Yield Farming

Yield farming is the practice of putting crypto to work in DeFi protocols to earn returns. Sources of yield include trading fees from liquidity pools, interest from lending markets, staking rewards, and extra tokens that protocols distribute to attract deposits. Farmers compare rates across protocols and move funds to wherever the return is highest.

The term became popular in mid 2020 when Compound began distributing its COMP governance token to users, and advertised annual yields on some pools briefly exceeded 1,000 percent. Those rates were paid mostly in newly created tokens whose prices often collapsed, so the real return was much lower. Rates on established protocols are now typically in the low single digits to low double digits per year.

High advertised yields usually signal high risk. Returns can come from token inflation, a fragile peg, or a protocol that has not been audited. Yield farmers also face impermanent loss, smart contract exploits, and gas costs that can exceed the earnings on small deposits. A quoted APY should always be traced back to where the money actually comes from.