One of the biggest promises of DeFi is the ability to earn passive income.
In addition to eliminating the need for banks, brokers, or middlemen in transactions, the new financial system offered multiple ways to make your money work for you. One of these ways is via yield-bearing assets.
In this article, we will explain how these assets work, what makes them different from regular cryptocurrencies, and most importantly, how you can use them effectively to grow your portfolio.
Let’s get to it.
What Is a Yield-Bearing Asset in DeFi?
Yield-bearing assets are crypto tokens or digital coins that automatically earn rewards or interest simply by being held. In other words, these assets “work for you” by generating extra value (yield) without active trading.
A regular cryptocurrency that only changes value when its market price moves; so generally, regular crypto holdings do not really generate income until they are sold at a higher price than their cost. Although they have potential for substantial returns, these assets typically would need to be held for a period of time and under the condition that the price increases to a point that profits can be made.
Holding a yield-bearing token in DeFi, on the other hand, is similar to having a bank account that pays interest on your balance. They either continuously increase in redeemable value or provide incentives simply for holding them.
They are also different from yield farming. The latter is a process you are actively involved in and it usually involves deploying yield-bearing assets. The key differentiator for a yield-bearing asset is that the protocol handles the rewards behind the scenes, so your asset balance or its token value grows without any extra effort on your part.
Common Types of Yield-Bearing Asset
DeFi offers several major categories of yield-bearing assets. Each category has its own examples and ways of generating yield. The most common types include:
Lending Tokens (Interest-Bearing Tokens)
When you lend crypto on a DeFi money market (like Aave, Compound, or Cream), you deposit assets to earn interest from borrowers. The protocol gives you special tokens in return. Well-known examples are Aave’s aTokens and Compound’s cTokens.
Liquidity Provider (LP) Tokens
On decentralized exchanges (DEXs) like Uniswap, SushiSwap or Curve, you can provide liquidity by depositing a pair of tokens into a trading pool (for example, ETH and DAI into an ETH-DAI pool). In return, you receive LP tokens (like Uniswap’s LP tokens) that certify your share of the pool. These tokens let you earn trading fees (and sometimes bonus tokens) in exchange for locking your assets in the pool.
Staked Tokens (Liquid Staking Derivatives)
In proof-of-stake blockchains, you can stake (lock up) your cryptocurrency to help secure the network, which earns you newly minted coins as a reward. However, traditional staking often ties up your coins, making them unusable elsewhere. DeFi introduces liquid staking tokens that represent your staked assets plus any rewards. A prime example is Lido’s stETH.
Vault Tokens (Auto-Compounding/Yield Aggregator Tokens)
Yield aggregators like Yearn Finance or Beefy combine many strategies to maximize yield. When you deposit into a vault, you get a vault token (like yvDAI from Yearn’s DAI vault). This vault token represents your share of the vault’s pooled funds.
The value of each vault token rises over time because the underlying pool of assets grows. Popular examples include Yearn’s yvTokens (yvDAI, yvUSDC, etc.), Beefy vault tokens (e.g. B-DAI), and Alpha Homora vTokens.
How Yield-Bearing Assets Generate Yield
The profit/reward/yield from yield-bearing assets in DeFi come through different ways depending on what function they are used for and their associated DeFi protocol.
From the type of yield-bearing tokens we discussed above, you’d notice that yield-bearing assets generate returns through:
- interest from lending,
- trading fees from decentralized exchanges,
- block rewards from staking, and
- reinvested earnings via vault strategies.
As long as you keep those tokens (or the underlying assets staked/lent in the protocol), you continue to earn yield.
In many cases, the number of tokens you hold stays constant (like aTokens), but their redeemable value grows. In other cases (like stETH), your balance of tokens may slowly increase as rewards are directly added. Either way, yield-bearing DeFi assets accumulate earnings over time through these mechanisms.
In all cases, the yield is programmatically distributed by smart contracts, removing the need for manual reinvestment or active trading. This makes yield-bearing assets efficient tools for passive income, especially when managed through reputable platforms.
Risks and Considerations
While yield-bearing DeFi assets can offer attractive returns, they also carry important risks that every beginner should understand:
Smart Contract Risk
All DeFi protocols run on code (“smart contracts”) that can have bugs or vulnerabilities. If a protocol’s contract is hacked or fails, users can lose their funds. For example, bugs have led to the loss of millions in DeFi hacks.
To reduce this risk, stick to well-known platforms with audits and a good track record.
Market Volatility
Cryptocurrencies are notoriously volatile. Even if a token is earning yield, its market price can swing up or down. If the underlying asset’s price falls sharply, your overall returns can shrink or even turn negative.
In simple terms, if you earn 5% yield in a year but the token’s price drops by 20%, your investment still loses value. Beginners should remember that yields do not guarantee profit if the market tank.
Impermanent Loss (for LP Positions)
When you provide liquidity to a trading pool, you own a share of two (or more) tokens. If one token’s price changes a lot relative to the other, you may end up with less total value than if you had just held the tokens separately. This phenomenon is known as impermanent loss.
In practice, fees earned can offset this, but large price swings can still cause a loss. Beginners should be cautious with LP tokens, especially in volatile pools, and understand this concept before providing liquidity.
READ MORE: What Is Impermanent Loss In DeFi?
Protocol and Liquidity Risk
Some DeFi projects have complex mechanisms (like over-collateralized loans or algorithmic stablecoins). If market conditions change abruptly, protocols may liquidate positions or break (e.g. algorithmic stablecoins losing their peg).
Also, not all tokens are easily sellable; if liquidity dries up, you might not exit a position quickly. Additionally, if you deposit through a third-party frontend or bridge, be aware of scams or faulty code outside the core protocol.
Regulatory and Counterparty Risk
The DeFi space is still evolving. Regulations could change, affecting how certain tokens or strategies can be used. There’s also trust risk: some tokens (even if decentralized) rely on teams or governance decisions.
Stablecoins used in yield strategies carry their own risk (e.g. a stablecoin losing its peg). Always know what you’re depositing.
Lock-up and Withdrawal Delays
Some yield strategies require locking funds for a period (especially with staking). During this time, you cannot withdraw instantly. In fast-moving markets, this could be risky if prices change. For example, if you stake ETH in a multi-day queue, you can’t react to market crashes until your ETH is unlocked.
READ MORE: SECURITY OF DEFI PROTOCOLS
How Can You Maximize Yield-Bearing Assets in DeFi?
While yield-bearing assets offer passive income, maximizing returns requires understanding strategy, timing, and risk. Here are actionable ways to boost yield while staying safe:
1. Choose the Right Protocols
Different platforms offer different yields, risks, and track records. Stick with audited, reputable protocols like Aave, Lido, or Yearn—especially if you’re new. Newer platforms may offer higher returns but often come with greater risk. Always check whether the protocol has security audits and active governance.
3. Diversify Yield Sources
Relying on one asset or protocol is risky. Consider diversifying across lending, staking, and vaults to spread exposure. For example, you might hold stETH for Ethereum staking yield, aUSDC for lending, and yvDAI for vault-based compounding.
4. Factor in Gas Costs and Fees
On high-fee chains like Ethereum, frequent small transactions can eat into your yield. Use L2 networks like Arbitrum, Optimism, or alternative chains like Polygon to lower transaction costs and maximize net yield.
5. Reassess Regularly
Markets shift. Yields fluctuate. Protocols launch new opportunities. Periodically reassess your allocations to ensure your assets are still performing. Use dashboards like DeFiLlama, Zapper, or DeBank to monitor earnings and risks across platforms.
Disclaimer: This piece is intended solely for informational purposes and should not be considered trading or investment advice. Nothing herein should be construed as financial, legal, or tax advice. Trading or investing in cryptocurrencies carries a considerable risk of financial loss. Always conduct due diligence.
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