An annualized rate on a DeFi position is an output, not a description. Two positions showing similar rates can be funded by mechanisms that behave nothing alike under stress.
Someone has to be paying
Every yield has a payer. Identifying that party is the first step in understanding what the position actually is and what would cause the payments to stop.
Borrower interest comes from people who want leverage or working capital. Trading fees come from traders crossing a spread. Staking rewards come from protocol issuance and transaction fees.
Token incentives come from a treasury spending its own supply to attract capital. That is a marketing budget rather than an operating return, and budgets are finite.
Borrower interest tracks demand
Lending rates in DeFi are usually set by a curve tied to utilization, meaning the share of deposited assets currently borrowed. Higher utilization pushes the rate up automatically.
The yield therefore reflects borrowing demand at that moment. When demand falls, the rate falls with it, and no announcement or governance action is required.
This source is durable in the sense that it does not depend on a treasury, but it is also unstable, moving continuously with market conditions.
Fee income depends on volume and exposure
Supplying liquidity to an automated market maker earns a share of trading fees, which scales with volume through the pool rather than with the size of the deposit alone.
The position simultaneously carries directional exposure to the assets in the pair. The fee income and the change in the underlying holdings are separate outcomes that get reported as one number.
A quoted rate that counts only fees describes half the position. A rate that nets out price effects describes a past period that may not repeat.
Incentives are a transfer, not a return
When a protocol pays depositors in its own token, the value comes from the token's holders through dilution. Nothing external is being earned by the pool.
These programs are typically scheduled, with emissions declining over defined periods. The rate falls on that schedule regardless of how the underlying activity performs.
Quoted rates that blend incentives with organic income obscure this. Separating the two shows which part continues after the program ends.
Layering sources multiplies dependencies
Composed positions stack sources, such as a staking derivative supplied as lending collateral and borrowed against to repeat the cycle.
Each layer adds a contract that must remain solvent and a price relationship that must hold. The combined yield is higher because the combined set of failure conditions is larger.
Comparing a single-layer position with a stacked one on rate alone therefore compares two different things, and the rate is the part that carries the least information.