Yield Illusions Entry #0901 Classified Declassified

Why a headline rate rarely holds up against a calendar

An advertised annual rate assumes today’s conditions repeat unchanged for a year, but rates move constantly, so the headline describes a world that will not last.

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Plate 801 — The forty percent that became eight the week after it was measured

Intuition test — answer before you read on

Why does an advertised annual yield rarely match what a depositor actually earns over a year?

A pool advertised a headline rate of forty percent a year. The figure was computed by taking the current moment’s earnings and projecting them across a full year as if nothing would change. Rates in these pools move by the hour with deposits, prices and incentives. A week later the same pool showed eight percent. The headline had not lied about the instant it was measured; it had lied by presenting an instant as a year, a snapshot as a forecast.

What everyone sees

A depositor reads forty percent a year and hears a promise about the next twelve months: put money in now and it grows at that rate until this time next year. The per-year framing implies stability across the year. The depositor treats a rate that is really a momentary reading as a durable feature of the pool, and plans as if the number will persist.

What is actually happening

Yields in these pools are annualisations of an instantaneous rate, extrapolating a single moment across a year under a false assumption of constancy. Finance research on rate display shows that annualising volatile short-term returns dramatically overstates realistic outcomes, because the conditions that produced the moment — high incentives, thin deposits, a price spike — decay quickly. The calendar exposes the fiction: over real time the average rate is a fraction of the headline.

Why it stays hidden

The hidden mechanism is the projection of an instant onto a year. The per-year unit smuggles in an assumption of permanence that the underlying rate never has. By quoting a momentary reading in annual terms, the pool lets the depositor imagine a stable yearlong return from a figure that describes only the second it was captured, and the gap is revealed only once a real calendar passes over it.

A yearly rate is a snapshot wearing a calendar. It describes one moment projected across twelve months that will not repeat it.

A yearly rate is a snapshot wearing a calendar. It describes one moment projected across twelve months that will not repeat it.

The hidden part — entry #0901

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A yearly rate is a snapshot wearing a calendar. It describes one moment projected across twelve months that will not repeat it.

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Sources & further reading 2
  1. Cong, Li & Wang — Tokenomics: Dynamic Adoption and Valuation (2021)
  2. Aramonte, Huang & Schrimpf — DeFi Risks and the Decentralisation Illusion (BIS, 2021)

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