Yield Farming

Yield farming is the practice of moving crypto assets between DeFi protocols to earn returns, typically by supplying liquidity, lending, or staking in exchange for fees and reward tokens. The 'farming' framing comes from the DeFi Summer of 2020, when protocols began distributing their governance tokens to users as an incentive, and returns from stacking these rewards could be substantial.

A concrete example: a farmer deposits ETH and USDC into a decentralized exchange pool, receives LP tokens, and then stakes those LP tokens in the protocol's rewards contract. They now earn three things at once: trading fees from the pool, plus the protocol's reward token emissions, and they might additionally lend the reward tokens out elsewhere. Dedicated platforms exist purely to automate and compound these loops.

A common misconception is that a high advertised APY reflects sustainable income — very often it is paid in a newly created token whose price falls as farmers sell their rewards, so the realized return is far lower than the headline number. Yield farming also stacks risks: smart contract bugs at every layer, impermanent loss in the pools, and the possibility that a reward token collapses entirely. High yields in DeFi are generally compensation for these risks, not free money.