A high yield number feels like free money. It isn't. Every percentage point of APY (Annual Percentage Yield — the yearly return if conditions hold) has something behind it, and that something is usually risk. Here's what to look for before you commit a single token.
The Four Sources of Risk in Any Yield
Smart-contract bugs are the quiet threat most beginners overlook. DeFi protocols run on code called smart contracts — self-executing programs that hold your funds automatically. If that code has a flaw, an attacker can drain the pool before anyone reacts. Bigger, older protocols have had more eyes on their code, but "more scrutiny" is not the same as "safe."
Depegs matter most in stablecoin pools. A stablecoin is designed to hold a fixed value (usually $1), but that peg can break under stress. If you're earning yield on a stablecoin that suddenly trades at $0.80, your "stable" position has quietly lost 20% — no matter what the APY said.
Low liquidity is a risk that hides in small pools. TVL (Total Value Locked — the total amount deposited in a protocol or pool) is a rough measure of size. A pool with very little TVL is easier to manipulate, harder to exit quickly, and less likely to have been stress-tested. Bigger isn't automatically safer, but smaller is almost always riskier.
Reward-token inflation is the engine behind most triple-digit APYs. When a protocol pays you in its own newly minted token, those rewards only hold value if demand keeps up. Early depositors often earn well; later ones may find the token has lost most of its value by the time they claim it. APY is not the same as profit — falling token prices can erase yields entirely.
One More Thing: Impermanent Loss
If you provide liquidity to a trading pool (rather than simply staking), you face impermanent loss — a reduction in your holdings that happens when the two assets in the pool drift apart in price. It's one of the least-understood risks in DeFi, and it can quietly outpace your yield.
Before comparing any two yields, ask yourself which of these four risks you're actually taking on. The comparison table can help you see APY and TVL side by side — but the risk behind those numbers is always yours to weigh.