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To compare DeFi lending yields fairly, separate the base supply return from token rewards, fees, borrowing interest, and transaction costs. Evaluate the same asset, chain, market type, strategy, and holding period; then account for liquidity and liquidation exposure. A displayed APY is a changing estimate—not a guaranteed return—and a headline reward may be conditional or have uncertain value.
What a DeFi lending yield includes
A supply rate is not necessarily the full interest paid by borrowers. In Aave v3, supplier yield is funded by borrower interest net of the reserve factor, and supplied aTokens increase in balance with pool borrowing activity. Rates respond to utilization, while available liquidity can affect withdrawals. See the Aave v3 overview.
Morpho documents a different way to express the relationship: supplyAPY = borrowAPY × utilization × (1 − fee). In that formula, utilization and the market fee affect how much of the borrower rate reaches suppliers. Morpho says the fee is set by governance and that its documentation reported no fees applied at the time it was written; check the selected market’s current fee rather than assuming that statement still applies. The market’s interest-rate model is selected at market creation from the governance-approved set described in the Morpho interest rate model documentation.
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Keep these components distinct when a protocol interface presents a single estimated figure:
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- Base supply yield: interest earned by supplying the asset, after any protocol or market-level deduction reflected in that rate.
- Token incentives: an additional, conditional source of value, separate from borrower-funded interest.
- Borrowing cost: interest and other costs incurred if the strategy borrows to increase or alter exposure.
- Strategy costs: applicable transaction, bridging, slippage, vault, or reward-claim costs.
Check whether the displayed APY already includes incentives before adding a reward estimate. Otherwise, the comparison can count the same return twice.
Build a like-for-like comparison
Record the same inputs for every candidate, with a timestamp. Market rates, utilization, incentives, and liquidity can change, so comparisons made at different times may not be meaningful.
| Comparison item | What to record | Why it matters |
|---|---|---|
| Asset and network | Token, chain, and exact market or pool | Rates and risks are market-specific; the same token name does not make two positions equivalent. |
| Base supply return | Supply APY, timestamp, utilization, and whether rewards are included | Separates lending yield from incentives and identifies the conditions behind a changing rate. |
| Fee treatment | Protocol reserve factor or market fee, and whether it is already reflected in the displayed rate | Prevents an assumed gross rate from being compared with a net rate or a fee being subtracted twice. |
| Reward terms | Reward token or points, campaign period or maturity, eligibility, payout method, and claim requirements | A headline incentive may not apply to every user or be immediately realizable. |
| Borrowing, if used | Borrow amount, borrow APY, timestamp, rate type or market conditions, and modeled duration | Borrow interest reduces strategy return and can change during the position. |
| Costs and liquidity | Applicable gas, swap or bridge costs, slippage, vault or claim fees, and withdrawal conditions | These costs can reduce the amount received, while limited unborrowed liquidity may constrain withdrawal. |
| Collateral and liquidation | Collateral asset, relevant health factor or LTV and LLTV parameters, and oracle/liquidation mechanics | Borrowing strategies can lose collateral if their market-specific liquidation conditions are reached. |
Use the same deposit assumptions and holding period for each candidate. If one position is unleveraged and another borrows, label them as different strategies rather than ranking their APYs as if they were equivalent.
Estimate return over the same holding period
For a position that does not borrow, use this comparison framework:
Estimated net return ≈ base supply return after protocol fees + estimated reward value − transaction and other applicable strategy costs.
For a strategy that borrows:
Estimated net strategy return ≈ supply return + reward value − borrow interest − transaction and other applicable strategy costs.
These are accounting frameworks, not protocol formulas or promises of performance. Put each component on the same time basis and use consistent denominators. An annualized rate is not itself the return for a shorter holding period: use the rate’s stated convention and disclose any compounding or duration assumptions. Morpho’s documentation uses 31,536,000 seconds as its seconds-per-year constant in a displayed borrow-APY compounding formula; that is a time-conversion constant, not a yield statistic.
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For a reward paid in a tradable token, show the token amount or the price and valuation time used to estimate its value. Because token prices can move, a single estimate can mislead; show a range under different price assumptions or keep the reward separate from the base yield. For points, do not assign cash value unless there is a supportable conversion basis. State reward eligibility, payout timing, campaign duration or maturity, and any claim costs.
Aave’s documentation distinguishes supply incentives, borrow incentives, and conditional incentives. Its v3 documentation says some third-party Merit initiatives require claims through an external platform and are not guaranteed by Aave Labs; governance rewards are a separate category. Aave v4 describes Merkl supply rewards as additional APY paid in the specified payout token when a campaign matures, and distinguishes token rewards from points programs. Read the applicable Aave v3 incentives and Aave v4 incentives terms for the particular market and campaign.
Include only costs that apply to the route
Transaction fees, bridging, slippage, vault fees, and reward-claim costs should be included only if the compared route incurs them. State whether a cost is one-time or recurring and how it is allocated to the modeled position. Do not compare a one-time cost against an annual yield without specifying the holding period.
Account for the borrowing leg
Borrow rates are variable and can change as utilization and protocol parameters change. Aave says interest begins accruing when a borrow is made, and that borrow rates respond to utilization and governance parameters. A borrow rate observed at entry therefore does not establish the cost for the full holding period. Consult the Aave borrow guidance and model a range of borrowing costs when the rate may change.
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Independent reader supportYour contribution helps us test, update, and keep practical guides available for everyone.Compare liquidity and liquidation exposure
Can you withdraw when you need to?
A quoted supply rate does not ensure that the full position can be withdrawn immediately. Aave notes that available withdrawal liquidity can constrain redemption. Include the market’s current liquidity conditions and any relevant withdrawal restrictions in the comparison rather than treating APY as the sole decision input.
What can trigger liquidation?
In Aave, a position may be liquidated when its health factor falls below 1. In Morpho, a position is eligible for liquidation when its LTV exceeds that market’s LLTV. For Morpho, collateral value can fall, debt can grow through accrued interest, or both; a liquidator repays some or all of the debt in exchange for collateral plus the market’s liquidation incentive. Consult the selected market’s parameters and the Morpho liquidation documentation rather than applying a generic threshold to every market.
These mechanics matter most when borrowing is part of the strategy: collateral volatility, accrued debt, and available liquidity can affect the outcome independently of the headline supply rate.
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A practical comparison workflow
- Choose comparable candidates. Match the asset, chain, market type, strategy, modeled deposit, and holding period.
- Capture a dated market snapshot. Record each exact market’s supply APY, utilization, and whether the displayed supply rate includes incentives.
- Separate base yield from deductions. Identify any reserve factor or market fee and determine whether it is already incorporated in the rate you recorded.
- Read the reward terms. Record token or points, eligibility, campaign dates or maturity, payout and claim mechanics, and the valuation assumption if assigning a token reward a value.
- Model the borrowing leg, if any. Record borrow amount and rate, estimate interest over the same period, and account for rate changes with scenarios rather than treating the entry rate as fixed.
- Subtract applicable costs. Include only costs incurred by that route, label one-time versus recurring expenses, and allocate them to the modeled period.
- Check exit and liquidation conditions. Review withdrawal liquidity and market-specific collateral and liquidation parameters before comparing the resulting estimates.
- Present assumptions with the result. Show base supply return, estimated incentives, borrowing cost, and other costs separately; date the snapshot and identify uncertain values instead of collapsing them into a falsely precise APY.
What a yield ranking can and cannot tell you
A ranking is useful only when its return sources and assumptions are visible. No universal supply APY, borrow APY, reward value, or best protocol applies across assets, chains, markets, eligibility rules, governance settings, and time. A higher displayed figure may reflect a temporary incentive, a different fee treatment, or borrowing risk rather than a better comparable lending return.
Use the estimate to compare scenarios, not to infer a guaranteed outcome or a personalized recommendation. Market conditions and governance settings can change, and rewards may be conditional; the relevant figures are those for the exact market and time being evaluated.
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