What is Yield?

This article explains crypto yield in simple terms, provides examples of its sources, and provides examples of how to manage it with Spectra.

As you navigate DeFi, the term 'yield' often pops up. In the most basic terms, yield refers to the earnings generated and realized on an investment over a particular period. These earnings can come from various activities such as:

• Lending: Platforms like Aave, Compound, and Morpho.

• Staking: Services such as Lido and EigenLayer.

• Yield Farming: Platforms like Yearn, Harvest, and Beefy.

When you put your tokens to work on one of these platforms, you receive proof of deposit as an Interest-Bearing Token. For example, when you lend USDC to Aave, you receive aUSDC in return. This aUSDC represents your lent USDC and entitles you to the interest it accrues over time. In this case, aUSDC is the Interest-Bearing Token.

Each platform has its version of an Interest-Bearing Token. For instance, Compound Finance provides cTokens, so you would receive cUSDC from Compound when depositing USDC.

In general, an Interest-Bearing Token acts as proof of funds and entitles its holder to the accrued yield in addition to the initial investment.

Detailed Examples of Yield-Generating Activities

Lending: Lending protocols like Aave, Compound, and Morpho allow users to lend their crypto assets to earn yield. For example, when you lend USDC to Aave, you receive aUSDC in return. This aUSDC represents your lent USDC plus the interest it accrues over time. The yield is the interest you earn on your loaned assets.

Staking: Staking is a broad definition that involves locking up tokens to support a platform's operation or liquidity in exchange for rewards. For instance, you can stake ETH via Lido Finance to earn rewards for securing Ethereum, receiving stETH as yield.

Yield Farming: Yield farming involves navigating the DeFi landscape to maximize yield by leveraging multiple protocols. For example, you can put ETH into a yield farming protocol like Yearn Finance, which rebalances it across various lending protocols to get the best APY while earning YFI tokens as additional yield.

Dealing with APY Volatility

APY volatility is a significant factor when engaging in DeFi yield-generating activities.

Understanding APY Volatility

APY (Annual Percentage Yield) represents the yearly rate of return you can expect from activities such as lending, staking, yield farming, and liquidity provision. However, APY isn't fixed and can fluctuate due to factors like supply and demand dynamics, changes in liquidity, or protocol governance decisions. This constant fluctuation is known as APY volatility.

Impact of APY Volatility

APY volatility can significantly impact your expected yield. For example, suppose you supply USDC to Aave at a 10% APY, expecting to earn 10% on your investment over the year. However, due to changes in market dynamics, the APY drops to 5% after a month. Your overall return will be much less than initially anticipated, affecting your yield and financial planning. APY volatility adds uncertainty to your investment strategy, making financial planning challenging.

CoinMarketCap for Interest-Bearing Tokens & APY Volatility

We are all familiar with CoinMarketCap and CoinGecko, the crypto world's primary sources of token prices. They provide essential information for traders and investors to make informed decisions. Similarly, understanding the volatility of APY in DeFi can help investors manage their yield expectations and adjust their strategies accordingly.

Is there a similar platform for tracking Interest-Bearing Tokens and their APY volatility? The answer is yes—meet DeFillama's Yield Page.

Key metrics include Base APY, 30-day average APY, and the accompanying chart. Each asset listed on DeFiLlama has a dedicated page, providing a more detailed chart and showcasing its APY evolution.

ERC4626 - Standardized Interest-Bearing Tokens

ERC4626 is an extension of ERC20 that proposes a standard interface for tokenized vaults. This standard allows different protocols (lending, yield, staking, etc.) to have a common interface to enter and exit such vaults and standardized getters to compute the APY.

An ERC-4626 can have multiple sources of yield in addition to the base APY, such as native token rewards or points.

Explore the APY of any ERC4626 with Vision.

Make informed decisions and visit vision.perspective.fi to gain access to the Vision API and dashboard to explore the historical interest rates of any ERC4626.

Harnessing APY Volatility with Spectra

Equipped with knowledge of yield sources, Interest-Bearing Tokens, and their volatile nature, let's explore how you can leverage Spectra to unlock more possibilities on top of your interest-bearing tokens.The Problem: An interest-bearing token represents both the principal (initial deposit) and the right to its future yield in a single piece.

The Solution: Spectra splits an Interest-Bearing Token into two parts: Principal Token (PT) and Yield Token (YT).

This process, known as 'yield tokenization,' unlocks new financial possibilities beyond standalone Interest-Bearing Tokens, such as:

• Fixed Rates

• Yield Trading

• Upfront Yield

• Discounted Assets

Learn more about what you can do with Spectra in the Use Cases & Practical Examples chapter.