 365 days as a reference ($54.2m) but not substantially as cost of emissions remains significantly higher

source: @tokenterminal

29/ next up is lending protocols. How do lending protocols like $AAVE earn money you ask?

basically a bit like Uber but with loans, not rides:

https://twitter.com/tokenterminal/status/1566025975980253186

30/ $AAVE has generated a total revenue of $33m in the past 90 days, averaging $0.37m per day

source: @tokenterminal

31/ with approximately 12% of revenue accruing to the protocol, $AAVE has earned roughly 4m in protocol revenue over the past 90 days and $33m in the past 365 days

source: @tokenterminal

32/ considering daily $AAVE issuance of $101k per day, $AAVE pays $37m in incentives to LPs on an annual basis

consequently, the annual cost is higher than the revenues that are currently being generated on an annual basis

33/ $COMP follows the same business model as $AAVE

over the past 90 days $COMP has earned a total of $5.5m in revenues and $173m over the past 365 days

source: @tokenterminal

34/ with approximately 11% of revenue going to the protocol, protocol revenue amounts to $588k in the past 90 days and $19.4m in the past 365 days

source: @tokenterminal

35/ daily $COMP issuance on the other hand, amounts to $430k, or $157m on an annualized basis. Consequently we have:

- protocol revenue: $19.4m p.a.

- cost: $157m p.a.

consequently issuance cost is higher than protocol revenue

36/ last but not least we have $LIDO. @LidoFinance generates revenue by charging a fee on the staking rewards earned by depositors

37/ this fee is currently 10% & is being split evenly between paying node operators and slashing insurance. This means that the protocol's revenue is driven by the fee charged, the amount of assets staked, the yields earned by validators & if measured in USD, the price of $ETH

38/ over the past 90 days $LIDO has generated $65m in revenue and $308m over the past 365 days

source: @tokenterminal

39/ 90% of staking rewards generated on @LidoFinance are supply-side revenue that accrues to the stakers

with the fee at 10% $LIDO has generated protocol revenue of $6.5m in the past 90 days and $31m in the past 365 days

source: @tokenterminal

40/ this contrasts a daily $LIDO issuance amounting to $210k or $77m on an annual basis. Hence, cost of $LIDO emission is higher than the protocol revenue generated on an annual basis

41/ profitability of #DeFi protocols is important consider for investors because a functioning business model is essential for sustainable long-term success of a protocol. Like companies, protocols should generate more revenue than they incur cost...

42/ ...and let token holders participate in the protocol's success through value accrual mechanisms based on the generated protocol revenue

43/ in conclusion of our analysis, we see that profitability varies strongly and that many protocols have higher emission costs than protocol revenue

44/ hence, to become sustainable in the long-term, more revenue must be generated. This can happen in two ways:

- increased adoption of current services leading to more revenue

- expansion of business model and build new revenue streams

45/ currently, as evidenced by the planned stablecoin implementations over at @AaveAave and @CurveFinance, many #DeFi protocols are using the current bear market to achieve the latter

for more info, see:

https://twitter.com/expctchaos/status/1568627041561620482

thanks for reading if you made it until the end! If you liked this thread, please support me by following & sharing the first post of the thread 🥰✨