What Is Yield Farming?
Yield farming is the practice of routing capital through DeFi protocols to earn rewards — usually a combination of trading fees, lending interest, and protocol-issued tokens. At its peak in 2021, some farms advertised triple-digit APYs by paying users in their own newly-minted tokens.
The mechanics: deposit assets into a liquidity pool, stake the resulting LP tokens in a farming contract, and earn the farm's emission token. Total return = trading fees + emission token price * emission rate, minus impermanent loss and gas fees. The hard part is sustaining yields once token emissions slow.
Most retail yield-farming gains evaporate when emission tokens are sold by farmers — the supply pressure overwhelms demand. Sustainable yield comes from real revenue sources (trading fees, lending interest), which top out at single-digit APY for blue-chip pairs. If a farm advertises 100%+ APY, the math almost always involves token inflation that will eventually devalue your gains.
Related terms
- AMM (Automated Market Maker) — Smart contract that lets users trade against a pool of assets without counterparties.
- DeFi (Decentralized Finance) — Financial applications built on blockchain without traditional intermediaries.
- Impermanent Loss — The opportunity cost suffered by AMM liquidity providers when prices diverge.
- Stablecoin — A cryptocurrency designed to maintain a stable value, usually pegged to USD.