Yield farming places crypto assets into liquidity pools, lending markets, vaults, or incentive programs in return for fees or rewards. The displayed annual rate is an estimate based on recent conditions, token prices, and assumptions. It can fall quickly as more capital enters, incentives end, or trading activity changes.
Trace where the yield comes from
- • Revenue: Separate borrowing interest or trading fees from token incentives.
- • Layers: List every vault, pool, protocol, bridge, and oracle involved.
- • Exit: Calculate net return after fees, lockups, queues, and liquidity.
Identify the source of yield
Determine whether returns come from borrower interest, trading fees, newly issued reward tokens, leverage, market making, or several layers combined. Sustainable fee revenue differs from temporary emissions. Compare base yield and incentives separately, along with compounding frequency and the price risk of every reward asset.
Map every layer of risk
A vault may deposit into multiple protocols, creating exposure to its own contract, underlying markets, oracles, bridges, and tokens. Liquidity providers can experience impermanent loss when paired assets move differently. Review audits, administrative powers, withdrawal controls, strategy changes, asset caps, and incident history.
Calculate net, accessible return
Include deposit, withdrawal, swap, performance, management, and network fees. Check lockups, exit liquidity, withdrawal queues, minimums, and whether rewards require manual claiming. High advertised yield is not a substitute for understanding how principal can be lost.
Continue your research
For related checks, review crypto lending platforms and decentralized exchanges.