Yield Farming

What Is Yield Farming?

Yield farming entails generating interest by investing cryptocurrency in decentralized financial marketplaces. Yield farming is a broad word that, in its most basic form, is attempting to maximize the return on cryptocurrencies. 

This might include earning money by providing loans of digital assets to others or storing the cryptocurrency in a liquidity pool. As an incentive for participation, certain decentralized finance protocols issue governance tokens, which have become the topic of wild speculation.

Illustration of How Yield Farming Works

Yield farmers calculate their expected returns by using annual percentage yield metric, which takes compounding into account. Investors would typically switch between multiple DeFi protocols in an effort to get the greatest bargain. 

But none of this comes without risk. DeFi technologies are sensitive to smart contract vulnerabilities, which might expose cash. As a result, it's critical to do enough of research before getting entangled in this fad. This approach erupted in favor in the summer of 2020, back when the total value locked in DeFi protocols skyrocketed.