DeFi 101
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Yield farming
Yield farming means depositing crypto into decentralized finance (DeFi) protocols to earn a return: lending interest, trading fees or token rewards. Smart contracts take the bank's place, so anyone with a wallet can take part.
In June 2020 Compound began paying its lenders and borrowers in a new token of its own, COMP. Others copied it, and the boom became known as DeFi Summer. This liquidity mining could turn a 5% lending yield into a 200% annual percentage yield (APY) or more. Those numbers pulled money in, and hid how much risk came with them.
From the report What is yield farming?
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Sources of yield
Some yield is paid by real activity: borrowers' interest (stablecoin lending on Aave paid 3 to 7% in 2026), swap fees to liquidity providers, staking rewards, or the funding rate in a basis trade like Ethena's.
Some is paid in newly issued tokens, and lasts only while people want them. Liquidity providers also face impermanent loss: on volatile pairs it can outweigh every fee earned. As the DeFi saying goes, if you don't know where the yield comes from, you are the yield.
From the report What is yield farming?
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The 2022 collapse
In 2022 governance tokens fell 90 to 95% and yields paid in them dried up. In May, Terra's UST lost its peg: $12 billion left Anchor within days, and the UST and LUNA spiral erased about $45 billion.
Anchor's 20% was topped up from Terra's reserves, funded by selling LUNA, because outside revenue was not enough to pay it. Three Arrows Capital, Celsius, Voyager, BlockFi and FTX fell within months. Code is a risk too: more than $10 billion has been lost to DeFi exploits since 2020.
From the report What is yield farming?
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MEV and transaction order
Maximal extractable value (MEV) is what can be earned by choosing which transactions go into a block and in what order. If ETH costs $3,000 on one decentralized exchange and $3,020 on another, the first trade to close the gap takes the profit.
Arbitrage pulls prices back in line and liquidations close unsafe loans. A sandwich attack only takes: a bot buys just before your large swap and sells right after it, so you pay a worse price.
From the report What is MEV and why does it matter?
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Real-world assets
Tokenization puts an off-chain asset, such as a Treasury bill, a loan or a building, on a blockchain. The token usually stands for a legal claim or a revenue stream, not the asset itself.
It brings yield from outside crypto: Treasury interest, loan repayments, rent. It also brings outside risks: regulation, the custodians holding the asset, thin markets to sell into and borrowers who may not repay.
From the report What is Real-World Asset (RWA) Tokenization?
Quiz
What paid most of the triple-digit yields of DeFi Summer, in 2020?
In a sandwich attack, what does the bot do?
What does a tokenized real-world asset usually represent?