What is yield farming?

What is yield farming?

Step into the captivating world of yield farming, where crypto enthusiasts sow their seeds of hope and reap the rewards of financial freedom. Yield farmers embark on a thrilling journey, obtaining not only a new token but also the assets they deposit in exchange for their liquidity.

You know how you earn interest on your savings account? Well, yield farming is the crypto version of that, only way more exciting! Imagine it’s like a farming game, but instead of crops, you cultivate crypto assets for maximum returns. A yield farmer is like a modern-day digital farmer who plants their crypto seeds and gets new tokens in return. Plus, they’ll also receive some assets they deposited as a bonus! It’s like planting a money tree and watching it grow!

Investors lock up their coins in a lending protocol, facilitated by a decentralized app (dApp). Through this dApp, other investors can borrow these coins, aiming to profit from sharp price swings they anticipate.

The art of staking is like offering a helping hand to provide liquidity, using blockchain-based apps. In return, cryptocurrency investors can revel in earning interest and even more coins! If the value of those additional coins’ skyrockets, the returns for these bold yield farmers soar even higher.


How does yield farming work?

Now, let’s delve into the captivating mechanisms of yield farming. Liquidity providers muster their funds into a liquidity pool, creating a hub for lending, borrowing, and token exchange. Fees for using these platforms become sweet rewards for the liquidity providers, adding to their treasure. This is the foundation of how an AMM (Automated Market Maker) works.

But wait, there’s more! A brand-new token might be offered as an enticing incentive for contributing to a liquidity pool. It could be a rare gem, not readily available on the open market, driving farmers to accumulate it by providing liquidity to that pool.

Distribution rules will vary depending on the protocol’s unique implementation. Liquidity providers get paid based on the amount of liquidity they provide to the pool.


Types of  yield farming

  1. Liquidity provider

Investors deposit two coins on a decentralized exchange (DEX) to offer trading liquidity. As tokens get swapped, exchanges charge fees, rewarding the liquidity providers, sometimes in the form of new LP tokens held in a smart contract.

  1. Lending

Here, coin or token holders become benevolent lenders, loaning their crypto to borrowers through smart contracts, who then pay back with interest.

  1. Borrowing

Brave farmers put up collateral in one token to borrow another, then masterfully use these borrowed coins for yield farming. They keep their initial holding while reaping the rewards of yield on the borrowed ones.

  1. Staking

Ah, staking – a tale deserving of its own article. Happy reading!


What is Total Value Locked? (TVL)

The key to measuring the DeFi yield farming scene’s health is Total Value Locked (TVL). It represents how much crypto is locked up in DeFi lending and money marketplaces, allowing us to compare different DeFi protocols’ “market share.” For the best TVL tracking experience, visit defipulse.com to uncover the most prominent platforms with vast crypto assets locked in DeFi.


How are yield farming returns calculated?

Of course, a good investor must calculate their potential gains. Enter the Annual Percentage Rates (APR) and Annual Percentage Yields (APY). The difference is that APY takes compounding into account, while APR does not. In this case, compounding refers to reinvesting profits directly to increase earnings. However, remember that yield farming is a realm of uncertainties, with rapidly changing incentives, making projections an art rather than a science.


what is yield farming


Risks of yield farming:

a) Volatility

Brace yourself for the wild ride of price fluctuations. While your tokens are locked up, their value might surge to great heights or plummet unexpectedly.

b) Fraud

Beware of treacherous schemes and fraudulent projects that may deceive unsuspecting yield farmers.

c) Rug pulls

The dreaded exit scam, where developers vanish into thin air, leaving investors empty-handed.

d) Smart contract risk

The very foundation of yield farming might falter due to bugs or hacking, putting your precious crypto at peril. However, third-party audits and meticulous code vetting can bolster your security.

e) Impermanent loss

During the staking period, your cryptocurrency’s value could shift, resulting in unrealized gains or losses. Assess whether the interest earned offsets any potential losses.

Yield farming, like a daring quest for riches, requires cunning strategies and significant capital to make it truly profitable. Venture forth with caution and embrace the speculative and thrilling essence of yield farming in the world of crypto. Let your journey begin!


Let’s get serious and recap what we’ve learned so far:

Yield farming is a practice in the crypto world where participants deposit their crypto assets into liquidity pools, lending protocols, and more, to earn rewards and new tokens. It’s analogous to earning interest on a savings account but involves higher risks and potentially higher returns. Yield farmers contribute liquidity to platforms, earning fees and new tokens in return. This practice comes with various flavors, including liquidity provision, lending, borrowing, and staking.

Total Value Locked (TVL) measures the health of the DeFi yield farming ecosystem by indicating how much crypto is locked in various protocols. Its returns are calculated using Annual Percentage Rates (APR) and Annual Percentage Yields (APY), with the latter considering compounding. However, it involves risks such as volatility, fraud, rug pulls, smart contract risks, and impermanent loss.



1. What is yield farming in the crypto world?

Yield farming involves depositing crypto assets into platforms to earn rewards and new tokens, akin to earning interest on savings.


2. How does liquidity provision work in yield farming?

Liquidity providers deposit assets into a decentralized exchange (DEX) pool, earning fees and new tokens as assets are swapped.


3. What is lending?

Lending involves loaning crypto assets to borrowers through smart contracts, who repay with interest.


4. How does borrowing work?

Borrowers put up collateral in one token to borrow another, using these borrowed assets for yield farming.


5. What is staking?

Staking involves providing liquidity to blockchain-based apps, earning interest and additional coins.


6. What is Total Value Locked (TVL)?

TVL measures the amount of crypto locked in DeFi lending and money marketplaces, indicating the health of the yield farming ecosystem.


7. How are yield farming returns calculated?

Returns are calculated using Annual Percentage Rates (APR) and Annual Percentage Yields (APY), with APY considering compounding.


8. What risks are associated with yield farming?

Yield farming carries risks such as volatility, fraud, rug pulls, smart contract vulnerabilities, and impermanent loss.


9. What is impermanent loss?

Impermanent loss occurs when the value of staked crypto fluctuates, resulting in unrealized gains or losses.


10. Is it profitable and suitable for everyone?

Yield farming can be profitable but requires careful strategy and significant capital. It’s speculative and involves risks, making it unsuitable for risk-averse investors. Remember, yield farming involves substantial risks and should be approached with caution and a good understanding of the mechanisms involved.


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