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The sustainability of a yield in DeFi depends on the resilience of the economic activity that generates it. While an attractive percentage may be enough to capture an investor’s attention, the more important question is whether that yield can be maintained over time without eroding the capital base or relying on unsustainable incentives. Several interrelated factors determine this durability, and their relative importance varies according to the type of yield instrument. Market volatility plays a central role, particularly in strategies where yield depends on asset prices. In lending markets, sharp declines in the value of collateral can trigger mass liquidation, reducing both the demand for borrowing and the supply of lendable assets. In liquidity pools, volatile price movements between the paired assets can lead to significant impermanent loss, eroding the effective return despite steady fee income. Periods of extreme volatility can therefore compress yields, sometimes abruptly, by undermining the stability of the capital base. Dependence on protocol incentives is another key determinant. Many high-yield opportunities in DeFi are fueled by governance token emissions that supplement organic returns. While such incentives can accelerate adoption, they rarely persist indefinitely; once emissions taper or the market value of the incentive token declines, the headline yield can collapse. The degree to which a yield relies on such subsidies is thus a critical measure of its sustainability. Speculation on future airdrops has emerged as a less formal but increasingly influential factor. In some cases, users provide liquidity or engage with a protocol not primarily for its current yield but in anticipation of a future governance token distribution. This speculative motive can temporarily inflate liquidity and trading volume, boosting nominal yields, but the effect is typically transient. Once the airdrop event has passed, participation often falls sharply, taking the yield with it.
The Uniswap (UNI) Airdrop In September 2020, Uniswap conducted one of the first most notable governance token airdrops in DeFi. Every wallet that had interacted with the protocol before a defined cutoff date was eligible to claim 400 UNI tokens. Shortly after launch, UNI began trading near $3, giving each eligible wallet an allocation worth about $1,200. Within weeks, the price surged to $8, raising the value of the airdrop to $3,200. A few months later. This event became a landmark in DeFi, not only for its financial impact but also for how it signaled the rise of governance tokens as a way to distribute ownership and align users with protocol growth.
In lending protocols, leverage can magnify both yields and risks. Some participants borrow against collateral to redeposit the borrowed assets into the same or another yield-bearing pool, a process sometimes called looping. While this can increase the nominal yield severalfold, it also heightens sensitivity to interest rate changes and liquidation risk. A sudden spike in borrowing rates or a downturn in collateral value can force rapid deleveraging, causing yields to contract sharply. For liquidity pools, the volume of trades relative to the depth of the pool is perhaps the most direct driver of yield. Higher transaction volumes generate more fees for liquidity providers, raising the effective yield. However, trading activity is highly cyclical and can be influenced by external factors such as market sentiment, token listings, or macroeconomic news. A pool that appears highly profitable during a period of intense market activity may offer far lower returns when trading volumes normalize. Taken together, these factors illustrate that a DeFi yield is not a static metric, but a dynamic outcome shaped by market conditions, protocol design, and participant behavior. Evaluating sustainability requires looking beyond the nominal percentage to assess the stability of the underlying drivers. For portfolio managers, this means not only projecting potential returns but also modelling the conditions under which those returns might erode, allowing for more resilient allocation decisions.