DeFi yield is the profit available from participating in DeFi protocols. It’s quoted as a yield because it’s earned in proportion to the amount you decide to deposit into the protocol, similar to how you earn interest on the money you deposit into a savings account or a CD. Exactly how the profit is generated and how much yield you can expect depends on the type of protocol as well as the underlying asset.
DeFi yield is the extra crypto you can earn by putting your existing crypto to work in <DeFi protocols>. It's known as “yield” because it’s earned in proportion to the amount you decide to deposit into the protocol, similar to how you earn interest on money in a savings account. Your total earnings will depend on the amount of yield you earn as well as asset performance. For example, let's say you deposit 1 ETH into a pool with a 10% yield. However, if the price of ETH goes down by 5% during that time, your overall earnings might be lower.
There are four main asset classes in crypto today:
- Bitcoin: the original asset most known as being a store of value with the ability to revolutionize central banking
- Ethereum: the main asset used to interact with smart contracts today
- Stablecoins: a digital representation of currencies and commodities available in the real world
- Altcoins: assets created to get exposure to new technologies and crypto projects
And, there are four main types of protocols generating sustainable yield in DeFi today:
- Lending
- Market making
- Staking
- Bridging
Understanding where the yield comes from is a critical part of evaluating different DeFi yield opportunities.
Now that you have a high level understanding of DeFi yield, let’s do a deep dive into each DeFi job. We’ll start with a familiar transaction — lending.