DeFi & yield
Providing liquidity, staking and lending, airdrop farming — and the iron rule of knowing where the yield comes from.
Providing liquidity & impermanent loss
An AMM pool prices trades with a formula (classically x·y=k) instead of an order book, and pays its liquidity providers the trading fees. Becoming an LP sounds like free yield — it isn't. You are selling a very specific service: always taking the other side of the market's moves.
When one pooled asset outperforms the other, the pool automatically sells the winner for the loser. Withdraw after a big move and you hold less of the winner than if you had just held both — that gap is impermanent loss (IL). It's only 'impermanent' if prices return; after a permanent divergence it's just loss. LPing profits when fees earned > IL, which favors high-volume, low-divergence pairs.
Where does impermanent loss actually come from?
When is providing liquidity most likely to be profitable?
Staking, lending & where yield comes from
All sustainable yield is payment for something: staking pays you for securing a network (risk: slashing, lockups, the token itself), lending pays you for credit risk (borrowers defaulting, protocol insolvency), LPing pays you for divergence risk. If you can name the service and the risk, you can price the yield.
The unsustainable kind announces itself: APY paid in the protocol's own token (dilution dressed as income), yields far above what the activity could earn, or 'guaranteed' returns. Celsius, Anchor, and a hundred forks all rhymed: the yield was other depositors' money.
Staking 3–5%
Paid for validating. Real, but priced in the token — you're still long the asset.
Lending majors 2–8%
Paid for credit risk. Check collateralization and utilization.
LP fees, correlated pair
Paid for (small) divergence risk. The workhorse of honest DeFi yield.
1,000% APY in farm token
Dilution as marketing. The exit liquidity is you.
A protocol offers 800% APY paid in its own token. What is the most likely reality?
Airdrops, points & farming
Protocols bootstrap usage by promising future tokens to early users — directly (airdrops) or via points programs that convert later. Some have paid life-changing amounts; most pay little or nothing. Treat farming as a trade with explicit costs: capital locked (opportunity cost), gas and fees spent, smart-contract exposure per protocol touched, and time.
The risks are specific: allocation criteria change retroactively, sybil filters disqualify farm-y behavior, points get devalued before conversion, and the token often lists straight into farmer sell pressure. Never bridge more than you'd risk on a speculative position, and never chase points into protocols you wouldn't otherwise trust with funds.
What is the correct way to evaluate an airdrop farming opportunity?