Yield farming
Also called: liquidity mining · farming
Definition
Yield farming is the practice of moving crypto into DeFi protocols, such as liquidity pools or lending markets, to earn trading fees, interest and extra token rewards.
This entry is shown in English.
How Yield farming works
A farmer might supply liquidity to a DEX pool, stake the LP tokens in a reward contract, and claim the project's governance token on top of fees. Some strategies stack several protocols or reinvest rewards automatically through vaults.
High advertised returns usually come from token emissions, new tokens printed to attract liquidity. If many farmers sell those rewards, the reward token's price can fall, and the headline APR shrinks with it. Fee income is more durable, but it depends on trading volume.
Risks add up with each layer: smart contract bugs in every protocol used, impermanent loss, token price drops, depegs, and gas costs that can eat small positions. Check where the yield comes from before chasing the number.
Example
Imagine you deposit 10,000 USDC worth of liquidity into a pool advertising 40 percent APR, of which 5 percent is fees and 35 percent comes from a reward token. After three months you earn about 125 USDC in fees and reward tokens that were worth 875 USDC at the start. If the reward token falls 60 percent during that time, those rewards are worth about 350 USDC, so your real return is closer to 475 USDC, before gas and impermanent loss.
Common mistakes
- Judging a farm by its headline APR without checking how much comes from inflationary rewards.
- Farming with small amounts on a chain where gas costs eat most of the rewards.
- Leaving funds in a farm after rewards end or the team abandons it.
Learn and practise
FAQ
Is yield farming the same as staking?
No. Staking usually means locking tokens to help secure a proof-of-stake network. Yield farming means seeking returns from DeFi apps, often including liquidity provision.
Is yield farming still profitable?
Returns vary widely with market conditions, reward programs and fees. Sustainable yields are usually far lower than promotional rates.