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Yield Farming

In simple terms

Yield farming is like lending money to a bank and earning interest, but for cryptocurrency. You give your crypto to a digital platform, it uses your money to help others trade, and you get rewarded with extra crypto in return.

Definition

Earning rewards by providing liquidity to DeFi protocols.

In depth

Yield farming involves depositing cryptocurrency into decentralized finance (DeFi) smart contracts to provide liquidity for trading pairs or lending pools. In exchange for locking capital in liquidity pools, farmers earn rewards through transaction fees generated by traders using those pools, plus incentive tokens distributed by the protocol. Returns vary based on pool utilization, total liquidity deposited, and the protocol's reward emission schedule, creating an APY that fluctuates with market conditions and competition for yield.

How does Yield Farming work?

Yield farming means supplying crypto to a protocol in exchange for a return. You deposit assets, most often into a lending market or a liquidity pool, and receive a receipt token representing your position. That position earns a base yield from borrower interest or trading fees. Many protocols layer an incentive on top, emitting their own governance token to depositors to attract capital. Farmers frequently move between protocols chasing the highest combined rate, and some stake their receipt token elsewhere for an additional reward, stacking positions. Returns fluctuate constantly with pool size, borrowing demand, and the value of the emitted reward token.

An example

Someone deposits an illustrative $1,000 into a lending pool advertising a combined 12 percent annual rate. Held for 30 days, that works out to roughly $9.86 before gas costs and before any tax. If the deposit and withdrawal transactions cost $15 in fees, the position is net negative over that period. The advertised rate is also not locked; it can drop to a fraction of 12 percent the moment more capital arrives.

Figures are illustrative only.

What beginners get wrong

  • Very high advertised rates usually come from newly issued reward tokens whose value can fall faster than the yield accumulates.
  • APY figures assume continuous compounding at a rate that rarely holds, so the headline number is a snapshot rather than a forecast.
  • Deposited funds sit in smart contracts that can contain bugs or admin keys, and contract exploits have wiped out entire pools.
  • Gas costs on deposit, harvest, and withdrawal can consume the whole return on small positions, particularly on a busy base layer.

Related terms

Part of

What is DeFi, and how does decentralized finance work? — the subject page for defi, with all 18 of its definitions in one place.

Educational only — not financial advice.