Passive Income vs Voting Governance: Are Productive DeFi Assets Worth Holding More? Data Tells Us the Answer

Today, DeFi tokens are mainly classified into two categories: productive and non-productive.

(This article is authorized to be reprinted from "The Way of DeFi," with the original title "Are Productive DeFi Assets Worth Holding? Data Tells Us the Answer," original article here)

Author's note: The original author is Bankless analyst Lucas Campbell.

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Non-productive DeFi tokens are the classic "valueless" governance tokens we are all familiar with and love, such as tokens like UNI and COMP. These tokens are perfect examples, although they have generated hundreds of millions of dollars in revenue since their inception, they merely represent the right to participate in governance without cash flow rights.

On the other hand, we have seen the emergence of productive DeFi tokens like SUSHI and AAVE. These are the holy grail of crypto capital assets as they represent rights to governance and on-chain cash flow simultaneously. Unlike non-productive tokens, they allow holders to earn passive income in the form of protocol fees (in some cases as inflation rewards).

For Aave, holders can stake in safety modules where their funds act as the ultimate collateral. In return, they receive rewards from the ecosystem reserves and protocol fees. Similarly, SUSHI holders can choose to stake their tokens and receive xSUSHI, entitling them to 16.6% of all fees generated by Sushiswap.

Intuitively, we might think that productive assets have the upper hand - assuming they are always the better choice for investors. But the reality may be different; ultimately, market performance is the most crucial factor.

Similar to traditional finance, what may be most important is not whether the token has cash flow rights. Instead, what drives valuation is the growth in fundamentals such as trading volume, revenue, users, and more.

This article uses some quantitative evidence to support this claim, so we will use two sets of similar protocols, one with productive assets and the other with non-productive assets.

The two sets of protocols are (1) Uniswap and Sushiswap and (2) Compound and Aave.

1. Comparison between Uniswap and Sushiswap

Understanding key metrics for any DEX tokens (such as SUSHI and UNI) is crucial, and one of the fundamental indicators is trading volume. This is a key metric to measure the adoption and success of decentralized exchanges, as higher trading volume indicates more fee revenue generated by the protocols, which drives the value of these DeFi tokens.

In terms of trading volume, Uniswap has been dominant. According to Token Terminal data, at the beginning of 2021, Uniswap had an average daily trading volume of around $7.33 billion. With the introduction of Uniswap V3 last month, the daily trading volume has increased to $14 billion, doubling from the beginning of the year. In comparison, Sushiswap had a slightly lower average daily trading volume of nearly $4 billion at the beginning of the year, which has now increased to $5.6 billion, showing a moderate growth of 42% over the past 6 months.

Trading volume and fees are directly related, so it's not surprising that the daily revenue chart mirrors the trading volume chart above. However, these revenues have a key distinction for the two protocols. As mentioned earlier, SUSHI holders can stake their tokens and receive xSUSHI, which effectively represents a 16% claim on all protocol revenues generated. On the other hand, UNI does not have such revenue, as all protocol revenues flow to the liquidity providers (LP).

Furthermore, Uniswap has seen a revenue growth rate of 72% from the beginning of the year, with LPs generating a daily revenue of $3.3 million. In contrast, Sushiswap's revenue has only grown by 42% this year, with LPs generating a daily revenue of $1.6 million (xSUSHI holders can earn approximately $250,000 in daily revenue).

(Note: If Uniswap adopts the same scheme as Sushiswap, "xUNI holders" could earn over $220 million in fees this year! If the staking rate is the same as Sushiswap, it means UNI stakers would receive an annualized return of 7.55%, almost the same as Sushiswap)

Ultimately, there is only one metric that matters to investors: price performance. Every investor wants to bet on the fastest horse, and the market is the ultimate judge in this regard.

Despite UNI not having cash flow rights and even being a relatively static governance ecosystem, its performance still surpasses SUSHI.

After some digging, we can see why this is the case. UNI has excelled in key areas driving DEX valuation (trading volume and revenue) over SUSHI. However, we should also emphasize a critical aspect that may directly impact the performance of both this year: the token supply schedule.

Sushiswap experienced a significant unlock of SUSHI tokens in late March, while continuing to provide liquidity mining rewards on a weekly basis for LPs. On the other hand, Uniswap has no plans to release tokens to the market, with a large portion of tokens held by the team and institutional investors, which may be a key factor in SUSHI's decline in March-April.

That being said, both protocols have had a fruitful year. The price of SUSHI tokens has risen by over 189% this year, while UNI has surged by 378%.

Winner: "Priceless" Governance Tokens

2. Compound and Aave

Compound and Aave have a similar contrast as Uniswap and Sushiswap. Compound represents a slower-paced lending protocol backed by US VCs, while Aave, on the contrary, has taken the "move fast" approach by introducing Aavenomics that gives AAVE token cash flow rights.

But what's the comparability here? Similar to DEX and trading volume, a key issue to watch for lending protocols is the growth of borrowing volume.

More borrowing volume translates to better rates for LPs, attracting more capital and increasing the protocol's lending capacity. While Compound has been in the lead for a long time, Aave surpassed Compound's position since the introduction of liquidity mining in May 2021.

Following the launch of Aave's liquidity mining program, there was a surge in the borrowing demand for the protocol. To provide some context, at the beginning of 2021, Aave had a modest outstanding debt of $500 million, which was insignificant compared to Compound's data at that time, which exceeded $1.7 billion.

From the beginning of the year until now, Aave's borrowing volume has grown by 1700%, handling over $10 billion in loans, while Compound's data has grown by over 200%, with a loan volume of $5.3 billion.

With the surge in borrowing volume, Aave has also taken the lead in daily revenue, which is good news for Aave holders.

Currently, Aave's daily revenue is just under $1 million, with most of it flowing to LPs. Meanwhile, Compound generates only $550,000 in daily revenue for LPs.

Interestingly, Aave's revenue has grown by over 360% this year, while Compound's growth rate has leveled off at 2% after recent declines.

Let me reiterate: for investors, ultimately, application performance is the most important, and investors want to see the numbers go up.

With the explosive growth of Aave this year, its performance surpasses Compound, which is not surprising. Overall, both assets have seen growth of over 123% this year, but AAVE wins with a 255% annual growth rate.

Winner: Productive DeFi Tokens

Conclusion

Although Uniswap's UNI is a non-productive asset, its performance outshines productive assets, while Aave, as a productive asset, outperforms its non-productitive competitor Compound. So, what does this mean? Whether an asset is productive or not may not be important; what matters most is the underlying product and its growth.

If the fundamentals are there and it is growing, the market will react to it, regardless of whether the token has a value accrual mechanism.

Not to offend UNI holders (I am one of them), but I must point out that it lacks cash flow rights and has almost no governance (I admit it has seen more governance activity recently).

But guess what? Uniswap remains the dominant force in the DEX space, with no other protocol coming close to its generated trading volume and fees, evident from its market share of over 60% and triple-digit growth rate from the beginning of the year.

Similarly for Aave, its borrowing volume and revenue exceed those of its competitors, and due to the well-timed liquidity mining program, its growth this year has surpassed Compound. I bet this would hold true even if AAVE were a non-productive, revenue-less governance token. The productivity feature of AAVE is just the cherry on top.

My argument is that whether a token is productive or non-productive is not actually important. What matters is the product fitting the market and the growth trajectory of the product. So yes, while having a value accrual mechanism that stakeholders can rely on and point to is a nice addition, ultimately, it does not guarantee numbers going up, nor does it mean it will outperform similar protocols with non-productive tokens.

We see this applies in traditional finance as well. Amazon and other high-growth tech stocks have never paid dividends, and I have never seen anyone truly engage in shareholder governance.

But how much did you order from Amazon this month?