Yield Farming

Yield farming is the use of one or more DeFi strategies to generate returns from cryptoassets. A user may provide liquidity, lend assets, receive protocol incentives, stake positions, or move capital between protocols in pursuit of a higher expected return.

A simple yield-farming strategy can begin with depositing assets into a liquidity pool. The user may receive trading fees and additional protocol rewards. Those rewards can potentially be reinvested to increase the position.

More complex strategies can combine multiple protocols. For example, a user can deposit an asset into a lending protocol, receive an interest-bearing position, and use that position elsewhere. Automated strategies can repeatedly reinvest rewards or rebalance capital.

Yield-farming returns are not guaranteed. APY and APR can change rapidly as capital enters or leaves a pool, trading activity changes, or token-emission schedules evolve. A high displayed yield can therefore decline substantially over time.

Yield farming also creates technological and economic risks. A strategy interacting with several smart contracts is exposed to the security of each component. Oracle failures, liquidity shortages, governance changes, and token-price declines can also affect results.

When AMM liquidity is involved, users must consider impermanent loss. When borrowing or leveraged positions are involved, the strategy may also face liquidation. The correct evaluation therefore requires more than comparing advertised yields.

Potential sources of yield

• trading fees from liquidity provision;
• interest earned through lending;
• protocol incentive tokens;
• staking or liquidity incentives;
• returns from automated compounding strategies.