Cytus Protocol

The massive yields that our fellow degens grew accustomed to have vanished. Protocols with clever ponzinomics and 1000% APRs have wilted under the massive weight of the bear himself. A combination of horrendous macro conditions and the combustion of protocols previously thought to be ‘too big to fail’ has led to a widespread risk off attitude among retail investors. Where people used to be foaming at the mouth to ape, they are now playing it safe. This has led to a desertion of liquidity. Just 6 months ago, the Total Value Locked (TVL) in DeFi was $300B. It is now $130B.

An environment with tight liquidity is a bad environment for DeFi. When liquidity leaves, the yields go down. When the yields go down, more liquidity leaves, which drives down yields even further, and on and on it goes. It’s a vicious cycle that is very difficult to escape from.

We all have high risk tolerances. If we didn’t, we wouldn’t be in crypto. But if we want to revolutionize finance, we need to attract every kind of person, even those that are, dare I say it, risk-averse. Where would these people park their money in DeFi at the moment? Answer: they wouldn’t.

Obviously, this is not a great selling point. How did we get to this point? Even more importantly, what can we do to fix it? Those are the questions we will be answering in this article.

I’m glad you asked.

Previously, when you saw that juicy 500% yield, it was coming from one or both of two sources.

Option A: From new money buying the token. Because many protocols hand out rewards in their own native token, the yield is denominated in that token. When the price of the token goes up, the yield also goes up. The problem with this is that a lot of these protocols were a load of crap. People aren’t going to hold a token for a useless protocol in a bear market. Once they dump, everyone else follows, and the yield comes crashing down.

Option B: From rapid native token emissions. As we previously established, most protocols hand out their rewards in their native token. The good thing about this is that you don’t need to actually earn any revenue to do this. In essence, you can pretty much print money, with the hope that by having early incentives you will be able to bootstrap enough liquidity and usage to survive in the long haul. Unfortunately, temporary rewards are just that, temporary. During a bull run, sure, they might mask some of the problems in a bad project and get people’s attention. But during a bear market, people tighten up with their money, dump their useless tokens, and down goes the yield.

Hopefully you can see the common theme here. Deep liquidity during the bull run gave bad protocols a lifeline, which they used to mask their problems with unsustainable yields. Of course, nobody cared because everyone was making a ton of money. But once the money stopped flowing, people dumped their useless tokens, and the yields dumped with them.

Now that we know what caused the current yield crisis, we can begin talking about how to fix it.

I think we are all in agreement on believing that DeFi needs a safe source of sustainable yield. A protocol with sustainable yield would mean a protocol that has found a product-market fit and is generating real revenue. It’s also one of the best ways to attract new users. Think of all the new people that Anchor and its 20% yield attracted. Now imagine that, but without the meltdown and complete destruction of billions of dollars.

The question then becomes how we get a sustainable yield. I propose that one solution is to incorporate TradFi into DeFi.

A pairing between DeFI and TradFi benefits all parties involved.

TradFi people want and need access to liquidity. Bureaucratic red tape is an annoying and expensive obstacle to TradFi entities accessing the liquidity that they desire. DeFi fixes this. Easy access to liquidity is one of the reasons this whole thing started in the first place.

DeFi people want and need a way to generate sustainable yield. Loaning money to TradFi people is an easy and immediate way for DeFi protocols to earn real revenue immediately. With real revenue comes sustainability, and with sustainability comes adoption.

There are a bunch of different protocols working on doing exactly this, but one of the newer and more interesting ones is Cytus, which we will now cover.

The goal of Cytus is to “bridge sustainable yield from the $1tr Private Credit market to solve the Yield Crisis in DeFi”. Basically, they want to connect DeFi people who want a safe and sustainable yield with TradFi people who want easy access to liquidity. The way they plan to go about this is actually quite clever.

At a high level, achieving Cytus’ goals seems pretty simple. Just loan the money and collect interest. However, two key problems present themselves. First, how do you ensure that you are making the best loan possible? Having crypto native teams try to handle TradFi loans might not bear the best results. Second, how do you satisfy the DeFi investors' need for capital efficiency? Traditional TradFi lending protocols inhibit capital efficiency by locking up your deposits, something that is intolerable to many DeFi users.

Cytus answers these questions through the use of Arrangers and the stablecoin USDY. By having Arrangers, who are experts in TradFi, facilitate the loans, Cytus ensures that they are receiving the best deals possible. By allowing users to mint an equivalent amount of USDY to their deposit, which can then be used in other DeFi protocols like any other stablecoin, Cytus ensures that users have full capital efficiency.

To defend the peg of USDY, Cytus has implemented a multi-layer defense system. First, there is the USDY-USDC liquidity pool, which should be pretty deep because of CTS rewards. Second, there is the transmuter, which is funded with 10% of deposits and works similarly to a bank reserve. Third, there are the Real World Assets (RWAs) backing the coin, with 20-30% in liquid short term assets like AAA corporate bonds and the rest in real estate. The good thing about using RWAs as collateral is that they are not as volatile as crypto collateral and they are orthogonal to crypto, meaning that if they are liquidated, they won’t bring down the price of USDY or CTS with it.

CTS is the governance and utility token for Cytus. The main goal of CTS is to incentivize people to lock USDY in the USDY-USDC liquidity pool. CTS can also be vote-escrowed to create veCTS, which rewards holders with a share of the protocol’s fees from minting, trading on its native DEX, and transmuter usage. The initial emissions will be two million per day, and the distribution is as follows:

Add it all together, and Cytus works something like this:

Cytus promises a yield ranging from 25-45%, and with some quick math, it’s not hard to see where that number is coming from.

There is no info on max CTS token supply, but even when using a massive number of 5B, the yield turns out to be quite good.

It’s not as sexy as some of the more esoteric PvP stuff, but a safe and sustainable yield of 31.42% sounds pretty good to me. Now imagine how that sounds to a guy just trying to preserve his money through inflation and is accustomed to earning saving account rates from his bank. That, ladies and gentleman, is how we eat TradFi.

There is more to like about Cytus than the obviously strong yield.

It’s one of the first protocols that has a clear plan to create value for its token. As explained in the baseplate thesis, too many protocols focus on value capture instead of value creation. This works well in a bull market, but as we are seeing now, comes up short in a bear market.

In traditional liquidity mining campaigns, because the protocols don’t have any real utility or generate any real revenue, there is no reason to hold the token long-term. If the token is destined to be dumped, holding it long-term would just end up in bag-holding.

For Cytus, because rewards are derived from revenue and paid out in USDY, there is an actual reason to hold and lock the CTS token. Instead of having to dump the token to cash out, now you can vote-escrow it and earn what is in essence a dividend.

Looking beyond just Cytus, sustainable projects are especially beautiful for two reasons.

First, sustainability means you've made a project with actual utility. A project can’t be sustainable unless it solves a real problem, has a real utility, and has good tokenomics. Just as you can’t build a sturdy house on sand, you can’t build a sustainable project out of a bad one. The quest for sustainability is also the quest for excellence.

Second, being sustainable means that as you grow larger, you grow stronger. More liquidity entering means more revenue, which means higher rewards, which attracts even more liquidity. It’s an extremely positive flywheel. In contrast, for unsustainable protocols, getting bigger just means you need even more new money to keep the game going. Eventually, the money stops coming in, and a violent crash down occurs.

For DeFi to reach its full potential, we need projects that attract even the most risk-averse user. Cytus looks like it could be one of those projects. For the sake of DeFi, we should all be rooting that it, and projects like it, become successful.