150% APR? How Are DeFi Yields So High? - DeFriday #6

When you first step into the DeFi world, you're presented with investing options that might break your brain. Sure, we all know about the “to the moon” stories where the value of a coin might unpredictably surge 10,000x and then go to zero days later—but that’s not the only source of yield in crypto.

For example, check out Yearn which I wrote about earlier. They're currently offering 3.3% APR on Tether, a stablecoin pegged to the US Dollar. How is that possible?

Savings accounts in the TradFi world pay 0.35% if you're lucky. So how is the APR on everything in DeFi around 3 - 7% minimum, and often into the tens, hundreds, or thousands of percent?

It's easy to see those rates and say "that's a scam" or "that's too good to be true," and you'd be right sometimes. But some of this yield can be explained without using the word ponzi. And in this piece, I'm going to try to explain where it's coming from, and what yields are robust, vs what yields are closer to unstable ponzi schemes.

Let's dive in!

The Foundations of Yield in DeFi

Not all yield is created equal. Some are extremely robust, some are an outright fabrication.

There are four types of yield that make up the foundation of all robust earnings in DeFi: