FoundationsBeginner5 min
Where Does Yield Come From?
Core question
Who actually pays the yield?
Lending (e.g. Aave): You lend your tokens to others, who post collateral. Yield usually comes from borrower interest and tends to be comparatively stable — but that depends on the collateral holding its value, the liquidation mechanism working as intended, and the price oracle the protocol relies on.
Liquidity pools (e.g. Uniswap, Curve): You supply two tokens so others can trade. You earn the trading fees. On top of that comes the risk of impermanent loss: if the prices of the two tokens move against each other, your position can end up worth less than simply holding the tokens.
Two sources, two mechanisms
- Lenders place their capital in a protocol's pool.
- Borrowers post collateral and borrow from it.
- Their interest flows back to the lenders by share.
- Depositors put two tokens into the pool together.
- Traders swap one token for the other — against the pool, not against a person.
- Every swap costs a fee that goes to the depositors by share.
Schematic, not market data. A real example follows in the next section.
A real example
USDC · Aave V3
6.89%
Total APY
Base APY6.89%
Reward APY–