Glossary

Yield Farming

Plain-language definition Crypto glossary

Key takeaways

Yield farming is the practice of putting crypto assets to work across DeFi protocols, and often moving them around, to earn the best available return from a mix of interest, fees and token rewards.
A farmer might supply assets to a lending market, provide liquidity to a decentralized exchange pool, or stake tokens, chasing whichever combination pays most and sometimes layering positions across several protocols.
Headline returns can be misleading, since risks include smart-contract bugs, volatile reward-token prices, and impermanent loss, so a high advertised yield does not necessarily mean a good risk-adjusted outcome.

Definition

Yield farming is the practice of putting crypto assets to work across DeFi protocols — and often moving them around — to earn the best available return, typically from a mix of interest, fees and token rewards.

How it works

A yield farmer might supply assets to a lending market, provide liquidity to a decentralized exchange pool, or stake tokens, collecting rewards in return. Protocols frequently add extra incentive tokens on top of the base yield to attract capital, and farmers chase whichever combination pays most, sometimes layering positions across several protocols.

Why it matters

Yield farming helped bootstrap liquidity across DeFi, but the headline returns can be misleading. Risks include smart-contract bugs, volatile reward-token prices, and impermanent loss when providing liquidity, so a high advertised yield does not necessarily mean a good risk-adjusted outcome.

Example

Depositing a stablecoin pair into a liquidity pool and then staking the pool tokens for extra rewards is a typical yield-farming strategy.

FAQ

Frequently asked questions

How does yield farming generate returns?

Yield farmers earn from a mix of interest, trading fees and token rewards by supplying assets to lending markets, providing liquidity to exchange pools, or staking. Protocols often add extra incentive tokens on top of the base yield to attract capital, and farmers chase whichever combination pays most.

What is impermanent loss?

Impermanent loss is a risk that arises when providing liquidity to a pool, where price changes between the paired assets can leave you worse off than simply holding them. It is one of several reasons a high advertised yield may not translate into a good actual outcome.

Is a high advertised yield a good deal?

Not necessarily, and this is not financial advice. Headline returns can be misleading because they ignore risks like smart-contract bugs, volatile reward-token prices and impermanent loss, so a high yield does not automatically mean a good risk-adjusted result.