In simple terms — Yield farming means putting cryptoassets to work in one or more DeFi protocols to seek a return. More steps may increase expected revenue, but also the number of places where something can go wrong.
The term covers different strategies: providing liquidity to an exchange, depositing assets in a lending market, reinvesting received tokens, or moving capital when incentives change. It is not a single product with one yield, and it is not automatically equivalent to a blockchain's native staking.
Where the yield comes from
Returns may come from fees paid by users, interest paid by borrowers, and incentive tokens. Liquidity mining is therefore one possible component of yield farming, not a perfect synonym. The former describes a reward program; the latter describes a broader strategy that may combine several protocols and sources of revenue.
An aggregator can automate harvesting and reinvesting rewards. The displayed APY, however, assumes that rates, token prices, and compounding frequency follow particular assumptions. APY can change as soon as new capital enters, an incentive campaign ends, or transaction costs rise.
Composability multiplies dependencies
A strategy may deposit a token in one protocol, receive a receipt token, use it in a second contract, and finally place the new token in a pool. Composability is useful, but it exposes the whole chain to every smart contract, oracle, bridge, asset, and governance rule involved. Any leverage amplifies both returns and losses or liquidations.
Before assessing the rate, reconstruct the path of the assets: where they are held, which intermediate tokens you receive, how you exit, and what happens if one loses its peg. If the strategy uses a pool, also account for impermanent loss. Distinguish yield already realized from rewards that have merely accrued and are priced in a volatile token. “Farming” describes the process; it does not certify safety, liquidity, or sustainability.
Sources
- BIS Working Papers No 1061 — Describes sources of return, leverage, and risks in DeFi strategies.
- BIS Working Papers No 1066 — Examines liquidity mining, yield aggregators, and dependencies between protocols.
Related entries
Liquidity mining · Liquidity pool · Impermanent loss · Flash loan