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Explore on-chain historical and current yields

· Capital tends to follow incentives, and tracking the rate of return or annualized rate of return in different ecosystems is the best indicator to measure capital incentives.

· Historically, a surge in yield within an ecosystem can signal future capital inflows into that ecosystem. This is especially true when the yield and underlying assets are high-value assets like stablecoins.

· The current yield environment is seeing major ecosystem yields converge as the dominant second-tier deal narrative fades. This apparent lack of a capital narrative has historically often coincided with stagnation or decline in broader markets.

· Monitoring future surges in yields within top-tier and emerging ecosystems can indicate when markets are ready to refocus capital flows.

Just as molecules naturally flow from high-concentration areas to low-concentration areas, capital flows from saturated low-yield areas to new high-yield opportunities. As an incentive measure, the annualized rate of return, if greater than the current interest rate, will attract capital to flow into the investment pool until the return saturates and returns to the market level (assuming the risk is equivalent).

This effect is manifested in cryptocurrencies as capital shifts to new pools, protocols, or chains that drive higher yields with greater user activity (fee revenue) or incentive programs (token rewards).

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Historical Earnings Impact

In February 2023, Canto’s native token roughly quintupled as users scrambled for high yields and possible new narratives. A surge in yields in the largest pools on-chain preceded a massive jump in price.

The rise in median yield on-chain is driven by DEX LPs on CANTO assets, such as the ETH-CANTO pair. At the same time, however, stablecoin money market pools and DEX LP pairs, such as NOTE-USDC (NOTE is the native CDP stablecoin on Canto), generate annualized yields of 20-30% and constitute an on-chain $85 million in total value for the largest pool. The annualized rate of return of 20-30% is roughly 5 to 10 times the median rate of return of leading on-chain stablecoins, which acts as a significant incentive for capital to earn near-risk-free returns.

While there is about a 1-month lead before price follows yield growth, this is not the case on other more popular chains. Canto, as a new Cosmos-based chain, is further down the risk curve than traditional chains, so users tend to pay less upfront attention and react slower when doing due diligence.

On popular chains like Arbitrum, there is a similar leading relationship between yield and ecosystem market capitalization growth, albeit more compressed and noisier due to the greater correlation to broader market conditions.

Similar to Canto, major DEX LP pairs like WETH-USDC drove the highest gains during Arbitrum’s yield surge. However, GMX's staking pool is the largest and most popular source of yield on-chain. During the outstanding surge from October 2022 to the present, GLP pools and their derivatives have seen annualized returns of between 20-50%, although users can deposit stablecoins into the pool, but this is denominated in ETH. Given the structure of this pool with organic and reliable yield streams, it has attracted significant capital inflows into Arbitrum, subsequently boosting the collective market capitalization of ecosystem assets.

A large pool of stablecoins with high yields is a key component in attracting large capital inflows, as relatively low risk, high returns compared to the rewards of the market and the risk of temporary loss are very desirable. For example, Optimism experienced an initial surge in yields in its stablecoin pool in the summer of 2022, but failed to see sharp yield growth thereafter, which would signal potential capital inflows.

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current earnings environment

Recently, the median annualized rate of return on major chains has dropped by 30% over the past 90 days and is now at an aggregated median of 3.4%. During this period, the yield of the main chain converged after a period of time, when the median yield of the second layer chain was about two to three times that of the rest of the market.

When the yields of major chains converge to a more even distribution, it indicates that the market lacks a meta or dominant narrative to guide capital flows. Without a consensus point, prices often lack upward momentum because bids are not concentrated enough in a single asset or ecosystem to result in significant positive price action (this is especially true in bear markets when available capital is low).

Looking at historical data, when the difference in median yield across major chains decreases, we see markets stagnate or even correct as capital flows are unguided.

Currently, as interchain yield differentials converge, historical patterns suggest a temporary halt to capital allocation until new yield opportunities emerge, which would manifest as a surge in yield on a particular chain or protocol, as shown in the history section above. However, this does not mean that there are no revenue opportunities on the main chain. By looking at the distribution of pool returns on major chains, there are some pools on Ethereum, Arbitrum, Optimism, and Binance that have high-scale returns.

The subtlety of the current yield environment on these chains is that they lack consistent returns or introduce market (price) risk or temporary loss risk. Breaking down the local revenue environment for the top ecosystems:

Ethereum: The current pool with the highest returns is the DEX LP pair of the stalker coins. These coins carry extremely high market risks, and the reserve price of the tokens may collapse, making high returns meaningless. Aside from geme pairs, the pools with over $10m TVL and 15% returns are either more traditional DEX pairs with temporary losses, or pools with heavy incentives.

Arbitrum: In addition to major DEX LP pairs such as WETH-USDC, derivatives of GMX’s GLP remain the highest yielding opportunity on Arbitrum. GLP's current return is about 10%, while its use of derivatives on protocols such as Pendle and Jones DAO brings 16-20% returns, including incentives and risks.

Optimism: While Optimism has the highest median annualized return for pools over $1M TVL, Optimism only has 8 pools over $10M with a return greater than 5%. The vast majority of these pools are stablecoins or collateralized derivative pairs on Velodrome, and these pairs have less organic use, meaning that most of the yield comes from protocol incentives denominated in relatively unpopular Velodrome assets rather than Native ETH or stablecoins.

final thoughts

final thoughts

Earnings are the derivatives of trading activities or incentives, and are the guiding incentives for capital. As the median yield on the top chains converges, it points to the lack of a dominant trading narrative in the market, which has historically been accompanied by stagnant or declining price action. Without clear incentives to direct capital flows, capital is widely dispersed, resulting in less upward volatility due to the lack of concentration.

Historically, large price moves within an ecosystem have been heralded by a surge in yield opportunities within the ecosystem. Unless there is a new burst of activity or protocol incentives within a particular ecosystem, historical data patterns suggest market stagnation.

However, monitoring the yield distribution of leading chains and emerging ecosystems over time may indicate where activity may flow in the future.