In Search of Yield: How DeFi is Reinventing TradFi

Every new project inevitably turns to yield farming, also called liquidity mining, to attract attention and capital to their product. When we talk about “yield” in this context, it’s earning a token in exchange for providing liquidity. Yield in the context of traditional finance is cash flow you can generate on top of your principal.

The difference lies in how this yield is realized. With, say, bonds, you’re lending your capital to an external entity. They pay you interest periodically and return your principal when the bond expires. You earn a stream of cash flows in fiat through the interest, making the yield realized upon receipt. With yield farming, realizing your yield is dependent on selling the tokens you earn. As more people realize their yield, the price of the farmed token goes down, leading more people to sell it, and giving way to a negative feedback loop. We can differentiate the two types of yield by categorizing them as “pure yield” and “farmed yield.”

For the average retail investor in crypto, the only access to pure yield is lending coins on platforms like Aave, Compound, BlockFi, and others. Retail investors in TradFi can access yields by either depositing money in a savings account — and earning a trivial amount of money — or by buying bonds issued by governments and corporations.

Institutions have access to a