Introduction

On-chain yields are a cornerstone of the decentralized finance (DeFi) ecosystem, offering investors a way to earn returns on their digital assets. These yields are generated through various DeFi protocols and smart contracts that operate on the blockchain. Understanding how on-chain yields work is crucial for anyone looking to participate in DeFi investments.

The Genesis of On-Chain Yields

On-chain yields originate from the services provided by various DeFi protocols. These services create real value for users, who are willing to pay fees for the utility they receive. The fees collected from these services are then distributed to investors as yields.

Sustainable Crypto Services and Yield Generation

Sustainable crypto services, such as Bitcoin's global ledger or Ethereum's platform for DeFi and Web3, require users to pay service fees using the native cryptocurrency. These fees are a primary source of yield for miners in the case of Bitcoin and Ethereum. In DeFi protocols, the fees are distributed to token holders and liquidity providers.

DeFi Protocols and Yield Strategies

Protocols like Curve, the largest DeFi stablecoin trading protocol, and Aave, a lending platform, allow users to earn yields by participating in the protocol. For example, CRV token holders receive trading fees, and Aave users can earn fees by providing liquidity to the platform.

Operational Risks and Yield Generation

On-chain yields can also be generated by charging for operational risks associated with financial services like providing insurance or liquidity. These methods revolve around the concept of compensating for the risk taken by the yield provider.

Zero-Sum Games and Yield Sustainability

It's essential to distinguish between sustainable yields and zero-sum games. If yields are high but service usability is low, it indicates that the yields are not being generated by the service itself but from an external source. When this external source dries up, the service and its yields may collapse.

Conclusion

On-chain yields are an integral part of the DeFi landscape, providing a way for investors to earn returns on their digital assets. These yields are generated from the fees paid by users of various blockchain services and DeFi protocols. Sustainable yield generation is characterized by the actual utility and value provided by these services. Investors should be cautious of high yields that do not stem from sustainable sources, as they may not be reliable in the long term.