Reaching for Yield in Decentralized Financial Markets

Abstract

Yield farms in decentralized finance dynamically compete for liquidity by offering high yields, advertised as salient headline rates. Farming these yields involves complex investment strategies with hidden downside risks. Capitalizing on the transparency of blockchain transactions data, we show that investors chase farms with high yields and that farms with the highest headline rates record the most negative risk-adjusted returns. Through randomized shocks to yield farmers' information display, we show that improved risk disclosure and lower perceived product complexity reduces yield chasing, thereby improving investor performance. Our evidence is consistent with salience theory that may underpin reaching for yield behavior.

Keywords: complexity, decentralized finance, derivatives, reaching for yield, salience

JEL Classification: G12, G13, G14, O33, Y80