Yield Farming is a process that allows crypto asset holders to lock up their holdings, which in turn provides them with rewards.
More specifically, it is the practice of staking or lending crypto assets in the DeFi market in order to earn either fixed or variable interest.
The term got popularized by the DeFi community in the summer of 2020 (“DeFi Summer 2020”), through the launch of various different projects such as Uniswap, Sushiswap, Yearn and Yam Finance.
Where does the yield come from?
With yield farming, you stake or lock up your crypto assets in a smart contract-based liquidity pool.
These incentives can be a percentage of transaction fees, interest from lenders or a governance token.
Think of governance tokens like a share of stock or a voting right.
Wnen you earn earn additional units from the protocol’s governance token, this is also known as “liquidity mining”.
Returns are expressed as an annual percentage yield (APY).
What is Yield Farming
The phrase “yield farming” has become somewhat of a marketing term in the crypto space so it’s important to distinguish what actually qualifies as yield farming:
- Yield farming requires a permissionless and trustless application or protocol built on a decentralized blockchain like Ethereum or Binance Smart Chain.
- Yield farming often requires lending liquidity as a liquidity provider (“LP”) in an automated market maker (“AMM”) like Uniswap, Kyber Network, Balancer, and Curve Finance.
- Yield farming allows you to earn multiple forms of yield simultaneously such as trading fees, lending interest, and governance tokens.