What is Yield Farming?

Yield farming is the practice of moving crypto assets across DeFi protocols to maximize returns. Farmers provide liquidity, stake tokens, or lend assets to earn rewards - often paid in the protocol's native token.

How yield farming works:

• Provide liquidity: Deposit token pairs into pools, earn trading fees + token rewards
• Staking: Lock tokens to secure the protocol, earn staking rewards
• Lending: Supply assets to lending protocols, earn interest + governance tokens
• Compounding: Reinvest rewards to compound returns

Risks: Impermanent loss, smart contract vulnerabilities, token price crashes, protocol exploits, and unsustainable APYs that eventually collapse.

How it works in practice: Farmers typically deposit token pairs into a liquidity pool on a DEX like Uniswap or Curve, earning trading fees plus bonus governance tokens. Common strategies include single-asset staking for simpler exposure, LP farming across multiple pools, leveraged yield farming through lending protocols like Aave, and auto-compounding vaults such as Yearn that reinvest rewards automatically. More advanced farmers rotate between protocols chasing the highest APY, a practice known as crop rotation.

Key risks in detail: Smart contract bugs can drain entire pools overnight, as seen in numerous DeFi exploits totaling billions in losses. Rug pulls occur when anonymous developers abandon a project and withdraw all liquidity. Impermanent loss erodes returns when token prices diverge significantly from your entry point. Always research audit history, team reputation, and TVL stability before committing funds.