DeFi · 56 / 86 · 2 min
Yield and liquidity mining
A high yield is a number. It comes from fees other people pay, from a subsidy of new coins, or from a design that only works while new money arrives.
A high yield is a number with a source. If the source is new deposits, it works until they stop.
A worked case
A farm pays a large percent. The percent is new tokens the protocol minted. Selling those tokens is what the farmers do. The percent stays on the poster. The token's price is how the farmers are paid, by the next buyer.
Three sources
Fees: real if the trades are real. A subsidy: the project prints tokens and calls them rewards. A ponzi-shaped loop: yesterday's depositors are paid by today's, until today stops.
Read the number
Ask what is paid, in which token, and who is diluted to create it. A reward paid in a token the team can mint is the team getting paid in attention while you hold the dilution.
If you cannot explain the yield in one sentence without the word APY, you do not know it.
Twenty percent was a bid for deposits
Anchor, on Terra, advertised yields around 20 percent on UST. The SEC's complaint says Terraform marketed UST as a yield-bearing stablecoin paying as much as that, and that the system depended on stories about adoption that were not true. When UST broke in May 2022, the yield and the peg failed together. A high number had been a machine for gathering deposits. The deposits were the product. The number was the advertisement.
Earlier yield farms, through 2020, paid in newly minted tokens. Farmers sold the tokens. The buyer of the token was the person paying the farmer. When new buyers slowed, the yield in dollars collapsed even if the percentage on the site stayed large, because the percentage was denominated in a coin the protocol could create.
Ask which of the three sources is paying you: fees from real trades, a subsidy of new coins, or the next depositor. Only the first survives a week in which nobody new arrives. Even the first can be smaller than the gap described in the pool course.
Read it yourself
These links are the record. They are not a recommendation, and they are not instructions. A news story or a court paper can still be wrong about a detail. The check does not change because a famous name is in the story.
Apply the check
Open a question. The line is about this topic. It is not a verdict that anything is safe.
Farmers who sell the subsidy, and the protocol that minted it.
The issuer, who can change the reward or mint more.
The end of the subsidy, or a rush for the exit.
Check yourself
Is a very high APY a gift?
No. It is paid by fees, by new coins, or by later depositors.
After this you can say where the yield comes from in one sentence, with no abbreviation.