Where does DeFi yield come from?
DeFi yield comes from borrower interest, trading fees, and token rewards. Rates float and smart contract failures can erase deposits in uninsured pools.
Vahe HakobyanEditor-in-chief
Updated Oct 6, 20263 min readFact-checked
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You earn it by supplying crypto to a protocol that other people use. The protocol collects interest or fees from that activity and passes a share to you. Some yield also comes from the protocol's own token, which it gives out to bring in more deposits.
How do lending and pools generate yield?
Lending markets connect you with borrowers. A borrower must post crypto as collateral to take a loan, and the interest they pay is the yield for lenders. Decentralized exchanges let people swap tokens directly from their wallets. Liquidity providers deposit tokens into a pool that the exchange uses to fill those swaps, and they earn a cut of the trading fees.
Why do token rewards boost yield?
Many protocols pay extra rewards in their own token to attract deposits. This practice is often called liquidity mining. The rewards can raise the yield you see, but they may be reduced or stopped at any time.
What risks and limits should I know?
DeFi yield carries risks that a bank savings account does not. The return depends on software and on activity in the market, so it can change quickly.
- Smart contracts can fail or be exploited, and deposits are not insured.
- Rates float with on-chain demand and can fall when fewer people borrow or trade.
- Borrower defaults or liquidations can create bad debt for lenders.
Frequently asked questions
In the US, the IRS treats crypto as property, and yield you receive is usually taxable as ordinary income when you get it. That can include interest and trading fees. Keep records and ask a tax professional about your situation.
APR is the simple yearly rate without compounding. APY adds the effect of compounding, so it is usually higher when rewards are reinvested often.
Bank savings rates are paid by regulated banks and often backed by deposit insurance. DeFi rates float with on-chain supply and demand, so they can rise or fall with activity. Higher shown yields usually come with risks like smart contract failure and no insurance.
Yes. Smart contract bugs, hacks, borrower defaults, or falling token prices can reduce or erase what you deposited. DeFi deposits are not insured like bank deposits.
