DeFi Yield Analysis & Optimization

Overview

Analyze and compare yields across DeFi protocols — lending, liquidity provision, staking, and yield farming — to identify the best risk-adjusted opportunities and assess sustainability. DeFi yields are a real-time proxy for crypto market leverage demand, capital allocation, and protocol health.

Core Concepts

1. DeFi Yield Sources

Yield Source	Mechanism	Typical APY Range	Risk Level
Lending (supply)	Earn interest from borrowers	1-15% (stablecoins 3-8%)	Low-medium
Borrowing cost	Interest paid by borrowers	3-20%	N/A (cost side)
LP fees (AMM)	Trading fee share from DEX	5-50% (varies by pair)	Medium-high
Staking	Validator/delegation rewards	3-15%	Low-medium
Liquidity mining	Protocol token incentives	10-500% (unsustainable)	High
Restaking	Re-hypothecated staking yield	5-20% (ETH + AVS rewards)	Medium-high
Points farming	Off-chain points → future airdrop	Unknown (speculative)	Very high

2. Lending Rate Analysis

Lending rates as market signal:

# High borrow rates = high leverage demand = bullish sentiment
# Low borrow rates = low leverage demand = bearish / waiting

def lending_rate_signal(borrow_rate_stable, borrow_rate_eth):
    """Analyze DeFi lending rates for market sentiment."""
    if borrow_rate_stable > 15:
        stable_signal = "extreme_demand"    # Leveraged long via stablecoin borrowing
    elif borrow_rate_stable > 8:
        stable_signal = "elevated_demand"
    elif borrow_rate_stable > 3:
        stable_signal = "normal"
    else:
        stable_signal = "low_demand"        # Bear market, no one borrowing

    if borrow_rate_eth > 10:
        eth_signal = "extreme_demand"       # Shorting or leveraged strategies
    elif borrow_rate_eth > 5:
        eth_signal = "elevated"
    else:
        eth_signal = "low_demand"

    return stable_signal, eth_signal

Key lending protocols:

Protocol	Chain	Specialization	TVL Range
Aave V3	Multi-chain	Blue-chip lending, institutional grade	$10-20B
Compound V3	Ethereum, Base	Conservative, USDC-focused	$3-5B
MakerDAO/Sky	Ethereum	CDP-based DAI/USDS minting	$8-15B
Morpho	Ethereum	Rate optimization, P2P matching	$3-8B
Spark	Ethereum	MakerDAO lending arm	$2-5B
Kamino	Solana	Concentrated LP + lending	$1-3B

3. LP Yield Analysis

Impermanent Loss (IL) — the core risk of LP positions:

def impermanent_loss(price_ratio_change):
    """
    Calculate impermanent loss for a 50/50 AMM pool.
    price_ratio_change: new_price / old_price of the volatile asset.
    """
    r = price_ratio_change
    il = 2 * (r ** 0.5) / (1 + r) - 1
    return il * 100  # Return as percentage

# Examples:
# Price +25% → IL = -0.6%
# Price +50% → IL = -2.0%
# Price +100% (2x) → IL = -5.7%
# Price +200% (3x) → IL = -13.4%
# Price -50% → IL = -5.7%
# Price -75% → IL = -20.0%

LP yield = fee income + token incentives - impermanent loss

def net_lp_yield(fee_apy, incentive_apy, estimated_il_annualized):
    """Calculate risk-adjusted LP yield."""
    gross_yield = fee_apy + incentive_apy
    net_yield = gross_yield - abs(estimated_il_annualized)
    return net_yield

# Example: ETH/USDC pool
# Fee APY: 15%, Incentive APY: 20%, Estimated IL: 8%
# Net yield: 15% + 20% - 8% = 27%

LP pool evaluation criteria:

Metric	Good	Mediocre	Avoid
Fee APY / TVL	> 10%	5-10%	< 5%
IL risk (based on pair volatility)	< 5% annualized	5-15%	> 15%
TVL stability (30d change)	Growing or stable	Declining < 10%	Declining > 30%
Volume/TVL ratio	> 0.5x daily	0.1-0.5x	< 0.1x
Incentive dependency	< 30% of yield	30-70%	> 70% (unsustainable)

4. Staking Yield Analysis

ETH staking ecosystem:

Method	APY	Risk	Liquidity
Solo validator	~3.5%	Slashing, downtime	Locked (exit queue)
Lido (stETH)	~3.3%	Smart contract, governance	Liquid (stETH tradeable)
Rocket Pool (rETH)	~3.2%	Smart contract, more decentralized	Liquid
Coinbase (cbETH)	~3.0%	Custodial, regulatory	Liquid
EigenLayer restaking	~3.5% + AVS rewards	Smart contract, slashing risk	Semi-liquid

Staking yield signal:

# ETH staking yield trends
# Rising yield = more transactions / MEV = network activity increasing (bullish)
# Falling yield = less activity = network cooling down

# Restaking yield premium
restaking_premium = eigenlayer_yield - native_staking_yield
if restaking_premium > 3:
    signal = "high_restaking_demand"     # AVS demand strong
elif restaking_premium > 1:
    signal = "moderate_premium"
else:
    signal = "low_premium"               # Restaking risk not compensated

5. Yield Sustainability Assessment

The "real yield" test:

def yield_sustainability(protocol):
    """
    Real yield = yield funded by actual economic activity (fees, revenue)
    Token yield = yield funded by token emissions (inflationary, unsustainable)
    """
    total_yield_usd = protocol.total_yield_distributed_per_year
    fee_revenue_usd = protocol.annual_fee_revenue
    token_emission_usd = protocol.annual_token_emissions_at_market_price

    real_yield_pct = fee_revenue_usd / total_yield_usd * 100
    token_yield_pct = token_emission_usd / total_yield_usd * 100

    if real_yield_pct > 80:
        sustainability = "highly_sustainable"   # Revenue-funded
    elif real_yield_pct > 50:
        sustainability = "partially_sustainable"
    elif real_yield_pct > 20:
        sustainability = "emission_dependent"    # Mostly token incentives
    else:
        sustainability = "ponzi_risk"            # Almost entirely token-funded

    return sustainability, real_yield_pct

Warning signs of unsustainable yield:

1. APY > 100% with no clear revenue source → token emissions will dilute to zero
2. Protocol TVL growing but token price declining → mercenary capital chasing yield
3. Yield declining month-over-month while TVL is stable → emissions being cut
4. Protocol governance voting to increase emissions → short-term pump, long-term dilution
5. Multiple yield sources stacking (lending + LP + staking + points) → complexity hides risk

6. Risk-Adjusted Yield Comparison Framework

def risk_adjusted_yield(opportunities):
    """Compare DeFi opportunities on risk-adjusted basis."""
    scored = []
    for opp in opportunities:
        # Base yield
        base = opp.apy

        # Risk deductions
        smart_contract_risk = -2 if opp.audit_status == "unaudited" else -0.5
        il_risk = -opp.estimated_il if opp.type == "LP" else 0
        protocol_risk = -1 if opp.tvl < 50_000_000 else 0  # Small protocol risk
        chain_risk = -0.5 if opp.chain != "ethereum" else 0  # Non-ETH chain risk
        sustainability_risk = -(base * 0.3) if opp.real_yield_pct < 30 else 0

        # Adjusted yield
        adjusted = base + smart_contract_risk + il_risk + protocol_risk + chain_risk + sustainability_risk

        scored.append({
            "protocol": opp.name,
            "base_apy": base,
            "adjusted_apy": adjusted,
            "risk_level": opp.risk_level,
        })

    return sorted(scored, key=lambda x: x["adjusted_apy"], reverse=True)

Data Sources

Source	Access	Data Available
DeFi Llama Yields	Free	APY across 1000+ pools/protocols
Aave/Compound dashboards	Free	Real-time lending rates
Dune Analytics	Free	Custom yield queries
DeBank	Free	Portfolio yield tracking
TokenTerminal	Free/Paid	Protocol revenue and earnings
EigenLayer dashboard	Free	Restaking rates and AVS yields

Output Format

## DeFi Yield Analysis — [Date]

### Market Yield Overview
- **Stablecoin lending (Aave USDC)**: X.X% supply APY
- **ETH staking**: X.X% base + X.X% restaking premium
- **Top LP yields**: [pool1 X%, pool2 X%]
- **Yield trend**: [rising / stable / compressing]

### Top Opportunities (Risk-Adjusted)
| Rank | Protocol | Pool/Strategy | Base APY | Adjusted APY | Risk |
|------|----------|--------------|----------|-------------|------|
| 1 | [protocol] | [pool] | X.X% | X.X% | Low |
| 2 | [protocol] | [pool] | X.X% | X.X% | Medium |
| 3 | [protocol] | [pool] | X.X% | X.X% | Medium |

### Lending Market Signal
- **Stablecoin borrow rates**: X.X% → [high leverage demand / normal / low]
- **ETH borrow rates**: X.X% → [shorting demand / normal]
- **Utilization rates**: [high / normal / low]

### Sustainability Assessment
| Protocol | Real Yield % | Token Yield % | Verdict |
|----------|-------------|---------------|---------|
| [protocol] | XX% | XX% | Sustainable |
| [protocol] | XX% | XX% | Emission-dependent |

### Yield Strategy Recommendation
- **Conservative**: [stablecoin lending on Aave/Compound, X-X% APY]
- **Balanced**: [ETH staking + restaking, X-X% APY]
- **Aggressive**: [LP on DEX with hedged IL, X-X% net APY]

### Risk Warnings
1. [Smart contract risk: protocol X is unaudited]
2. [IL risk: volatile pair X/Y estimated IL X%]
3. [Sustainability risk: protocol Y >80% token-funded]

Notes

• DeFi yields are highly variable and can change within hours; quoted APYs are point-in-time snapshots
• "APY" in DeFi often assumes compounding that requires manual action (claiming + restaking); true returns may be lower
• Smart contract risk is the dominant risk in DeFi; even audited protocols have been exploited (multi-sig, oracle manipulation)
• Tax implications of DeFi yield vary by jurisdiction; yield farming income is taxable in most countries
• This framework is for research purposes only and does not constitute investment advice