The DeFi market has grown significantly over the years. DeFi started from scratch with nothing, and has already become a multi-billion dollar industry. People’s dependence on FinTech is apparently increasing, and with the trend of becoming even more robust, the decentralized finance industry is poised to reap immediate benefits.
Where does the money in DeFi come from?
It is now known that liquidity providers, stakeholders and lenders are being fetched with returns to park their funds. But have you ever wondered where the money comes from? Well, there are some legitimate sources of income.
Trading Fees
The fees that traders pay to trade different asset pairs is one significant income stream. However, these fees go to liquidity providers. In turn, long-playing records earn via both sustainable [trading fee] and unsustainable [incentivized rewards] mean.
However, a significant part of the rewards is financed by sign inflation and is not sustainable. Even more so since there is no external income that supports these rewards. Magik Invest’s Shivsak Huja explained the consequences on a Twitter thread:
The trading fee earned as such is part of the ‘real’ income. why? Because users pay a trading fee for the services provided by the liquidity, and the fund flow is organic. After revealing the various fee amounts charged by various platforms, Huja claimed that “none” of the said amount goes to token HODLers.
Transaction fee for services
The fee paid to a service protocol consists of the transaction fee, bridging fees, fund management fee, platform fee and other similar fees that fall under this category. This, according to Huja, is again “real money” because people paid for the platform’s service.
Borrowing rate
Defi-loans allow users to lend their crypto to someone else and earn interest on the loan. Interest from borrowers is another source of “real income” for platforms, though most of it goes to borrowers. However, a portion of it is retained by the protocol. Huja highlighted how to calculate the same, tweeted,
“The actual $ that the protocol gets to keep and share with sign holders = interest from borrowers – interest paid to borrowers.”
Word of warning
For users, it is always important to look at the bigger picture. If something is noticed irregularly, it is essential to be careful. If the revenue relies entirely on new token buyers, it’s a red flag. In addition, for example, if the protocol does not work without a reward sign, even that is not a healthy sign. Emphasize why the Astaria’s Joseph Delong explained:
Income is also just one side of the coin and does not give a complete picture of the cash flow. In addition, expenses are incurred, which must be kept in mind by investors.