Understand what earns the yield.

Start with the activity, then the rate

Decentralized finance describes financial applications built around blockchain-based rules and contracts. Different applications do different things: exchange assets, facilitate borrowing, manage collateral, or support other strategies. Proof-of-stake validation is a separate network activity, even though staking products often appear alongside DeFi services.

Before interpreting a return, identify the activity producing it. Borrower payments, trading fees, token issuance, and incentives have different dependencies. A single APY label can hide changes in reward prices, compounding assumptions, service charges, and exit conditions.

Three mechanisms to distinguish

Neither a higher stated return nor a familiar protocol name makes these risks disappear. Our staking guide and liquidity pool guide explain the mechanics with practical examples.

Trace the dependency chain

A position may depend on a base network, a token issuer, a smart contract, an oracle, a bridge, and the interface used to interact with them. List those dependencies individually. Several positions that share the same oracle or collateral may be exposed to the same failure.

Read who controls upgrades and administrative permissions, what independent reviews actually covered, and whether the code you are using matches the reviewed version. A review can identify weaknesses; it cannot guarantee that a system will never fail.

Understand the exit before entering

Check whether an exit requires a queue, a cooldown, available borrowers’ repayments, a market trade, or another party’s cooperation. Selling a receipt token can have a different price and risk profile from redeeming it through the underlying mechanism.

Look at the assets and fees required to leave. An apparently accessible position can still be costly to unwind during congestion. Our fee guide explains why each transaction needs its own review.

Ask better questions about rewards

• Which asset is paid, and what could change its market value?
• Does the displayed rate assume compounding, and can that assumption hold?
• Are rewards temporary incentives or tied to continuing economic activity?
• What losses, penalties, and service fees are outside the headline rate?
• Can the position be closed without depending on a liquid secondary market?

Record the answers and the source dates. Avoid comparing rates that refer to different activities or ignore different costs. Continue with portfolio risk to see how individual positions can share the same exposure.

Source: Ethereum’s staking documentation explains participation options and their tradeoffs. Network rules and third-party arrangements should be checked separately.