Yield Farming
Actively moving crypto assets between DeFi protocols to maximize yield through lending, liquidity provision, and staking rewards.
What is Yield Farming?
Yield farming is the practice of actively deploying cryptocurrency across multiple DeFi protocols to maximize the return on assets. A yield farmer might supply tokens to a lending protocol to earn interest, deposit those receipt tokens into a liquidity pool to earn trading fees, then stake the resulting LP tokens in a yield optimizer to earn governance token rewards — all simultaneously. Returns are expressed as annualized percentage yield (APY), which can appear extremely high (sometimes thousands of percent) but typically reflect unsustainable token emissions, impermanent loss risk, and smart contract vulnerabilities. Yield farming strategies range from simple single-asset deposits in established protocols to complex multi-protocol loops that amplify both yield and risk. Automated yield optimizers like Yearn Finance move funds between strategies programmatically to maximize returns. High-profile exploits and 'rug pulls' have resulted in massive losses for yield farmers, making protocol security assessment a critical skill.
Example
A yield farmer deposits USDC into Aave, earning 5% APY. Aave issues aUSDC tokens as a receipt. The farmer then deposits aUSDC as collateral to borrow additional USDC, which is redeposited into Aave — a 'recursive' strategy amplifying yield. An automated vault on Yearn Finance performs these steps automatically and regularly harvests, sells, and compounds governance token rewards.
Source: Yearn Finance Documentation