Glossary
Yield farming
Yield farming is the practice of depositing crypto into DeFi protocols, such as liquidity pools or lending markets, to earn fees, interest and extra reward tokens, often moving funds to chase the best return.
Also called Liquidity mining, DeFi farming, Farming, Yield aggregation
See also
Yield farming means putting crypto to work in decentralized finance to earn a return. A “farmer” deposits tokens into protocols such as lending markets or liquidity pools and collects fees, interest and, often, extra tokens that the protocol distributes to attract users. The term took off in June 2020, when the lending protocol Compound began distributing its COMP governance token to its users on 15 June, a period later nicknamed “DeFi summer”.
How yield farming works
Protocols need deposits: a lending market needs lenders, a DEX needs liquidity. To bootstrap them, many reward depositors with their own token on top of the normal yield. This is called liquidity mining. Farmers then stack strategies: deposit tokens into a pool, receive LP tokens, stake those LP tokens in a “farm” for rewards, sell or reinvest the rewards. Yield aggregators, or vaults, automate these steps.
Returns are usually shown as an APR or APY. A large part of a high figure often comes from reward tokens, whose price can drop quickly as farmers sell them.
A concrete example
Lisa deposits $1,000 worth of ETH and USDC into a DEX pool. She earns a share of trading fees, plus a reward token paid by the protocol. The interface advertises 25% APY. A month later, trading volume has dropped, the reward token has lost half its value and ETH has moved sharply, causing impermanent loss. Her real return is far below the advertised figure, possibly negative.
Why it matters for users
Yield farming can generate income from idle crypto and is open to anyone with a wallet. It is also a good way to understand how DeFi protocols compete for liquidity, which shows up in metrics such as total value locked.
Risks and limits
- Smart contract bugs and exploits, multiplied when strategies stack several protocols.
- Impermanent loss on liquidity pools.
- Reward tokens with heavy inflation and selling pressure.
- Rug pulls: anonymous teams that withdraw funds or mint unlimited tokens.
- Gas fees that eat the gains on small amounts.
- Tax complexity: each claim and swap can be a taxable event.
Compared with staking at protocol level, yield farming adds layers of risk. Read our guide DeFi explained first, and only use money you can afford to lose.