Nominal Yield: Everything to Know
By Beluga Research August 5, 2023
- Nominal yield refers to the stated annual interest rate or return on a particular cryptocurrency investment or lending product
- It represents the potential earnings or rewards that an investor can expect to receive over a specified period, typically expressed as a percentage
- Nominal yield is often associated with staking, lending or yield farming activities where users lock or lend cryptocurrencies to earn passive income
- Nominal yield may not reflect the actual or effective yield received by investors, as factors such as fees, compounding, and market conditions can impact the final returns
Nominal yield refers to the stated annual interest rate or return on a particular cryptocurrency investment or lending product. It is a measure of the income generated by an investment, expressed as a percentage of the investment's face value. In traditional finance, nominal yield is often used to calculate the return on bonds or other fixed-income securities. In the world of cryptocurrency, nominal yield is used to measure the return on staking or lending activities.
Staking involves holding a certain amount of a cryptocurrency in a wallet or on a platform, and using it to validate transactions on the blockchain. In return for staking their coins, investors receive a reward in the form of additional coins, which can then be sold or used for further staking. Lending involves loaning cryptocurrency to other investors or borrowers, in exchange for interest payments.
A Brief History
The concept of nominal yield has been around in traditional finance for many years. In the early days of finance, bonds were the primary investment vehicle and nominal yield was used to calculate the return on these investments. Over time, the concept of nominal yield was applied to other types of fixed-income securities, such as CDs and money market funds.
In the world of cryptocurrency, nominal yield has only recently become a popular concept. Staking and lending activities have been around for a few years, but it wasn't until the rise of DeFi (decentralized finance) platforms that nominal yield became a widely-used measure of return. DeFi platforms allow investors to earn interest on their cryptocurrency holdings by staking or lending them, and nominal yield is used to calculate the return on these activities.
What is Nominal Yield in Crypto?
Nominal yield in crypto is a measure of the return on staking or lending activities. When an investor stakes coins, they receive a reward in the form of additional coins. The nominal yield is calculated by dividing the amount of the reward by the amount of coins staked and expressing the result as a percentage.
For example, let's say an investor stakes 100 coins and receives a reward of 10 coins. The nominal yield would be calculated as follows:
Nominal yield = (10 / 100) x 100% = 10%
This means that the investor earned a nominal yield of 10% on their staking activity. The nominal yield can vary depending on the cryptocurrency being staked, the amount staked, and the length of time coins are staked.
Lending activities also generate nominal yield. When an investor loans cryptocurrency to another investor or borrower, they receive interest payments in return. The nominal yield is calculated by dividing the amount of interest received by the amount of cryptocurrency loaned, and expressing the result as a percentage.
For example, let's say an investor loans 100 coins and receives 5 coins in interest payments. The nominal yield would be calculated as follows:
Nominal yield = (5 / 100) x 100% = 5%
This means the investor earned a nominal yield of 5% on their lending activity. The nominal yield can vary depending on the cryptocurrency being loaned, the amount loaned and the length of time the coins are loaned.
To understand nominal yield, it's important to first understand the concept of yield itself. Yield refers to the amount of money an investor earns on an investment over a certain period of time, expressed as a percentage of the amount invested. For example, if an investor buys $1,000 in a cryptocurrency and earns $50 in interest over the course of a year, the yield would be 5%.
Nominal yield, as mentioned earlier, is simply the stated rate of return on an investment without taking into account any external factors. For example, let's say an investor puts money in a cryptocurrency that promises a nominal yield of 8%. This means that if the investor puts in $1,000, they can expect to earn $80 in interest over the course of a year. However, this does not take into account any changes in the value of money over time. If inflation is 2%, then the real yield on the investment would only be 6%, as the value of the money you earn is eroded by inflation.
One unique aspect of nominal yield in the world of cryptocurrency is that it can often be higher than the nominal yield on traditional investments. This is because cryptocurrency is a relatively new and volatile asset class, with prices that can fluctuate rapidly. As a result, many cryptocurrency projects offer high nominal yields as a way to attract investors and incentivize them to hold onto their assets.
However, it's important to be cautious when investing in high-yield cryptocurrency projects, as they often come with a higher degree of risk. High nominal yields can be a sign that a project is not sustainable in the long term, or that it is engaging in risky practices to generate returns. Additionally, high nominal yields may not take into account external factors such as taxes or inflation, which can significantly reduce the real yield on an investment.
Another unique aspect of nominal yield in the world of cryptocurrency is that it can often be difficult to accurately calculate. This is because many cryptocurrency projects offer rewards in the form of tokens, which may have a fluctuating value. Additionally, many projects offer rewards that are paid out on a regular basis, such as daily or weekly, which can make it challenging to accurately calculate the nominal yield over a longer period of time.
- Passive income. Nominal yield provides an opportunity for investors to earn passive income by holding onto their tokens or coins. This is particularly attractive to those who are looking for a low-risk way to generate income.
- Predictable returns. Nominal yield is usually set at a fixed rate, which means investors can calculate their expected return on investment. This makes it easier to plan for the future and make informed investment decisions.
- Incentivizes holding. Nominal yield incentivizes investors to hold onto their tokens or coins for a longer period of time. This can help to stabilize the market and prevent sudden price fluctuations.
- Attractive to new investors. Nominal yield can be attractive to new investors who are looking for a way to earn a return on their investment without having to actively trade or monitor the market.
- Inflation risk. Nominal yield may not account for inflation, which means the real return on investment may be lower than expected. Inflation can erode the value of the investment over time, which may make nominal yield less attractive.
- Market risk. Nominal yield may be affected by market conditions, which means the return on investment may not be predictable. This can be particularly problematic in volatile markets where prices can fluctuate rapidly.
- Limited liquidity. Tokens or coins that offer nominal yield may have limited liquidity, which means it may be difficult to sell them quickly if needed. This can result in investors being locked into their investment for a longer period of time than they anticipated.
- Security risk. Nominal yield may require investors to hold their tokens or coins in a particular wallet or platform, which can create security risks. If the platform is hacked or compromised in any way, investors may lose their investment.