Yield Farming

Yield farming is the practice of putting crypto assets to work across DeFi protocols — and often moving them around — to earn the best available return, typically from a mix of interest, fees and token rewards.

How it works

A yield farmer might supply assets to a lending market, provide liquidity to a decentralized exchange pool, or stake tokens, collecting rewards in return. Protocols frequently add extra incentive tokens on top of the base yield to attract capital, and farmers chase whichever combination pays most, sometimes layering positions across several protocols.

Why it matters

Yield farming helped bootstrap liquidity across DeFi, but the headline returns can be misleading. Risks include smart-contract bugs, volatile reward-token prices, and impermanent loss when providing liquidity, so a high advertised yield does not necessarily mean a good risk-adjusted outcome.

Example

Depositing a stablecoin pair into a liquidity pool and then staking the pool tokens for extra rewards is a typical yield-farming strategy.