Yield farming

Yield farming is the practice of putting crypto into DeFi protocols to earn a return on it. The return can come from trading fees on a decentralized exchange, interest paid by borrowers on a lending protocol, or reward tokens a project hands out to attract deposits. Farmers often move funds between protocols to chase the best rate, which is where the name comes from.

The most common route is depositing two tokens into a liquidity pool and receiving a receipt token that represents your share. That receipt can then be staked in a separate farm contract, which pays out the project's own token on top of the trading fees. Some farmers go further, using the receipt as collateral to borrow more and redeposit it, which stacks yield but also stacks risk. Every step is a smart contract interaction that costs gas, so small deposits can be eaten up by fees.

For anyone buying or holding small tokens, farming matters because projects often launch a farm to bootstrap liquidity by paying large emissions of their own token. Those rewards are newly created supply, and farmers who sell them as they arrive push the price down. A very high APY on a new token usually reflects heavy inflation plus a price that may not hold, not real income. The useful question is where the yield actually comes from: fees paid by real users, or freshly printed tokens.

The main traps are impermanent loss, bugs in the farm contract, and reward tokens that lose most of their value faster than you earn them. Check whether the contracts were audited, whether the pool's liquidity is locked, and whether the owner can mint tokens, change emissions, or pull funds. Also look at how much of the yield is trading fees versus emissions, and at how deep the pool is, since a thin pool makes exiting expensive. Finally, review the token approvals you granted and revoke the ones you no longer need once you leave a farm.