Understanding Yield and Lending

Today, we turn our attention to one of the most powerful ways to put your assets to work in DeFi: yield and lending. This guide will explain what yield and lending are, how to evaluate opportunities.

Part 1: What Are Yield and Lending?

In DeFi, yield refers to the return you earn on your crypto assets over time. This is usually expressed as an annual percentage yield (APY) and can come from several sources, including lending, liquidity provision, and incentive rewards.

One of the most fundamental and widely used yield strategies is lending.

When you lend in DeFi, you:

• Deposit your assets into a lending market (like Aave or Compound).
• Earn interest from borrowers who take loans from that pool.
• Often receive a tokenised representation of your deposit (e.g., aTokens or cTokens) that automatically accrues interest over time.

This is powerful because:

• Your assets stay in crypto: You don’t have to sell your tokens to earn a return.
• Composability: You can sometimes use your interest-bearing tokens as collateral or in other DeFi strategies.
• Passive income: Once deposited, your assets work for you 24/7, with interest accruing block by block.

Common assets used for lending include:

• Stablecoins like USDC, USDT, and DAI (popular for lower volatility).
• Blue-chip tokens like ETH or stETH (staked ETH), which may offer higher yields but with more price risk.

Part 2: How to Find the Best Yield and Lending Opportunities

Not all lending markets or yields are created equal. When comparing opportunities, here are the key factors to look at:

1. APY Level and Source

• Base APY: The organic borrowing interest you earn from borrowers.
• Incentives: Extra rewards (often in protocol tokens) that boost the displayed APY.
• Sustainability: Very high APYs often come from temporary incentives and may not last.

Ask yourself: Is this yield mostly from real borrowing demand, or from short-lived token emissions?

2. Asset Risk

• Stablecoins: Lower price volatility, but you still need to consider peg risk and issuer risk.
• Volatile tokens: Higher potential upside, but price swings can easily outweigh your yield.
• Long-tail assets: Smaller, less liquid tokens may offer eye-catching yields but carry higher smart contract and liquidity risks.

3. Protocol Quality

Look for:

• Battle-tested, “blue-chip” protocols with strong track records and audits.
• Transparent documentation explaining how interest rates and risk parameters work.
• Decentralisation and governance: Who controls the protocol and its risk settings?

4. Liquidity and Utilisation

• Total Value Locked (TVL): Larger pools usually mean deeper liquidity and more stability.
• Utilisation rate: If utilisation is very high, it can signal strong demand (and higher APYs), but may also make withdrawals slower or more expensive.

5. Chain and Gas Costs

• Higher gas fees can eat into your yield, especially for smaller deposits.
• Consider L2s and sidechains where gas is lower if you’re deploying smaller amounts.

Part 3: Best Practices for Yield and Lending in DeFi

Lending is often considered one of the more straightforward yield strategies, but it still comes with risk. Here are some guidelines to help you navigate it safely:

Start Simple

Begin with:

• Blue-chip lending protocols (e.g., Aave, Compound, or similar).
• Major assets like top stablecoins or ETH.

Avoid complex, leveraged strategies until you’re fully comfortable with the basics.

Understand the Risks

Key risks include:

• Smart contract risk: A bug or exploit in the protocol could result in loss of funds.
• Oracle and liquidation risk: If you borrow against your deposits, price feed issues or sudden volatility can trigger liquidations.
• Peg and issuer risk (for stablecoins): If a stablecoin depegs or the issuer suffers issues, both your principal and yield can be impacted.

Don’t Over-Leverage

Many lending protocols allow you to:

• Supply collateral
• Borrow against it
• Loop or leverage to increase your yield

While this can boost returns, it also increases liquidation risk. A conservative approach is to:

• Use lower loan-to-value (LTV) ratios.
• Avoid looping until you fully understand the mechanics and risks.

Diversify Across Assets and Protocols

To reduce concentration risk:

• Spread deposits across more than one protocol.
• Use a mix of assets (e.g., some in stablecoin lending, some in blue-chip token lending).

This way, an issue in a single protocol or asset is less likely to impact your entire portfolio.

Monitor and Rebalance

DeFi is dynamic:

• APYs change as borrowing demand shifts.
• Protocols update risk parameters, supported assets, and incentives.

Check your positions periodically and be prepared to:

• Move to better risk-adjusted yields.
• Reduce exposure if risks increase or incentives end.

Conclusion

Yield and lending are at the heart of DeFi, turning your idle assets into productive capital. By understanding how lending markets work, what drives APY, and how to assess risk, you can build a more resilient and efficient DeFi portfolio.

Portals makes this journey smoother by aggregating the best opportunities, simplifying the execution, and helping you manage your positions across protocols and chains from a single interface.

About Portals.fi: Portals.fi is the DeFi Super App. A one-click gateway to the entire on-chain economy. Powered by real-time data and seamless execution, Portals.fi connects traders to over 20 million assets, thousands of protocols, and every major blockchain.

Disclaimer: The content of this blog is for informational purposes only. It is not investment advice. Please do your own research and consult with a qualified financial advisor before making any investment decisions. DeFi investments carry significant risks, and past performance does not guarantee future results. More details here.