Yield farming involves earning interest by investing crypto in decentralized finance markets.
Yield farming is a broad term — and in its simplest form, it involves trying to get the biggest return possible from cryptocurrency.
This could involve earning interest by lending digital assets to others, or locking up the crypto in a liquidity pool. Some decentralized finance protocols also issue governance tokens as a reward for participants — and these assets have become subject to wild speculation.
Yield farmers calculate their estimated returns using the annual percentage yield metric, because APY takes compounding into account. Investors will normally chop and change between different DeFi protocols in order to get the best deal possible.
But all of this isn’t without risks. DeFi protocols can be prone to smart contract bugs, and this can leave funds vulnerable. Because of that, it’s crucial to perform plenty of due diligence before getting involved in this craze.
This practice exploded in popularity in the summer of 2020, when the total value locked in DeFi protocols surged. Some of the most popular projects involved in yield farming at the time included Compound, Aave, Balancer and Curve.