Supply-Side Yield

Supply-side yield refers to the interest earned by lenders who provide assets to a liquidity pool. This yield is generated by the interest paid by borrowers, and in some cases, augmented by protocol-specific token rewards.

The supply-side yield is the primary incentive for capital providers, and it must be competitive to attract sufficient liquidity to the protocol. It is dynamic, fluctuating based on the utilization ratio of the pool and the overall demand for borrowing.

Lenders must consider the risk-adjusted yield, which accounts for the probability of smart contract failure or collateral loss, when deciding where to supply their assets. In highly competitive markets, protocols often engage in yield wars, offering extra incentives to capture market share.

Understanding the drivers of supply-side yield is essential for passive investors looking to generate income from their crypto holdings in a decentralized environment.