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DeFi Yield System Overview

system overview

DeFi Yield System Overview ÔÇö Passive and Active Earning Layers

The DeFi ecosystem offers multiple ways to earn yield from digital assets ÔÇö through staking, lending, liquidity farming, and automated yield vaults. Each yield model differs in risk, reward timing, liquidity, and protocol dependency. Some yield sources are passive, while others require active management or risk exposure (like impermanent loss).

Use Case: This overview maps the types of yield available in decentralized finance and helps clarify which models are best suited for passive holders, active traders, or liquidity miners.

Key Concepts:

  • APR vs APY
  • Impermanent Loss
  • Yield Aggregators
  • Auto-Compounding
  • Liquidity Incentives
 

Primary DeFi Yield Sources:

  • 1. Staking (Proof-of-Stake Chains)
    • Users lock native tokens to secure a blockchain and earn block rewards
    • Examples: $ETH, $ADA, $FLR, $HBAR
    • Can be traditional, delegated, or liquid (e.g., $sFLR, $stETH)
  • 2. Liquidity Farming (DEXs and AMMs)
    • Users provide token pairs to decentralized exchanges and earn swap fees + token rewards
    • Yield depends on pool volume and token inflation
    • Risk: impermanent loss from price divergence
    • Examples: Uniswap, PancakeSwap, BlazeSwap, SparkDEX
  • 3. Lending and Borrowing Platforms
    • Users lend assets to earn interest or supply collateral to borrow against
    • Interest rates vary by utilization ratio and asset demand
    • Examples: Aave, Compound, Kinetic on Flare
  • 4. Liquid Staking Tokens (LSTs)
    • Assets like $stETH or $sFLR represent staked tokens that earn yield and remain liquid
    • These can also be reused in DeFi (farming, lending, or as collateral)
  • 5. Protocol Revenue Sharing
    • Protocols may share fee revenue with token holders or stakers
    • Often tied to governance tokens or locked tokens (e.g., $CVX, $BAL)
    • Examples: SushiSwap xSUSHI, Enosys Staking Vaults
  • 6. Auto-Compounding Vaults
    • Smart contracts automatically claim and reinvest rewards to maximize APY
    • Examples: Beefy Finance, Cyclo.Finance, SparkDEX auto-pools
    • Great for long-term holders who want hands-off returns

Why DeFi Yield Systems Matter:

  • They create incentives for liquidity, security, and user participation
  • Allow users to generate income without selling their assets
  • Drive adoption of decentralized applications and Layer 1 ecosystems
 
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