I made a post about defi hype - Is Defi Hype for real?? and what are the risks??. In that post I conclude that defi protocols would be able to exist as sustainable income generating products.

Since then I saw huge rise in prices of defi tokens with some correction later on. And that baffled me over last full week. I wanted to do some analysis of returns and their sustainability. This post is about that.

I chose Balancer for my analysis as it is much more versatile than all other defi platforms. Below picture shows the evolution of Total Value Locked (TVL) in Balancer protocol:

It has increased but lately not showing as good growth as growth of all the defi protocols as can be seen in below picture:

From these two pictures it is easy to understand that DEFI sector is growing but there is huge churning among protocols depending on the rewards offered and innovations introduced.

In case of Balancer, users can create their own liquidity pools and also provide liquidity to any existing pool. Liquidity providers will mine BAL tokens. Below is what BAL white paper says about BAL distribution to liquidity providers:

For more details one can refer to Proposing Balancer Liquidity Mining

Since there is constant BAL Token mining reward per week so if TVL increases then token prices has to increase to maintain same level of mining rewards in $ terms. If BAL token price remain constant or even decreases then defi mining could reduce significantly. Below picture shows price evolution for BAL over time, which is continuously decresing:

I did reward analysis for two pools of Balancer- Largest Pool and Average Pool.

Largest Pool

0x72Cd8f4504941Bf8c5a21d1Fd83A96499FD71d2C . This pool currently has ~20mn$ liquidity.

For this I collected the trx data from etherscan and analyzed that. The results are shown in below pictures in linear and log scale respectively:

We can clearly see that the TVL in the pool is increasing over time and interest per year (IPY) is decreasing.

Average Pool

0x9b208194acc0a8ccb2a8dcafeacfbb7dcc093f81 . This pool currently has ~1mn$ liquidity.

For this also I collected the trx data from etherscan and analyzed that. The results are shown in below picture in linear and log scale respectively:

Here also on average the liquidity has increased over time but IPY is decreasing.

Observations & Conclusions

1. The TVL is increasing
2. BAL price is decreasing
3. IPY on average is decreasing.
4. Largest pool IPY has decreased 4500% to 50% while its TVL increased from 1mn$ to 20mn$

Looking at trends - it is possible that there will be more reduction in IPY as TVL increases and space become more mature. But in the short term the users will be churning out from one protocol to another in search of higher returns.

I will do similar analysis for few other dominant protocols to see the trends and try to pick protocols that are still offering hype level returns like 1000% as they were in the beginning of defi hype.

The risk of change in prices of tokens locked in pool are not considered in the analysis. This risk does not exist for those who provide liquidity in stable coins. For other coins if defi space keeps growing then reduction in supply of tokens, due to locking in the protocol, would help push the prices upward. This is already visible in slight altcoins rally supported by DEFI hype. And that can further increase the returns. However, in case of any tail event that suddenly crashes crypto token prices the prices can correct substantially wiping out any returns from mining and even causing substantial losses.

Happy Defi Mining.