What the numbers mean
Where you encounter them
Three contexts, with different sources of return.
Staking
Locking a network’s native token to participate in validation, earning a share of block rewards and fees. The most straightforward case, and the rate is set by the network’s own economics.
Lending
Depositing an asset for others to borrow, earning interest they pay. The return comes from borrowers, so it carries their credit risk.
Liquidity pools
Supplying two assets to an exchange pool, earning a share of trading fees. The most complicated, and the quoted rate frequently omits an effect described below.
Why a high number is usually misleading
This is the paragraph worth reading twice.
A high advertised rate is very often paid in a token the platform issues itself. Two hundred percent sounds transformative until you notice the reward token has fallen ninety percent over the same period, at which point the position lost money while the rate was accurate.
The mechanism is not hidden and it is easy to miss. Ask what asset the yield is paid in. If the answer is anything other than what you deposited or a stablecoin, the headline rate is a claim about token quantity rather than about value.
Second, high rates reflect risk pricing. A protocol paying far above what others pay is paying for something: unproven code, low liquidity, or an incentive programme that ends. Nothing about crypto suspends the relationship between return and risk.
The risks behind the rate
Impermanent loss
The effect liquidity pool rates tend to omit.
Supplying two assets to a pool means the pool rebalances between them as prices move. If one asset rises sharply, you end up holding less of it than if you had simply kept both. The fee income may or may not cover that difference, and the quoted APR usually counts the fees while ignoring the loss.
The name is unfortunate, since the loss becomes permanent the moment you withdraw.
The risk layers
Three, and they stack rather than substitute.
Smart contract risk
The code holds your funds and cannot be edited after deployment. The smart contract entry covers why bugs are permanent, and bridges and pools have lost billions this way.
Counterparty risk
Lending means somebody borrowed. Platforms that lent customer deposits and could not return them are a recurring feature of the sector’s history.
Price risk
Yield on a volatile asset is denominated in that asset, so a good rate on something that halves is still a loss.
Relevance to a merchant
Near zero for operations, and worth stating so nobody confuses the two things.
Accepting crypto payments involves no yield product. Funds arrive, convert and settle, and the payment gateway touches nothing described above.
Where it appears is treasury: a business holding reserves and considering whether to earn on them. The honest framing is that yield-bearing means risk-bearing, and operating reserves a business needs next month are the wrong place to accept either the contract risk or the counterparty risk above. The entry on TVL covers how to read the scale of a protocol you are relying on.