The sustainable yield checklist: 7 questions before you ape

Key takeaways

Seven critical questions reveal whether yield is sustainable: source, retention, subsidy dependence, duration, counterparty risk, volatility sensitivity, and governance risk
Good yield is cash-flow backed, maintains stable retention without subsidies, and has transparent cost structures
Bad yield shows high emissions, attracts mercenary liquidity, and has unclear take-rates or value capture mechanisms
Weekly monitoring using this checklist catches deteriorating yields before major losses occur
No single metric tells the full story; comprehensive evaluation prevents common yield traps

The 7-Question Checklist

Question 1: What Funds the Yield?

Start with the source. Where does the money actually come from? Real yield comes from fees paid by users for services rendered. Fake yield comes from printing tokens and distributing them to create the illusion of return.

To verify yield sources, check how data providers like DefiLlama categorize the protocol's revenue. Their data definitions clarify what counts as protocol revenue versus pass-through payments, helping you distinguish real cash flows from accounting tricks.

If the answer is "trading fees from active users," that's good. Users pay to swap. The protocol captures a portion. That portion funds yield. The economics are clear. The sustainability depends on maintaining user activity, not token price.

If the answer is "liquidity mining rewards," that's bad. The protocol prints tokens. Recipients can sell them. Selling creates downward price pressure. The cycle is unsustainable unless the protocol achieves strong product-market fit before emissions end.

Look for specificity. "Protocol revenue" is vague. "5% of interest spread between borrowers and lenders" is specific. Vague answers often hide subsidy dependence. Specific answers reveal the actual mechanism.

Question 2: Does Yield Persist Without Emissions?

Test retention. What happens when the liquidity mining program ends? If yield drops from 50% to 3%, the 47% difference was subsidy. The 3% residual might be real. This test separates durable from temporary.

Check historical data. Did the protocol run incentive programs previously? What happened to yield and TVL when they ended? If both collapsed, users are mercenaries. If yield dropped modestly but TVL stayed stable, users value the service.

Ask about the roadmap. When do emissions taper? Is there a graduation plan? Protocols with credible paths to sustainability often publish emission reduction schedules. Protocols planning permanent subsidies often avoid this topic.

Question 3: What Is the Emissions-to-Revenue Ratio?

Calculate annual token issuance. Multiply by average token price. Divide by annual retained revenue. The ratio reveals subsidy dependence quantitatively.

Ratios below 0.5 are excellent. The protocol spends half a dollar in subsidies for every dollar of revenue. This is profitable even accounting for emissions. Ratios between 0.5 and 1.0 are acceptable if improving. The protocol is near break-even.

Ratios above 2.0 are concerning. The protocol spends two dollars in subsidies for every dollar of revenue. This is deeply unprofitable. Unless revenue is growing much faster than emissions, it's unsustainable.

Ratios above 5.0 are red flags. The protocol is burning capital to maintain activity. Most users are farming tokens, not using the service organically. When subsidies end, activity will collapse.

Question 4: How Long Has This Yield Persisted?

Duration reveals stability. A yield that's been 8-12% for six months is more credible than a yield that just jumped to 80% last week. Stable yields suggest structural sources. Volatile yields suggest subsidy manipulation or temporary conditions.

Check the trend. Is yield increasing, stable, or decreasing? Increasing yield without corresponding revenue growth often means emissions are accelerating. Stable yield with growing TVL means the protocol is scaling sustainably. Decreasing yield might indicate improving economics or deteriorating demand.

Compare to similar protocols. If one stablecoin lending pool offers 5% and another offers 50% on the same asset, one is subsidizing. The market doesn't misprice identical risks by 10x without reason. The higher yield is almost certainly temporary.

Question 5: What Are the Counterparty Risks?

Identify who you're depending on. Lending protocols have borrower counterparty risk. If borrowers default and collateral is insufficient, lenders lose principal. Staking protocols have validator counterparty risk. If validators misbehave and get slashed, stakers lose principal.

Check the collateralization ratio. Overcollateralized lending is safer than undercollateralized. A loan requiring 150% collateral has a safety buffer. A loan requiring 105% collateral is fragile. Small price moves can cause bad debt.

Understand liquidation mechanics. Can positions be liquidated quickly enough to protect lenders? Are there circuit breakers for extreme volatility? Is there an insurance fund to cover shortfalls? These mechanisms determine whether yield survives tail events.

Question 6: How Sensitive Is Yield to Volatility?

Volatility can enhance or destroy yield. Options sellers earn high premiums during volatility but risk large losses. Lending protocols earn more when volatility increases liquidation frequency but risk bad debt if volatility causes collateral to fall too fast.

Understand the payoff structure. Is this a selling volatility strategy or buying volatility strategy? Selling volatility generates steady returns most of the time with occasional large losses. Buying volatility generates frequent small losses with occasional large gains.

Check drawdown history. Did this strategy experience any significant losses in past volatility events? A strategy with 12% average yield but -50% worst month is very different from one with 8% average yield and -2% worst month. Risk-adjusted returns matter more than nominal rates.

Question 7: What Are the Governance Risks?

Governance can change everything. A DAO vote could redirect revenue from tokenholders to the treasury. It could increase emissions dramatically. It could change fee structures. Protocol-level decisions affect yield sustainability.

Check governance concentration. If a small number of addresses control a majority of voting power, they can unilaterally change terms. Decentralized governance with broad distribution is safer for yield recipients.

Read recent proposals. Are there active discussions about changing emission rates, fee structures, or revenue distribution? Proposals to increase emissions are red flags. Proposals to decrease emissions while maintaining revenue are green flags.

What Good Looks Like

Cash-flow backed yield from fees paid by active users. A DEX distributing 30% of trading fees to tokenholders is cash-flow backed. Users trade because they want to swap tokens, not because they're farming yield. The fees persist regardless of token price.

Stable retention after incentives end. If a lending protocol sees 90% of TVL remain after tapering emissions from 20% to 5%, retention is strong. Users are there for the lending service, not just the subsidies.

Transparent cost structures. The protocol clearly discloses what percentage of fees goes to LPs, what percentage goes to stakers, and what percentage funds yield. Documentation explains the economics. Dashboards show real-time metrics. Nothing is hidden.

Low emissions-to-revenue ratios with improving trends. A protocol with 0.6 ratio this quarter versus 0.8 last quarter is moving toward sustainability. Revenue is growing faster than emissions. The graduation from subsidy to profitability is progressing.

Overcollateralization and robust liquidation systems. Lending with 150% minimum collateral ratios and tested liquidation bots reduces counterparty risk. Historical stress tests show the system handled volatility without bad debt.

What Bad Looks Like

High emissions funding most of the yield. A protocol offering 80% APY where 75% comes from token distributions and 5% from fees is 94% subsidized. When emissions taper, yield collapses. Users leave. The apparent high yield was temporary.

Mercenary liquidity that disappears when incentives end. TVL of $500M during a liquidity mining program drops to $50M after it ends. The 90% exodus reveals users had no interest in the protocol's services. They came for subsidies and left when they stopped.

Unclear or changing take-rate structures. The protocol documentation says "fees are distributed to stakeholders" without specifying percentages. Or the percentages change frequently through governance votes. Lack of clarity signals potential value extraction or misaligned incentives.

Emissions growing faster than revenue. Quarter-over-quarter, emissions increase 40% while revenue increases 10%. The protocol is becoming more dependent on subsidies, not less. This trajectory leads to unsustainability.

High counterparty risk with insufficient safeguards. Undercollateralized lending without effective liquidation mechanisms. Reliance on oracles with poor liquidity or manipulation risk. No insurance fund to cover shortfalls. These create principal risk that yield doesn't compensate for.

How to Use This Weekly

Set up a monitoring routine. Every Monday, check your active yield positions against this checklist. It takes 10 minutes per protocol. The early warning signals save multiples of that time in prevented losses.

Track emissions-to-revenue ratios. Calculate this monthly. Plot it over time. If the ratio is deteriorating, reduce exposure. If improving, maintain or increase allocation. The trend is more important than any single data point.

Watch for governance proposals. Set up alerts for the DAOs you're invested in. Read proposals about emission changes, fee structures, or revenue distribution. These directly affect yield sustainability. Vote or exit accordingly.

Compare actual yield to expected yield. If you're earning 15% and the protocol claims 20%, where's the gap? Fees might be lower than projected. Emissions might have tapered. Understanding discrepancies reveals changing fundamentals.

Stress test your assumptions. What happens if token price drops 50%? If emissions were denominated in tokens, does dollar-denominated yield collapse? If yield was partially from price appreciation, does it turn negative? Know your exposure to these scenarios.

Sustainable Yield Checklist

Question	Good Answer	Bad Answer
What funds the yield?	User fees from organic activity	Token emissions or vague "protocol revenue"
Does it persist without emissions?	Yes, yield stays 70%+ of current level	No, yield collapses when programs end
What is emissions/revenue ratio?	Below 1.0, declining over time	Above 2.0, increasing over time
How long has it persisted?	Stable for 3+ months at similar levels	Just launched or highly volatile
What are counterparty risks?	Overcollateralized with robust liquidations	Undercollateralized or untested systems
Sensitivity to volatility?	Low drawdown history, clear risk limits	Selling vol with unlimited downside
Governance risks?	Decentralized voting, stable parameters	Concentrated control, frequent changes

See live data

Links open DefiLlama or other external sources.

Related Concepts

Evaluating yield sustainability requires understanding protocol economics:

Real yield: Learn the precise definition of cash-flow backed yield versus subsidized returns
Emissions vs revenue: Understand how to measure emissions as expenses and compare to revenue
Fees vs revenue vs profit: The accounting framework for evaluating protocol economics
Protocol revenue: What protocols actually retain and can distribute
Liquidity mining: How token incentive programs work and when they're rational

FAQ

Is high APY ever sustainable?

Sometimes, but only if it's funded by durable cash flows and appropriate risk premia. High yields from selling options during volatility can be real but risky. High yields from token emissions are almost never sustainable. Check the source and risk profile.

What single metric should I check first?

Emissions relative to retained revenue over time. If emissions are 3x revenue and growing, everything else is secondary. The protocol is burning capital unsustainably. If emissions are 0.3x revenue and shrinking, dig deeper into other questions.

How do I know if retention is good enough?

Compare TVL during high incentives versus low incentives. If TVL drops less than 30% when incentives taper, retention is probably acceptable. If TVL drops more than 70%, most users were mercenaries. The exact threshold depends on protocol type and stage.

Should I avoid all subsidized yield?

Not necessarily. Early-stage protocols can rationally subsidize growth if they have credible paths to sustainability. The question is whether emissions are buying durable users or renting mercenaries. Check cohort retention and unit economics.

What if the protocol won't disclose emissions data?

Treat it as a red flag. Lack of transparency usually means the numbers are bad. If a protocol is genuinely sustainable, it has every incentive to disclose emissions data to differentiate from competitors. Opacity suggests something to hide.

How often do I need to re-check this?

Weekly for active positions. Protocol economics can change quickly through governance votes, program endings, or market conditions. Ten minutes weekly per protocol is cheap insurance against major losses from deteriorating yields.

Can governance change these answers overnight?

Yes. That's why governance risk is question seven. A single DAO vote can redirect revenue, increase emissions, or change fee structures. Monitor governance activity. Vote if you have power. Exit if you don't and proposals are adverse.

Cite this definition

Sustainable yield passes seven tests covering funding source, retention without subsidies, emissions-to-revenue ratios, duration stability, counterparty risk management, volatility sensitivity, and governance risk, distinguishing cash-flow backed returns from temporary subsidies that collapse when incentives end.