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11 - Yields

The Galapagos Syndrome of Cryptofinance

from Part IV - Cryptocurrency Economics and Monetary Policies

Published online by Cambridge University Press:  06 March 2025

By
Bernhard K. Meister  and
Henry C. W. Price
Edited by
Reena Aggarwal  and
Paolo Tasca
Reena Aggarwal
Affiliation:
Georgetown University, Washington DC
Paolo Tasca
Affiliation:
University College London
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Summary

In this chapter, structures that generate yield in cryptofinance will be analysed and related to leverage. While the majority of crypto-assets do not have intrinsic yields in and of themselves, similar to cash holdings of fiat currency, revolutionary innovation based on smart contracts, which enable decentralised finance, does generate return. Examples include lending or providing liquidity to an automated market maker on a decentralised exchange, as well as performing block formation in a proof of stake blockchain. On centralised exchanges, perpetual and finite duration futures can trade at a premium or discount to the spot market for extended periods with one side of the transaction earning a yield. Disparities in yield exist between products and venues as a result of market segmentation and risk profile differences. Cryptofinance was initially shunned by legacy finance and developed independently. This led to curious and imaginative adaptions, reminiscent of Darwin’s finches, including stable coins for dollar transfers, perpetuals for leverage, and a new class of exchanges for trading and investment.

Keywords

Automated market makerscross currency swapcrypto loanscrypto optionsdecentralised exchangesdecentralised financeEthereumleverageperpetual futures
Type
Chapter
Information
Digital Assets
Pricing, Allocation and Regulation
 , pp. 242 - 268
Publisher: Cambridge University Press
Print publication year: 2025

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