DeFi yields are very high right now. Why? The easy and lazy answer is “ultra high risk!” Also probably because no one knows the eth supply, oh noes. But the real answer is more nuanced and way more interesting...

Yes there is risk, but there is also market inefficiency and information assymetry. There is also nuance around yield comparisons, liquidity of the asset the yield is paid in etc.

A lot of us, and this shows how dumb everyone is, had this quaint theory that yields would simply compress as more people found out about DeFi. Lol.

But the number of projects building and the number of different yield opportunities is exploding so aggregate yields have increased not declined.

We didn’t factor in that the amount of information produced would accelerate to the point where it is impossible to keep up either. Which means it’s hard for market efficiency to increase.

Until we have industrial scale yield farming optimisation I don’t see this shifting. And even then it’s hard because there are so many variable and time is a critical one.

I think we also didn’t factor in the potential for governance tokens to appreciate so much that current distributions programs would have incredible yields even as more assets flow in to absorb them.

Right now we are in a positive feedback loop, where more awareness creates more demand which brings in more builders to launch more projects which increases aggregate yield and demand further.

You now have this two phase speculation, should I farm or buy, and if I farm which protocol has the best change of maintaining yield through capital appreciation the longest. It’s not just what is the cash flow from depositing USDC into this protocol.

This increases information assymetry further because you can’t just do a direct assessment of yield today, well you can, but you risk leaving a lot of yield on the table. You probably only get burned on this a few times before you learn.

So now many yield farmers have switched from selling their produce immediately for cash flow to hoarding it. Produce prices will go up which contributes to the APay both immediately and longer term.

Finally you have liquidity, some assets you can yield mine have high liquidity and some have low liquidity and are highly reflexive. If some Wheat Barron turns up at the market and tries to sell a million bushels the price will collapse. So liquidity risk is also a factor.

It’s unclear how long this part of the cycle lasts but given most of us failed to predict it in the first place it’s hard to even estimate. I’m not sure that even looking at 2017 is helpful because unlike that time many of these protocols are live and providing utility.