Yield farming

What is Yield farming?

Yield farming is a decentralized finance (DeFi) strategy where users lend, stake, or provide their cryptocurrency assets to DeFi protocols in exchange for interest, trading fees, or token rewards. It enables holders to earn passive income by making their digital assets available for liquidity provisioning or borrowing markets instead of keeping them idle in a wallet or on an exchange.

Typically, yield farming involves depositing tokens into liquidity pools on decentralized exchanges (DEXs) like Uniswap, Curve, or Balancer. In return for supplying liquidity, users receive a share of the transaction fees generated by that pool and often receive additional incentives in the form of governance or protocol-native tokens. For example, a user might provide a pair of tokens (e.g., ETH and USDC) to a trading pair pool, earning proportional rewards every time a trade is executed through that pool.

More advanced yield farming strategies may include leveraging, staking LP tokens in multiple protocols, or “auto-compounding” rewards. While yield farming can offer attractive returns, it also comes with significant risks, such as impermanent loss, smart contract vulnerabilities, and market volatility.

Overall, yield farming is a key innovation in DeFi, allowing users to maximize the utility and profitability of their crypto holdings while contributing to the liquidity and stability of decentralized markets.