A displayed annual yield is an output, not an explanation. Before evaluating a DeFi opportunity, identify who pays the return, what risk they receive in exchange and whether the rate depends on temporary incentives.
Separate cash-flow-like revenue from rewards paid in an asset whose value depends on continued demand.
High yield can also be compensation for low liquidity. Exiting a position may move the market or become impossible during stress.
Document assumptions and position limits before depositing. This framework supports research and discussion; it is not individualized financial advice.
Break the yield into components
Returns may come from borrower interest, trading fees, staking rewards, liquidation income or newly issued tokens. Each source behaves differently when activity, token price or liquidity changes.Separate cash-flow-like revenue from rewards paid in an asset whose value depends on continued demand.
Price the hidden risks
Consider smart-contract failure, oracle manipulation, depeg, bridge exposure, validator penalties, governance changes and liquidation. A strategy built from several protocols inherits dependencies from every layer.High yield can also be compensation for low liquidity. Exiting a position may move the market or become impossible during stress.
Test sustainability
Compare rewards with protocol revenue and user activity. Model a lower token price, reduced incentives and higher borrowing costs. Check whether advertised rates are historical, variable or based on a short promotional window.Document assumptions and position limits before depositing. This framework supports research and discussion; it is not individualized financial advice.