What is Yield Farming?

Yield farming is the practice of providing liquidity or lending capital to DeFi protocols to earn returns. Returns come from lending interest, trading fees, or governance token rewards and can range from a few percent to hundreds of percent APY.

How does Yield Farming work?

Deposit crypto into a DeFi protocol a lending market, liquidity pool, or staking contract.
Earn returns from the protocol's mechanics: interest, fees, or token incentives.
Harvest rewards and optionally reinvest to compound returns.
Monitor yields and move funds when better opportunities emerge.

Why does Yield Farming matter?

It put capital efficiency front of mind for DeFi users. While traditional savings offer under 1 percent, DeFi protocols have offered 10 to 100 percent or more though higher yields come with proportionally higher risks.

Key features of Yield Farming

Returns from fees, interest, or governance token rewards
Yields fluctuate based on supply and demand
Higher APY typically means higher risk
Subject to impermanent loss, smart contract risk, and rug pulls

Examples of Yield Farming

Providing liquidity to a high-volume Uniswap pool can earn 10 to 20 percent APY in fees. Lending USDC on Aave earns 3 to 5 percent APY in interest.

Farming a new protocol offering 200 percent APY carries extreme risk of rug pull or token collapse.