Yield is mostly someone else's leverage

Lending yield on major protocols is frequently presented as a property of the protocol. It is not. It is the price borrowers are willing to pay, and the overwhelming majority of borrowing is leverage on a directional view.

That makes the return profile clear once stated plainly: you earn most when others are most confident, and least when they are not. Correlation with the thing you were trying to diversify away from is therefore high, precisely when it matters.

Where the exceptions are

• Basis trades, where the borrower is hedged and demand is less sentiment-driven.
• Working capital borrowing against tokenised receivables — small, growing, and structurally different.
• Liquidity provision fees on genuinely high-turnover pairs, which are compensation for a real service.
• Protocol incentives, which are a transfer rather than a yield and should be modelled as one.

We stopped quoting APY to the investment committee and started quoting what the borrower was doing with the money.

What to watch

Whether hedged borrowing grows as a share of the book. That mix, not the headline rate, determines how this behaves in the next drawdown.