DeFi
Yield Farming
The practice of moving cryptocurrency between DeFi protocols to maximize returns through interest, trading fees, and token rewards.
Last updated: January 5, 2025
What is Yield Farming?
Yield farming is the practice of putting cryptocurrency to work in DeFi protocols to earn returns. Farmers move assets between protocols, chasing the highest yields from lending, liquidity provision, or incentive programs.
How Yield Farming Works
Basic Concept
- Deposit assets into DeFi protocol
- Protocol uses your assets (lending, liquidity)
- Earn yield from various sources
- Often receive bonus tokens
- Compound earnings for more yield
Sources of Yield
Lending Interest
- Supply assets to lending protocols
- Borrowers pay interest
- You receive portion of interest
- Examples: Aave, Compound
Trading Fees
- Provide liquidity to DEXs
- Earn share of swap fees
- Usually 0.3% per trade
- Examples: Uniswap, Curve
Liquidity Mining
- Protocols distribute tokens
- Reward liquidity providers
- Incentivize participation
- Can be very lucrative
Staking Rewards
- Stake governance tokens
- Earn additional tokens
- Often compounds
Yield Farming Strategies
Simple Farming
- Deposit stablecoins to lending protocol
- Earn 2-8% APY
- Low risk
- Straightforward
Liquidity Provision
- Provide LP tokens
- Earn trading fees
- Risk: impermanent loss
- Medium complexity
Leveraged Farming
- Borrow to increase position
- Higher yield, higher risk
- Liquidation possible
- Advanced strategy
Yield Aggregators
- Protocols optimize for you
- Auto-compound rewards
- Examples: Yearn, Convex
- Convenient but has fees
Yield Farming Returns
APY Examples
| Strategy | Typical APY | Risk Level |
|---|---|---|
| Stablecoin lending | 3-8% | Low |
| Blue-chip LP | 5-20% | Medium |
| New protocol incentives | 50-500%+ | High |
| Leveraged strategies | Variable | Very high |
Important Notes
- APY changes constantly
- High APY often unsustainable
- Token rewards may depreciate
- Always calculate real return
Risks of Yield Farming
Smart Contract Risk
- Bugs can drain funds
- New protocols less tested
- Audits help but don’t guarantee
Impermanent Loss
- LP positions can lose value
- Price divergence causes loss
- Can exceed yield earned
Token Risk
- Reward tokens may crash
- Farm and dump dynamics
- Calculate in real terms
Protocol Risk
- Governance attacks
- Oracle manipulation
- Admin key exploits
Liquidation Risk
- Leveraged positions
- Collateral value drops
- Forced closing of position
Getting Started
Prerequisites
- Crypto wallet (MetaMask)
- Some ETH for gas
- Understanding of DeFi basics
- Risk tolerance assessment
Beginner Strategy
- Start with stablecoin lending
- Use established protocols (Aave, Compound)
- Small amounts first
- Learn mechanics
- Gradually explore more strategies
Popular Yield Farming Protocols
Ethereum
- Aave - Lending
- Curve - Stablecoin LP
- Convex - Curve optimizer
- Yearn - Vault strategies
Multi-Chain
- PancakeSwap - BNB Chain
- Raydium - Solana
- Various L2 protocols
Yield Aggregators
What They Do
- Auto-compound rewards
- Optimize strategies
- Save gas costs
- One-click farming
Examples
- Yearn Finance
- Beefy Finance
- Convex Finance
- Pickle Finance
Tax Implications
Taxable Events
- Rewards received = income
- Swapping tokens = capital gains
- Harvesting rewards = taxable
- Complex tracking needed
Record Keeping
- Track all deposits/withdrawals
- Note reward tokens received
- Calculate cost basis
- Use tracking software
Farm Responsibly
Guidelines
- Only farm with money you can lose
- Understand what you’re depositing
- Check protocol audits
- Diversify across protocols
- Monitor positions regularly
Compare to Traditional Options
Ready to Start Trading?
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