By Team SalaryCalculate · 9/3/2025

DeFi Returns Explained: Lending, Borrowing, and Beyond

Most people think of DeFi as a way to “earn yield,” but the reality is more nuanced. What you actually earn depends on the protocol, the risks you take, and how the returns are structured. Sometimes it’s lending interest. Sometimes it’s trading fees. And sometimes, it’s a mix of both.

In 2025, DeFi platforms look very different from their early “yield farming” days. The hype has cooled, regulations are clearer, and returns are more grounded in real economics. But for someone new, it can still feel overwhelming. Are you really earning interest? Is it just token incentives? How do you know what’s sustainable?

That’s what we’ll unpack here. We’ll go through lending and borrowing, liquidity pools, staking, and the new wave of tokenized real-world assets. Along the way, we’ll use plain language, worked examples, and quick tables so you can compare options without getting lost in jargon.

Why DeFi Returns Look Different

DeFi returns aren’t like a bank’s savings account. They usually come from one or more of these sources:

• Borrower payments (interest paid by people who take over-collateralized loans).
• Trading activity (fees paid by traders who use liquidity pools on DEXs).
• Token incentives (extra rewards funded by a protocol treasury to attract liquidity).

A key lesson from the last cycle: incentives can vanish fast. Sustainable yield usually traces back to borrower demand or trading volume that’s not dependent on subsidies.

Lending and Borrowing (Core DeFi)

The simplest DeFi product is a money market. You deposit an asset (say USDC) and earn interest from borrowers. Loans are over-collateralized: to borrow $1,000 of USDC, a user might need to lock $1,300 of ETH. If the collateral falls in value, the protocol can liquidate it to repay you.

Rates float with supply and demand. If more users borrow, borrow APR rises and lenders earn more. If deposits flood in, yields compress. Protocols like Aave and Compound adjust rates with utilization curves that target healthy liquidity without making withdrawals hard.

Why borrow at all? Traders use leverage, market makers unlock working capital, and long-term holders tap liquidity without selling. In some jurisdictions, borrowing instead of selling can also defer a taxable event — but always check local rules and run numbers in our crypto tax calculator.

Worked Example: Supplying USDC

You supply 10,000 USDC to a money market at 5% APR. Over a year, that’s about 500 USDC in interest before fees and tax. If utilization drops and the rate falls to 3%, your annualized return falls to ~300 USDC. Yields are variable, not fixed.

DEX Liquidity Pools (Trading Fees, Not Interest)

On decentralized exchanges like Uniswap, you can provide tokens (e.g., ETH and USDC) to a pool. Traders pay a fee (often 0.05–0.3% per trade), which is shared among liquidity providers. Your return depends on trade volume and your share of the pool. The catch is “impermanent loss” — if prices move, your pooled assets may be worth less than simply holding them.

Concentrated liquidity lets you choose a price range for your capital. Tighter ranges can boost fees when price stays inside — but if price moves out, you earn little until you rebalance. For most people, broad ranges or stable-stable pairs (e.g., USDC/USDT) reduce volatility and the risk of impermanent loss.

Staking and Protocol Rewards

With proof-of-stake networks, you can stake assets to help secure the chain and earn rewards. In 2025, ETH staking yields hover around the low single digits. Liquid staking tokens (LSTs) like stETH or rETH pay roughly what the network pays, minus provider fees, and can be used elsewhere in DeFi.

Some protocols add extra emissions on top of base yields. Those incentives can be attractive, but they’re not guaranteed. If token price falls or a program ends, your APY may drop quickly.

Tokenized Real-World Assets (RWAs)

RWAs bring traditional yields on-chain: short-term U.S. Treasuries, corporate credit, private credit, or even revenue-backed receivables. The appeal is transparent, often asset-backed returns. The trade-off is onboarding and KYC requirements, jurisdictional restrictions, and issuer risk.

RWAs have helped stabilize DeFi yields, making them competitive with traditional money market funds while keeping assets programmable for collateral or composability — subject to each issuer’s terms.

Risks That Shape Your Real Return

Protocols mitigate risk with audits, bug bounties, insurance funds, and conservative collateral factors. You can reduce exposure by diversifying across protocols, avoiding exotic pairs, and using time-tested primitives for core holdings.

How Taxes Interact with DeFi Returns

Tax treatment varies by country, but two patterns show up often: rewards from lending, staking, or LP fees are treated as income when you receive them; later sales can trigger capital gains or losses. Getting the classification right matters to your real, net return.

If you’re comparing accounting methods for trades — say, First-In-First-Out vs. Last-In-First-Out — see our guide on FIFO vs LIFO crypto gains, and if you’re unsure whether something counts as income or a capital gain, start here: income vs capital gains in crypto. You can explore all of our crypto tools at our crypto calculators hub and browse more articles under Crypto.

Building a Simple, Sensible DeFi Stack (2025/26)

Here’s a pragmatic way to think about returns without chasing every new incentive. This isn’t advice — just a framework you can adapt to your risk tolerance.

1. Anchor with low-volatility yield: tokenized T-Bills or reputable stablecoin lending for a base return.
2. Add proof-of-stake exposure: a modest allocation to ETH staking or liquid staking tokens to participate in network rewards.
3. Use liquidity pools carefully: prefer deep, battle-tested pairs; consider wider ranges or stable-stable pools to limit impermanent loss.
4. Be selective with incentives: if a token reward makes up most of the APY, ask what happens if it ends or price falls 50%.

Three Quick Return Scenarios (Illustrative)

These are sketches, not promises. Your realized return could be higher or lower, depending on utilization, volume, fee tiers, rebalancing, and token prices. Test ideas with small amounts, then scale thoughtfully.

FAQs

Why do DeFi returns change daily?

Rates are set by market forces. As more users borrow, protocols raise borrow APRs to attract more lenders. When deposits surge, the same curves push yields down. On DEXs, fee income tracks trading volume, which swings with volatility and news.

Are token incentives worth chasing?

Sometimes. Ask what the base yield is without incentives. If a pool pays 2% in real fees and 10% in rewards, your APY relies on that token’s price and the program continuing. Incentives can be a bonus, not the backbone of your plan.

What’s the “safest” DeFi return?

There’s no risk-free option. Lower-volatility choices include tokenized T-bills, large money markets for major stablecoins, and ETH staking via reputable providers. Even then, contract, issuer, or liquidity risks remain.

How do taxes reduce my headline APY?

If rewards are income on receipt, you owe tax even if the token later falls in price. Later disposals can create gains or losses. Track cost basis and timing carefully and model outcomes with tools before you move size.

Bottom Line

DeFi returns in 2025/26 are less about hype and more about real economics. Lending and borrowing remain the backbone. DEX fees and staking add diversity. RWAs bring familiar yields on-chain. If you keep your eye on what truly generates cash flow — not just incentives — you’ll have a clearer picture of what’s durable and what’s not.