What is the yield?
In TradFi, the yield is a measure of an investment’s ability to generate cash flow, usually expressed as an annual percentage. The two most common forms are:
Dividend Yield = Annual Dividend / Current Stock Price
For example, if a company pays an annual dividend of 5 yuan and the stock price is 100 yuan, the yield is 5%.
Bond Yield = Annual Coupon / Bond Price
A bond with a face value of 1,000 dollars, an annual interest of 30 dollars, and a market price of 900 dollars has a yield of 3.33%.
The yield is a concept of return efficiency, but it is important to note that it typically does not reflect the price fluctuations of the asset, only measuring cash returns.
The appearance of yield in the crypto market.
When the concept of yield enters the cryptocurrency world, its form becomes more flexible and complex. Here are several common types of Crypto Yield:
1. Staking Interest Rate
- Focusing on PoS public chains, such as ETH, SOL, ATOM, etc., staking tokens earn block rewards.
- Source: Native token rewards distributed by the protocol
- Features: Stable returns, low risk (provided that the chain itself is secure)
- Note: The annualized return will fluctuate with the network staking ratio.
2. DeFi liquidity mining interest rate
- Provide liquidity on protocols like Uniswap, Curve, PancakeSwap in exchange for LP tokens and earn rewards.
- Source: Trading fees + Platform token subsidy
- Features: High returns but high risk, need to bear impermanent loss.
- Common Terms: APY (Annual Percentage Yield)
3. Stablecoin Pool Yield Rate
Deposit stablecoins like USDT, USDC, DAI into Aave, Compound, or Curve stable pools to earn low-risk passive income.
- Source: lending interest rate spread or protocol rewards
- Features: Suitable for conservative on-chain yield strategies
- Note: There are still smart contract risks.
4. CeFi Yield Products
Such as the fixed deposit and demand deposit functions offered by the exchange (e.g., Gate Earn)
- Advantages: Simple operation, user-friendly interface.
- Risk: Must trust the platform’s own solvency.
What is the difference between yield and annualized return?
Yield and Annualized Return are often used interchangeably, but they are actually slightly different.
Yield: Focuses on the ratio of “cash return”.
- Excluding capital gains (price increase)
- Focus on stability and the efficiency of long-term holdings.
Annualized Return: Reflects the ‘Overall Rate of Return’
- Includes price fluctuations and compounding effects
- More suitable for measuring overall investment performance.
In DeFi, the APY commonly indicated by platforms is the annual percentage yield, rather than the pure yield, which is something that must be clearly understood when calculating returns.
What should be noted about high interest rates?
In the crypto market, high interest rates are often a weapon to attract funds, but the higher the interest rates, the greater the risks that are often hidden behind them:
1. Understand the source of returns
- Is it a platform token subsidy? Or actual trading fees?
- If the subsidy stops, will the yield immediately drop to zero?
2. Pay attention to token inflation and unlocking
- High interest rates often come from a large number of newly issued token subsidies.
- If the circulating supply surges, it will inversely suppress the token price.
3. Calculate the real annualized return
- Many protocols claim 1000%+ APY, but the actual daily return is less than 2%.
- Try using Excel or the DefiLlama tool to verify actual returns.
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Summary
In this ever-evolving crypto universe, yield plays a crucial role; it is not only an indicator of investment efficiency but also a signal of on-chain capital flow. Web3 investors should learn to find their own balance strategy between the temptation of high yield and the measurement of real returns.
