Yield on DXS
Yield on DXS - will it grow?
Let’s start with a quick update on the status of liquidity fundraising:
- The liquidity pool stands at 27,700 BSV, which exceeds the principal amount of liquidity contributed by 20%
- Since inception in December 2020, 800 monthly active users (on average) have generated 1,400 BSV of returns paid to DXS liquidity providers
- Annualized return (aka APR or APY) paid to liquidity providers is 7.3%
- (1,400 * (12 / 10)) / 23,000 = 7.3%
This yield of 7.3% has been generated by only 800 users. What happens when we have 8,000 users on DXS? What happens when we have 80,000?
It can be very confusing. Generally in crypto-space, yield refers to the return you generate on some amount of principal committed. In general you can substitute saying ‘yield’ with ‘return’ or ‘interest’.
In the context of this post, ‘yield’ is referring to the return you generate on an amount in BSV (or tokens) that you commit to a pool as liquidity.
It is common to talk about yield in annual terms. APY (annual percentage yield) and APR (annual percentage rate) are used interchangeably in crypto. They are not in fact exactly the same, read this if you want to dive deeper.
We’ll talk in terms of APR in this post.
Here’s a simple APR example:
- You contribute 1,000 BSV to a liquidity pool (principal)
- You get 1 BSV as yield / return / interest each day
- Your APR is 365 / 1,000 = 36.5%
The liquidity providers of our liquidity pool receive their proportional share of 3% of the losses that are made on DXS each day. These daily payments fluctuate with the amount of trading activity on DXS. More trading activity = more losses = larger payments to liquidity providers.
DXS has been in operation for 10 months. The APR over this time period is 7.3%. The average number of active users over this time period is 800.
Here are some questions you should be asking:
- 1.Is an APR of 7.3% any good?
- 2.How will this APR change in the future?
- 3.Given the above, should I contribute liquidity to DXS?
Here’s what you need to understand to make an informed decision:
You will continue receiving daily BSV payments from DXS until your interest AND principal are returned to you. If you contributed 100 BSV as liquidity today into our liquidity pool, you would be contributing in round 21 which will pay you interest of 88 BSV over time (below screenshot). You will continue receiving daily BSV payments until you have received 188 BSV.
Understand that your APR is the same irrespective of what round you invest in. Earlier rounds pay more interest, meaning that you receive payments for a longer period of time.
With that scenario in mind, consider this:
At DXS's current APR, you would expect to recover your principal and interest of 188 BSV in 26 years.
That’s a long time right?
Yes, it’s a long time. It’s the amount of time that it would take given the trading activity of 800 monthly active users. Remember:
The liquidity providers of our liquidity pool receive their proportional share of 3% of the losses that are made on DXS each day. These daily payments fluctuate with the amount of trading activity on DXS. More trading activity = more losses = larger payments to liquidity providers.
What if our monthly active users went from 800 to 8,000 (all else remaining constant)?
With 8,000 monthly active users, your APR would be 73%. You would expect to recover your 188 BSV in 2.5 years.
That’s not bad right?
With the above understanding in place, here are the bets you are making as an liquidity provider at DXS:
- 1.Your returns are denominated in BSV. You are betting on BSV increasing in value over the longer term
- 2.Your returns are derived from economic activity on DXS. You are betting on DXS growing over the longer term
- 1.