What Is Yield Farming?

Yield farming is the practice of moving crypto assets between DeFi protocols to earn the highest possible return — from trading fees, interest, and reward tokens. It is the more active, more complex cousin of staking.

How Yield Farming Works

A yield farmer deposits assets into a protocol to earn a return, then often reinvests or shifts those assets to another protocol offering higher returns. Returns can come from:

• Trading fees from liquidity pools.
• Interest from lending protocols.
• Reward tokens the protocol pays to attract users.

Staking vs Yield Farming

Staking locks assets to help secure a proof-of-stake blockchain and earns a relatively predictable reward. Yield farming is broader and more active — it involves moving between protocols and often carries higher complexity and risk. Use the Staking Rewards Calculator to model simple staking returns.

Why Returns Can Be Misleading

A protocol might advertise 200% APY, but that return is often paid in the protocol's own token. If the token's price falls, the real return collapses. This is "real yield" vs inflationary yield — returns funded by genuine protocol revenue are more sustainable than returns funded by printing new tokens.

The Risks

• Smart contract risk: A bug can drain the protocol.
• Impermanent loss: Providing liquidity risks loss versus holding.
• Reward token collapse: High APY paid in a falling token is not real yield.
• Complexity: Strategies involve multiple steps, bridges, and contracts — each a potential failure point.

A Simple Example

A farmer deposits ETH and USDC into a liquidity pool earning 30% APY in trading fees plus reward tokens. If the reward token loses 80% of its value, the dollar return is far below the headline 30% — and the farmer may also face impermanent loss.

Continue Learning

• What Is Staking? — The simpler alternative
• Liquidity Pools Explained — Where farming often starts
• What Is Impermanent Loss? — The LP risk

This article is for educational purposes only and is not financial advice.