Why the highest yield is a warning

Every yield is a price someone pays to use your money. When one venue pays noticeably more than everywhere else, the market is telling you something specific: the extra return is compensation for an extra risk. The dashboards that rank yields from highest to lowest are, in effect, ranking risks from highest to lowest, upside down.

In a lending pool there is a mechanical version of this. The interest rate rises when nearly all the money in the pool is lent out. But that is exactly the moment when a depositor who wants to leave may find the door crowded: the money is out on loan, and a withdrawal has to wait for repayments. The high rate and the hard exit are the same fact wearing two faces. A professional reads the high number as congestion, not as a gift.

A real example. In 2022, a lending platform called Maple offered what looked like a modest premium over ordinary rates for lending dollars. The premium existed because the loans were uncollateralised: the borrowers were trading firms borrowing on reputation. One of them failed, and the depositors in one pool lost roughly eighty cents of every dollar. The rate was never a bonus. It was the price of lending without collateral, stated plainly for anyone who asked what was behind it.

One more pattern worth knowing: some advertised yields are not paid from interest at all, but in a token the platform itself creates. That is closer to a store coupon than to income, and it lasts only as long as the printing does. The first question about any yield is what pays it; the second is what you gave up to get it.

• What exactly pays this yield: interest from borrowers, or a token the platform prints?
• If I wanted my money back on a bad day, what stands between me and it?
• What did the venues paying less than this one refuse to do?