What Is Yield Farming?

Yield farming became widespread in the summer of 2020, when the Compound protocol began distributing its governance token COMP to its users; this period is referred to as DeFi Summer. To attract liquidity, protocols distribute rewards in their own tokens to users; this is also called liquidity mining. For example, a user provides liquidity to an ETH/USDC pool on a DEX, stakes the LP token received in return in a rewards contract and earns a share of both trading fees and the distributed tokens.

Returns are usually shown as APR or APY. Yield farmers can move their funds between protocols for higher returns or use vaults that automatically reinvest rewards. Some strategies also involve leverage by redepositing borrowed assets.

Apparently high returns carry significant risks. Continuously minting reward tokens can push their prices down; in that case, the dollar-denominated return can quickly erode. Liquidity providers can suffer impermanent loss, and smart contract vulnerabilities or a rug pull can result in the loss of all funds. In leveraged strategies, price moves can lead to liquidation. The yield rates shown are based on real-time data and are not fixed.