Chasing DeFi Yield Without Getting Rekt
Where on-chain yield actually comes from, how to read an APY, and the risks hiding behind the biggest numbers.
Yield is not free money
DeFi lets you earn a return on crypto by lending it, providing liquidity, or staking it in a protocol. The returns can genuinely beat a bank — but every percentage point of yield is a payment for a risk someone is taking. If you cannot name the risk, you are the risk.
Where the yield comes from
- **Lending:** you supply an asset, borrowers pay interest. Real, sustainable, usually single-digit. - **Liquidity provision:** you deposit a token pair into an automated market maker and earn trading fees, minus impermanent loss. - **Token incentives:** the protocol prints its own governance token to bribe you into depositing. This is the source of most eye-watering APYs, and it is often temporary.
vault_position:
base_lending_apr: 4.1%
reward_token_apr: 38.0% # paid in $FARM, price falling
impermanent_loss_est: -6.2%
realistic_net: ~6% and droppingImpermanent loss, briefly
When you provide liquidity to a pool and the two assets' prices diverge, you end up with more of the loser and less of the winner compared to just holding. The trading fees are supposed to compensate you. In volatile pairs, they often do not.
A risk checklist before you deposit
- Has the contract been audited, and by whom? - How much total value is locked, and for how long? - Is the yield paid in a real asset or in an inflationary reward token? - Can the team pause withdrawals or upgrade the contract unilaterally?
The protocols that survive multiple market cycles tend to offer boring, sustainable yields. Treat any number that looks too good as a countdown timer, and never deposit more than you are prepared to watch go to zero.
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