Variable yield

A savings account that pays a fixed rate for a year is making a promise. Most of DeFi makes no such promise. Rates move with every block because they come from activity that moves: how many people want to borrow, how much traders pay, how markets are priced. That is variable yield, and knowing where it comes from matters more than the number on the screen.

Where DeFi yield comes from

• Borrowers. In a money market, lenders earn the interest borrowers pay. When demand to borrow rises, rates rise; when it falls, they fall.
• Trading activity. Liquidity pools pay their providers a share of swap fees, which depend on volume.
• Market payments. Hedged, delta-neutral positions can earn payments between traders, such as the funding rate on perpetual futures, which can also turn negative.
• Real-world rates. Tokens that hold government debt pass through interest set by central banks.
• Incentives. Some protocols pay rewards in their own token. That is marketing spend, not income, and it usually ends.

If a yield cannot be traced to one of these, or to a clearly explained mix of them, ask why. The return that a yield-bearing dollar token passes to holders is variable for exactly this reason: it follows its source.

APY vs. APR

APR is a simple annual rate. APY includes compounding, the effect of earning on earlier earnings. For the same underlying rate, APY is the bigger figure, and the gap widens the more often returns compound. For a variable yield, both are snapshots: today's rate projected forward as if it would not change, which it will. A seven-day or thirty-day average tells you more than the spot figure.

A simple example

Suppose a lending market pays a 1,000 dollar position at a pace of about 50 dollars a year while borrowing demand is strong. A month later demand falls, and the same position earns at a pace of 30 dollars a year. Nothing broke; the yield followed its source. Now picture a token advertising several times that pace with no explanation of where the money comes from. Telling those two cases apart is what to check first.

Variable vs. fixed

Fixed-rate positions exist in DeFi, often built through yield tokenization, which lets a buyer lock in a rate by purchasing a discounted principal token. Even then, the fixed rate is a market price for future variable yield, and it still carries the risks of the underlying asset.

Risks and limits

A variable yield can fall to zero, and in some strategies below zero after costs. Higher yields usually pay for higher risk, even when that risk is not obvious. Past rates do not predict future ones. And the yield is only part of the return: changes in the value of the underlying asset, fees and smart contract risk all count. Variable means what it says: never guaranteed.

strUSD, Tori Finance's ERC-4626 vault token, accrues the variable yield of a delta-neutral strategy that earns from global markets, with positions hedged to USD. The yield changes with market conditions and is never guaranteed.