If you can borrow token A at X% interest, but there is an opportunity to use that borrowed token and earn Y% interest, if Y is greater than X, you can make profit. This is a super simplified explanation but that's the gist of it. Basically defi is a gigantic game of rehypothecation.

The high yield isn't coming from high interest rates, generally they're being subsidized by the protocol to attract deposits. In fact, some these these subsidies pay you to borrow.

There's a ton of reasons.

Arbitrage

- Borrowing, swapping and paying back in the same function call.

Liquid Staking

- Say i have a POS coin. When i stake i secure the network with collatoral and get paid a certain APR. But now that token is stuck staking. But if you create a smart contract the aggregates the coins together, stakes them and loan them out to represent their underlying value, you get slight divergence between the total value in the smart contract and your underlying ownership in it. So now i have this Liquid X coin, that is rising in value at a set rate to normal X Coin. So now, i can then go and utilize the underlying value of the Liquid coin by utilize it as collatoral to mint more X_Coin. Rinse and repeat until you are at a respectable collateralization ratio.

I was curious to this myself (I'm speaking more generally than any project). One reason I found is just to provide margin investing. So some company buys some $FOO and it goes up 10x. It may prefer to borrow stablecoins with it as collateral, even at a high rate. This way, investment can continue without selling (they may want to defer selling for liquidity or tax reasons, simply want to leverage and buy more etc)

Not precisely what you’re asking for, and about Compound/Uniswap rather than this bundle, but I made a comment a while ago explaining some of the core dynamics of defi lending.

https://news.ycombinator.com/item?id=30348136