Where DeFi yield comes from

A yield is money paid to you for letting someone use your tokens. Someone always pays it. If you cannot work out who, you are probably the one taking the risk. This lesson shows where returns in DeFi really come from.

The real sources

There are only a few.

• Borrowers pay interest. In a lending pool, your return is the interest borrowers pay. Lesson 43 covered this.
• Traders pay fees. In a DEX pool, your return is your share of the swap fees. Lesson 42 covered this.
• The network pays validators. Staking rewards come from new coins and transaction fees. The next module covers staking.

These rates are usually modest and they change daily. In October 2026, staking ETH paid about 2.5% a year.

Token rewards

Many services add a second return on top: they hand depositors their own newly created token. The advertised rate can then look very high.

Look at what you are being paid in. A reward token is created from nothing. Its value depends on people wanting to buy it. If most recipients sell it, the price falls and the real return shrinks with it. When the rewards stop, deposits often leave.

If the reward token falls 80% in a year, most of the advertised yield goes with it.

When the yield is the product

In 2022 a stablecoin called TerraUSD was marketed, in the words of the US Securities and Exchange Commission, "as paying as much as 20 percent interest" through a service called Anchor. Deposits poured in.

In May 2022 TerraUSD collapsed. Lesson 10 covers how about $40 billion in market value was wiped out.

A rate far above what borrowers and traders are paying elsewhere is a warning. Either it is temporary, or it is being paid out of new deposits.

Yield accounts at companies

Some companies offer "earn" accounts that pay interest on deposited crypto. They are not DeFi. The company takes your crypto and lends or invests it.

A US Securities and Exchange Commission bulletin in February 2022 warned that the interest "is based on these investment activities", that the deposits are "not currently insured", and that the company "might fail or go bankrupt". Several large crypto lenders did fail that year.

Impermanent loss

Providing liquidity to a DEX pool has a cost that the fee rate does not show.

When the price of one token in the pool rises, the pool automatically sells some of it as traders buy. You end up holding less of the token that went up. Compared with simply holding both tokens, you have lost out. This is called impermanent loss, because it disappears if the price returns to where it started.

Uniswap's documentation gives the size of the loss for a standard pool, before fees:

The loss is the same whether the price doubles or halves. Fees may cover it or may not. It depends on how much trading the pool sees.

Four questions before you deposit

1. Who is paying me? Borrowers, traders, the network, or the service's own token.
2. What am I paid in? A stablecoin, the token I deposited, or a reward token that may fall.
3. What can I lose? The contract can fail, the token can fall, a loan can be liquidated, a pool can leave me with the loser.
4. Can I get out? Check for lock-ups, withdrawal queues and thin pools.

If the answers are unclear, the rate is not worth it.