Back to: DeFi 101
Every yield has a source. Lending interest comes from borrowers; staking rewards from issuance and fees; farm emissions from dilution. This lesson teaches you to trace any APY back to its source — because unsourced yield is just someone else’s exit.
The yield ladder (risk order)
1. Blue-chip lending (USDC on Aave): single-digit, battle-tested, boring. The baseline everything else must beat *after* adjusting for risk. 2. Native staking (ETH/SOL direct): issuance + fees, lockups, slashing risk, validator choice matters. 3. Liquid staking: staking yield + DeFi usability, minus a new layer of provider-concentration risk. 4. LP + farming: fees + emissions vs impermanent loss + contract risk. Only the fee part is real income. 5. Points/meta-farming: unpriced promises of future tokens. Lottery tickets, priced accordingly.
APY literacy
– APY assumes compounding at the current rate — rates move, prices move harder. – “APY paid in X” means your return is denominated in X’s volatility. – Distinguish nominal APY from realized return net of gas, IL, and the reward token’s decline. Screenshots of 1,000% APY are advertisements for risk.
The three questions before any deposit
- Where does the money come from? (Borrowers? Issuance? Greater fools?)
- What breaks first? (Oracle? Bridge? Admin key? Bank run?)
- Can I exit? (Lockups, thin liquidity, and withdrawal queues decide.)
If you can’t explain the yield’s source in one sentence, you’re the source.
Next lesson: reading contracts and audits.