Yields: The Galapagos Syndrome Of Cryptofinance

TL;DR

This paper analyzes yield-generating structures in cryptofinance, highlighting how decentralized and centralized platforms create returns through leverage, market segmentation, and innovative financial products, despite most crypto-assets lacking intrinsic yields.

Contribution

It provides a comprehensive analysis of yield mechanisms in cryptofinance, connecting them to leverage and market segmentation, and discusses the unique innovations developed outside traditional finance.

Findings

Cryptofinance generates yields through lending, liquidity provision, and staking.

Market disparities lead to different yield opportunities across platforms.

Innovations like stablecoins and perpetuals emerged independently from legacy finance.

Abstract

In this chapter structures that generate yield in cryptofinance will be analyzed and related to leverage. While the majority of crypto-assets do not have intrinsic yields in and of themselves, similar to cash holdings of fiat currency, revolutionary innovation based on smart contracts, which enable decentralised finance, does generate return. Examples include lending or providing liquidity to an automated market maker on a decentralised exchange, as well as performing block formation in a proof of stake blockchain. On centralised exchanges, perpetual and finite duration futures can trade at a premium or discount to the spot market for extended periods with one side of the transaction earning a yield. Disparities in yield exist between products and venues as a result of market segmentation and risk profile differences. Cryptofinance was initially shunned by legacy finance and developed independently. This led to curious and imaginative adaptions, reminiscent of Darwin's finches, including stable coins for dollar transfers, perpetuals for leverage, and a new class of exchanges for trading and investment.