Yield farming can earn interest, trading fees or protocol rewards from digital asset deposits, while shifts in lending supply rates and strategy costs affect what depositors ultimately retain.
Strategies differ in how they produce income. A lending market pays interest; a liquidity provider can collect charges on pool trades; a protocol may issue token rewards. On Aave, lending supply rates can change as more or less of a pool's supplied assets are in use, and governance parameters also affect them. A vault may collect rewards, exchange them for its deposit asset and put that value back into the strategy. Swaps, network use and strategy charges can add cost. Reinvestment changes how earnings accumulate but does not add a separate revenue source. A quoted yield may not reveal which income channel dominates or how long a rate can persist.
APR is a yearly return measure that leaves reinvested earnings out; APY includes compounding. Gross APR commonly excludes fees, while net APY may reflect them, so displayed rates can use different cost assumptions.
Consider a hypothetical 10,000 USD Coin (USDC) deposit at a fixed 12% APR for one year. With no reinvestment, its modeled ending total is 11,200 USDC. Monthly compounding results in 11,268.25 USDC; daily compounding gives 11,274.75 USDC, just 6.50 USDC above the monthly case before costs. If daily reinvestment brought an assumed 100 USDC in annual charges, the balance would fall to 11,174.75 USDC, below the no-reinvestment outcome. The illustration assumes a steady rate and asset value; it is not a current rate offer. USDC may trade above or below $1 on third-party platforms.
For liquidity providers, a change in pool assets' relative prices can produce impermanent loss, and trading fees may not make up for it. Token swaps, network fees and strategy charges can cut the retained return; smart-contract or operational failures can also endanger deposited funds. The rate alone therefore leaves out how expenses and market movements affect what a depositor keeps.
