DeFi Yield Farming: Understand the Risk Before Chasing an APY
Yield is not a return promise. This guide explains where DeFi yield can come from, what liquidity provision and leverage actually expose you to, and how to assess a position before committing funds.
CL
CryptoLV EditorialEditorial team
·4 min read
Review and sources
Reviewed 2026-08-13 by CryptoLV Editorial. Next review: 2026-11-13.
- Uniswap: v2 protocol overview opens in a new tab
Supports: Uniswap's official v2 documentation describes an automated-market-maker protocol whose liquidity and trading mechanics must be evaluated alongside price movement and pool design.
- Aave: Health Factor and liquidations opens in a new tab
Supports: Aave's liquidation mechanics depend on health factor, collateral/debt value and protocol parameters; liquidation can be permissionless and can transfer collateral plus a liquidation bonus.
- Investor.gov: crypto asset interest-bearing accounts opens in a new tab
Supports: Crypto-asset yield products can involve market volatility, illiquidity, failure or bankruptcy of a company holding assets, fraud, technical issues and regulatory change.
- IRS: digital asset transaction FAQs opens in a new tab
Supports: For US federal tax purposes, digital assets are property; records, basis and transaction facts matter, and exchanging materially different digital assets can create gain or loss.
- IRS: digital asset reporting overview opens in a new tab
Supports: US taxpayers may need to report digital-asset income, gains and losses whether or not they receive a Form 1099-DA; broker reporting does not replace recordkeeping.
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