What Is DeFi Yield and How Does It Work? A Beginner's Guide

The Terminology Problem

Something strange is happening in financial policy circles. Drafts of regulations are circulating that reference “staking stablecoins” — a concept that doesn't actually exist.

“I've literally seen in policy discussions, I have drafts of things that say you can stake a stablecoin. You can't stake a stablecoin.”

— Cuy Sheffield, Head of Crypto at Visa

This isn't a minor semantic issue.

DeFi yield products are moving from crypto-native platforms into mainstream financial services: Kraken just launched multi-protocol yield vaults, Coinbase has Morpho-based earn products, Bitwise acquired a staking firm with $2.2 billion in assets.

Uniform vocabulary is important. Regulators are confused. Traditional finance professionals are confused. Even some builders are confused.

So let's fix that.

Two Primitives: Staking and Lending

DeFi yield can come from many different strategies, like staking, lending, looping, arbitrage, or other methods. Staking and lending are two of the most well-known yield strategies, but they come from fundamentally different sources. They share one thing in common: both let you earn on your assets.

Source 1: Staking

Staking is about supporting network security. When you stake ETH, SOL, or another proof-of-stake asset, you're locking up that asset to help validate transactions on the blockchain. In exchange, you earn fees as rewards.

“Staking has always been this entry point into DeFi.”

— Sun Raghupathi, CEO & Co-Founder, Veda Labs

The yield comes from transaction fees paid by network users and block rewards issued by the protocol. Essentially, you're earning a share of the network's revenue for helping run it. For existing holders, staking also prevents dilution from new token issuance.

The key insight: Staking only works with the native asset of a proof-of-stake blockchain. You stake ETH to help secure Ethereum. You stake SOL to help secure Solana. You can't stake BTC because the Bitcoin blockchain doesn't use a proof-of-stake mechanism.

Similarly, you can't stake a stablecoin because stablecoins don't secure networks. They're not the native asset of any proof-of-stake chain.

Source 2: Lending

Lending is about supplying capital.

You deposit assets (including stablecoins) into a protocol. Borrowers pay interest to access that capital. You earn yield. In DeFi lending, borrowers typically post crypto assets as collateral — often at 150% or more of the loan value — and pay interest to borrow stablecoins against those holdings.

Protocols like Aave and Morpho facilitate this matching, though they differ materially in liquidity profiles and risk characteristics.

“Lending opens DeFi yield to mainstream consumers who come across a stablecoin, they're not interested in crypto assets, but they want dollars, and they want to earn 3%, 4%, 8% on their dollars.”

— Sun Raghupathi

The customer for lending products may have never touched crypto before. They just want better returns on their dollars than what they might find with a traditional bank account.

So What Is a Vault?

If staking and lending are the raw ingredients, vaults are the finished product — the vehicle that facilitates easy and transparent user access to those yield strategies.

Veda's vaults aggregate yield across multiple protocols and multiple blockchains into a single, simplified experience. The user deposits assets. The vault handles everything else — moving capital to wherever the best risk-adjusted returns are available.

Kraken's new DeFi Earn product is an example of this. A Kraken Exchange user who may have never used DeFi directly can deposit USDC and immediately start earning yield sourced from Aave, Morpho, Curve, and other protocols across multiple chains.

The user doesn't need to know what any of those protocols are. They don't need to manage gas fees or bridge assets between chains. They just see a yield number and choose whether to participate.

According to Sun, within the first week, Kraken's product attracted over $40 million in deposits and 13,000 unique users — many of whom may have been accessing DeFi for the first time.

What Makes Vaults Different From Funds?

This is where traditional finance professionals often get stuck. A vault sounds a lot like a fund or a structured product. In some ways, the mental model is similar. But the underlying mechanics are fundamentally different.

Three core features make vaults unique:

1. Transparency

All money movement happens onchain. Users can see exactly where their assets are at any moment. Unlike quarterly NAV reporting or delayed disclosure, vault positions are publicly verifiable in real-time.

“A vault provides guarantees to users. They can see where their assets are at all times. It's all on the blockchain. It's all transparent. It's all publicly verifiable.”

— Sun Raghupathi

2. Cryptographic Constraints

Veda vaults operate under programmatic rules that limit what can happen to user assets by using an allowlist-only approach. Controls on leverage, restrictions on which protocols can receive capital, limits on asset exposure — all of this is encoded in smart contracts and publicly auditable.

“They have guarantees as to what can happen to those assets. Things like control on leverage, what protocols can be taken out, what assets can this vault actually take exposure to — all of this stuff is all public. It's all verifiable onchain.”

— Sun Raghupathi

3. Non-Custodial Access

Users retain the ability to withdraw their assets at all times, without waiting on a fund manager.

The 2022 collapse of centralized yield platforms like Celsius and BlockFi demonstrated what happens when users can't verify where their assets are and can't access them on demand.

“People wanted high-yield savings accounts on their stablecoins. It's why those products did so well until they blew up. But why did they blow up? It's because there was no accountability. Customers couldn't see where their capital was.”

— Sun Raghupathi

Curators: A New Kind of Asset Manager

If vaults are the product, curators are the professionals who manage them. They decide which protocols receive capital, how allocations shift over time, and how to balance yield against risk.

“We've mentioned the term curator four times, and everyone's like, what is a curator? In my mind, I just default to asset manager.”

— Cuy Sheffield

Traditional asset managers operate in a trust-based relationship with clients. Curators operate under cryptographic constraints, making their actions publicly verifiable. They're performing similar functions — risk management, capital allocation — but the accountability mechanism is fundamentally different. Users can verify rather than trust.

“What we're seeing is massive interest from traditional institutions to bring their risk management abilities onchain. We're going to see a fusion of these roles: asset managers, risk managers, and curators. We're all talking about the same thing, and these things will converge.”

— Sun Raghupathi

The Institutional Adoption Sequence

For traditional financial institutions looking to enter onchain yield markets, there's been a clear progression:

1. Staking — The entry point. Well-understood, mature infrastructure. Bitwise's acquisition of staking firm Chorus One ($2.2B in staked assets) is a recent example.
2. Onchain Lending — Clear parallels to traditional finance. Institutions are now getting educated on protocol mechanics and security considerations.
3. General-Purpose Vaults — The end state. Products that access the full universe of onchain yield — staking, lending, RWAs, fixed income — all packaged with appropriate risk controls.

“This is a wave that is washing over all traditional institutions and all asset managers. It's a question of when and not if.”

— Sun Raghupathi

The Unsolved Problem: Privacy

One major gap remains — current DeFi infrastructure was not built with privacy in mind.

For fintechs considering yield products, transparency can have drawbacks. When millions of customers deploy into a vault, it creates a publicly visible association between platform and customer addresses onchain. Competitors and analysts can observe flows and infer customer behaviour.

“There is no good way of doing that on Ethereum today and it's one of the main challenges.”

— Sun Raghupathi

Privacy-preserving vaults don't exist yet. Building them will require new infrastructure. Until that's solved, institutional adoption will remain constrained. Privacy isn't a nice-to-have. For many use cases, it's table stakes.

The Bottom Line

DeFi yield is entering a new phase. The products are maturing. The infrastructure is scaling. Major exchanges are shipping real products to millions of users.

But the terminology confusion persists. And it matters. Regulators writing rules need to understand what they're regulating. Financial institutions evaluating opportunities need to understand what they're buying. Users need to understand what they're using.

Staking secures networks. Lending supplies capital. Vaults aggregate yield. Curators manage risk under cryptographic constraints.

These are the building blocks of onchain finance.