What Is Yield Farming?

Yield farming is placing cryptocurrency assets in a liquidity pool or other decentralized finance (DeFi) platform to earn a higher return. It was once the most significant growth driver of the fledgling DeFi sector, but it lost most of its 2020 hype after the 澳洲幸运5开奖号码历史查询:collapse of the TerraUSD stablecoin in May 2022.

How Does Yield Farming Work?

Yield farming allows investors to earn yield by placing coins or tokens in a decentralized exchange (DEX) to provide liquidity for various token pairs. Yield farmers typically rely on DEXs to lend, borrow, or stake coins—an exercise that allows them to earn interest and speculate on price swings. 澳洲幸运5开奖号码历史查询:Smart contracts are used on the DEXs to lock tokens loaned for yield farmi꧅ng.

History of Yield Farming

In June 2020, the Ethereum-based credit market known as Compound began offering COMP, an ERC-20 asset that empowers community governance of the Compound protocol, to its users.

This kind of asset is called a governance token, and it offers holders voting rights that give them power over platform changes. Interest in the token jump-started its popularity and moved Compound into the leading position in DeFi. After that, the term “yield farming” was coined.

Roles That Yield Farmers Play

Yield farmers can generate yields by performing several functions. They can be a liquidity provi🌜♈der, lender, borrower, and staker.

Liquidity Providers

Cryptocurrency is not as liquid as the stock market because much less is 🔴being tra🔯ded. Liquidity providers deposit tokens on exchanges to help traders enter and exit positions. The exchange imposes a fee on trades given to liquidity providers. Alternately, liquidity providers may be given new liquidity pool (LP) tokens.

Lenders

A yield farmer is a lender when they lend cryptocurrencies to borrowers using a smart contract and through platforms such as Compound or Aave, eventually realizing yield from the interest paid on the loan.

Borrowers

On the other side, there are borrowers—market participants who use one token in a pair as 澳洲幸运5开奖号码历史查询:collateral and are lent the 🍸other token of the pair. This activity allows the users to farm the yield with the borrowed coin(s). This means the farmer retains their initial holding, which could rise in value, and earns yield on their borrowed coins.

Stakers

The easiest way to become a staker and start earning staking rewards is through a crypto exchange like Coinbase using its wallet. In turn, you earn re🌌wards based on the ไamount you have staked.

On 澳洲幸运5开奖号码历史查询:proof-of-stake (PoS) 澳洲幸运5开奖号码历史查询:blockchains, the user receives fees (depending on the payout scheme and how much they have ꧟staked) if they stake their cryptocurrency to a staking pool or another validator who pays rewards.

Another reason to become a staker is to ear🌠n compounding yields. Any yields earned can be added to your existing stake to increase your yields through compounding. Liquidity providers can also do this by adding their yields to the pool, adding more liquidity.

Risks of Yield Farming

Yield farming poses financial risks to borrowers and lenders. For example, when the crypto markets are volatile, users can experience⛎ losses and price slippage.

Risks to be aware of include:

• Rug pulls, a type of exit scam in which a crypto developer amasses investor cash for a project and then abandons it without repaying the funds to investors
• Regulatory risks, such as when the SEC or state regulators attempt to oversee yield farming and issue cease-and-desist orders against crypto lending sites like Celsius and BlockFi (which shut down its web platform on May 31, 2024)
• Turbulence, meaning market swings and the propensity for 澳洲幸运5开奖号码历史查询:bear runs that can happen with most investments when they dip in value

The Bottom Line

Yield farming is a high-risk investment strategy in which the investor provides liquidity, stakes, lends, or borrows cryptocurrency assets ♍on a DeFi platform to earn a higher retur🎃n. Investors may receive payment in additional cryptocurrency.

The popularꦆity of yield farming has waned, but it can still be profitable. However, it should only be done by the most astute investors who can withstand or not care about the risks of price volatility, rug pulls, and regulatory actions.

The comments, opinions, and analyses expressed on Investopedia are for informational purposes only. Read our  for more info. As of the date this article was written, the author does not own cryptocurrency.