Sources of Yield

Not all yields and farms are created the same. Knowing this, how would one differentiate good yield from the bad? How do you know if the yield farm you are in is bountiful like the former picture below, or if the farm token price prints the latter^[1], like the fate of many high-yielding predecessors before it? To understand the quality of the crops (yields), we have to examine the different seeds (sources) that make up the farm.

There can be many permutations and derivatives of fund flows, but most generally, yield comes from a few sources:

1. Demand for Leverage

Because of the reflexivity of crypto markets and the fact that DeFi enables secular hypothecation, demand for leverage constitutes a majority source of yield, especially during bull markets.

In centralized exchanges, this manifests in the form of funding rates for perpetual swaps (perps)[2], where funding rates are positive: buyers pay sellers for the privilege to be leveraged long when markets are bullish. During bear markets, funding rates are negative (as seen below), and bears pay bulls for the opportunity to be leveraged short. As of 3/9, shorts were paying longs 24.9% a year annualized to have a token-ma...