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Yield farming is the practice of moving crypto capital between DeFi protocols to maximize returns from staking, lending, and liquidity-provision incentives.
Yield farming (also called liquidity mining) is the active rotation of crypto capital across DeFi protocols in pursuit of the highest possible yield. A yield farmer might deposit stablecoins into a lending market, borrow another asset, provide liquidity with it, and stake the resulting LP tokens — stacking several layers of reward on the same capital.
Protocols incentivize farmers by paying additional rewards (usually governance tokens) on top of the base fees or interest. These incentive programs can produce eye-watering APYs during bull markets, which is why yield farming became synonymous with the 2020 "DeFi summer" boom.
The risks scale with the complexity. Each added layer introduces a new smart contract that can be exploited, a token whose value can collapse, or a borrowing position that can be liquidated. High headline APYs often come from inflationary reward tokens whose price falls faster than they accrue, leaving farmers with less dollar value than they started with.
Yield farming is the practice of moving crypto between DeFi protocols — lending markets, liquidity pools, and staking contracts — to maximize returns. Farmers stack multiple layers of yield on the same capital and chase the highest-paying incentive programs.
Staking typically means locking one token in a proof-of-stake network to secure it and earn rewards. Yield farming is broader and more active: it can involve staking, but also lending, borrowing, providing liquidity, and rotating capital across protocols to maximize total yield.
Headline APYs can be misleading. Many are paid in inflationary governance tokens whose price falls faster than they accrue, so the real dollar return is often much lower — sometimes negative. Always calculate yield in terms of the token you actually want to hold.
Smart-contract exploits, impermanent loss, liquidation of borrowed positions, governance-token collapse, and rug pulls from unaudited protocols. The more layers a strategy stacks, the more ways it can fail. Stick to audited, established protocols and size positions accordingly.
A liquidity pool is a smart-contract vault of paired tokens that decentralized exchanges use to enable automated, peer-to-contract trading without an order book.
Staking is the act of locking up cryptocurrency to help secure a proof-of-stake network in exchange for periodic rewards, analogous to earning interest.
APY is the annualized rate of return on an investment, including the effect of compounding interest over the year.
A smart contract is self-executing code deployed on a blockchain that enforces an agreement automatically when predefined conditions are met, without an intermediary.
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