What Is Yield Farming?
Yield farming is moving crypto between DeFi protocols to chase the best returns: lending it, pooling it, staking receipt tokens, and harvesting whatever rewards each stop pays. In the 2020 mania it minted triple-digit APYs and a generation of cautionary tales. The durable lesson is learning where each yield actually comes from.
The Only Question That Matters: Who Is Paying, and Why?
- Trading fees. Providing pool liquidity earns a cut of real swap volume. Honest but exposed to impermanent loss.
- Borrower interest. Lending on money markets earns what borrowers pay. Honest, with smart contract and bad-debt risk.
- Protocol emissions. New tokens printed to attract deposits. This is marketing spend. The yield is real only if the token holds value, and most emission tokens bleed.
- Points and airdrop hopes. Yield denominated in a token that does not exist yet. Treat as a lottery ticket with deposit risk.
Risks and Common Mistakes
- Reading APY as a promise. Advertised rates float hourly and collapse as capital arrives.
- Stacking protocols until one failure anywhere unwinds everything. Complexity is a risk multiplier, the same lesson as restaking.
- Farming with gas-heavy small positions where fees eat the yield.
- Every harvest and swap is a taxable event in the U.S. The bookkeeping alone can erase a small farm's profit. See my tax guide.
- New farms with huge APYs are the classic wrapper for rug pulls.
When It Matters
Understanding DeFi dashboards and evaluating any advertised yield, even if you never farm. Sustainable single-digit yield from real fees exists; my DeFi page frames who should even consider it, and the compound calculator shows what honest rates actually build to.
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