Yield Farming
Yield farming is an active DeFi strategy in which you deploy capital across protocols, and regularly move or adjust it, to earn returns from several sources such as trading fees, interest and token rewards.
Where the yield comes from
The returns usually stack from a few sources. Liquidity providers earn a share of trading fees on decentralized exchanges. Lenders earn interest paid by borrowers. On top, many protocols pay extra rewards in their own tokens to attract capital, a practice known as liquidity mining.
Farmers combine these. A typical loop might be: deposit two tokens into a liquidity pool, receive LP tokens representing that position, stake those LP tokens elsewhere for reward tokens, then sell or reinvest the rewards. The farming part is the ongoing work of chasing better rates and compounding.
A worked example
Say you deposit 1 ETH and 2,000 USDC into a pool. Over a month the pool's fees add a little to your position and a farm pays you reward tokens on your LP tokens. The headline rate looks attractive, but by month's end ETH has moved, so impermanent loss has reduced your position compared with simply holding, and the reward token has fallen in price. Your real result depends on all three, not on the advertised number.
Why it matters
Yield farming helped bootstrap liquidity across DeFi, especially during the 2020 boom often called DeFi Summer. It shows how protocols compete for capital, and why advertised yields can change sharply from week to week.
Risks and common mistakes
Smart contract bugs and exploits can drain funds, and stacking several protocols multiplies that risk. Impermanent loss can outweigh fees. Reward tokens are often issued in large amounts and sold by farmers, so their price can fall faster than the rewards accumulate. Rug pulls, where developers withdraw liquidity or abuse admin keys, remain common among unaudited farms.
Costs add up too: gas fees for every deposit, claim and move can eat small positions, and in many countries each reward or swap can be a taxable event. Very high yields usually signal high risk or temporary incentives, not free money.
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Frequently asked questions
Is yield farming the same as staking?
No. Staking secures a proof-of-stake network and earns protocol rewards. Yield farming moves capital between DeFi protocols to collect fees and incentive tokens.
Why are some farming yields so high?
Often because they are paid in newly issued reward tokens. If those tokens lose value, the real return can be far lower than advertised.
Can you lose money yield farming?
Yes. Exploits, impermanent loss, falling reward tokens and fees can all lead to losses, including loss of the whole deposit.
Related terms
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