Real Yield DeFi: How to Find the Source of an APY

Lesson 7 of 10 · Intermediate

What is yield farming?

Yield farming means depositing assets in DeFi protocols, such as a liquidity pool, a lending market or an automated vault, to earn a return. That return is usually shown as one of two numbers:

• APR: the simple annual rate, without compounding.
• APY: the annual rate assuming the return is regularly reinvested. It always looks larger than APR.

Both numbers are snapshots of the recent past stretched across a whole year. The APY of a high-volume day or a high-incentive week may be half, or zero, tomorrow. So the right question is not “what is the APY?” but “whose pocket is this return coming from, and does it continue?” If you cannot answer that, you may be the source of the yield yourself.

Three main sources of yield

1. Real fees and interest. Money that real users pay for a service, such as trading fees on a DEX or interest paid by borrowers. This is usually called real yield. It is more sustainable, but it shrinks when activity falls and it has its own risks (impermanent loss, bad debt).

2. Token incentives (emissions). The protocol prints its own governance token and gives it to depositors to attract liquidity. This yield is really dilution: its value depends on the price of a token whose supply grows with every payout. If most recipients sell the reward, the price falls and the dollar APY melts away. Many three-digit APYs are of this kind.

3. Leverage and loops. The return on an asset is multiplied by borrowing against the same asset: deposit, borrow, deposit again. Apparent yield goes up, but so do liquidation risk and sensitivity to interest rates. If the borrowing rate rises above the deposit rate, the loop becomes loss-making.

There is also a hidden fourth source: risk being sold to you. If a protocol pays more than the market, it may have put your asset into a risky strategy or with an unknown counterparty.

A hypothetical example: dissecting an APY

Suppose a pool advertises “80% APY”. On inspection you find:

In this hypothetical example only about 6 percent comes from real work. If the reward token’s price halves, a large part of the dollar yield halves too, and if the pair is volatile, impermanent loss may swallow even that 6 percent.

Anatomy of a collapse: the Stream and Elixir chain (November 2025)

According to Pharos, in November 2025 the protocol Stream Finance announced a loss of about 93 million dollars. The protocol’s xUSD token, which was meant to hold a value near one dollar and pay yield, lost its value. Because protocols were interconnected, the damage spread: the deUSD stablecoin of the Elixir project, which depended on Stream, was wound down, and USDX was hurt too.

The more instructive part was in the lending layer: according to the same report, some lending vaults had hard-coded xUSD’s price as a fixed 1 dollar. So even when the market valued it far lower, these vaults kept counting it as a dollar. Liquidations did not happen in time and the loss reached the depositors of those vaults.

Three lessons from the case:

1. A “yield-bearing dollar” means a dollar plus a strategy. If you do not know the strategy, you do not know the risk.
2. Above-market yield needs an explanation. If the explanation is a “proprietary strategy”, you have no transparency.
3. Composability transmits risk. A depositor in a vault that accepted xUSD as collateral may never have held xUSD, yet took the loss.

Warning signs in yield marketing

None of these signs alone proves a project is a scam, but each is a reason to pause and look deeper:

• Fixed, guaranteed returns: DeFi markets fluctuate and real yield fluctuates too. “A fixed X percent a month” on any platform is a common pattern of Ponzi schemes.
• Vague explanations: “proprietary arbitrage”, “AI bot” or “confidential strategy” with no on-chain data to inspect.
• High rewards for new depositors: when early depositors’ returns are paid from newcomers’ money, the system works only while inflows continue.
• Withdrawal limits or delays, or a request for a “release fee” before withdrawal; the latter is almost always a scam.
• TVL concentrated in a few wallets tied to the team itself, creating an image of popularity.

A simple rule: the higher the yield compared with prevailing market rates, the clearer and more checkable an explanation you should be able to find. If you cannot find one, assume hidden risk.

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Frequently asked questions

What is yield farming?

Depositing assets in DeFi protocols such as liquidity pools or lending markets to earn a return. The return may come from real fees, token incentives or leverage, and each source has its own risks.

What is the difference between APR and APY?

APR is the simple annual rate; APY assumes regular reinvestment of earnings. Both are stretched from recent data across the year and neither guarantees the future.

What does real yield mean?

Yield paid from a protocol’s genuine income, such as trading fees or interest from borrowers, rather than from printing new tokens. It is more sustainable but not risk-free.

Education only, not a recommendation to buy or sell; we never give signals. Price examples are illustrative. Test any method on a demo account first, with strict risk management.