What is yield farming?
- Author
- CRYPTO PORT Editorial
- Published
- Updated
- Reading time
- 6 min
In short
Yield farming is the general term for depositing assets into DeFi protocols to collect fees and distributed tokens. Headline yields are projections that assume the distributed token holds its price — and when it does not, the realised outcome differs sharply.
Key points
- An umbrella term for earning by supplying DeFi protocols
- Much of the return is the protocol's own distributed token
- Quoted yields collapse when their assumptions break
- Stacking protocols stacks their contract risks
Definition
The practice of supplying crypto assets to DeFi protocols in order to earn trading fees and protocol-distributed tokens.
A typical flow is: supply a DEX pool, take the share token you receive, stake that in another contract, and collect a third protocol's token. Each added layer raises the quoted yield and adds another contract that can be exploited.
Quoted APR and APY assume the current emission rate and the current token price both persist. The distributed token is usually newly minted, and recipients selling it pushes the price down. The highest headline numbers often rest on the shortest-lived assumptions.
Depositing, withdrawing and claiming each cost gas. Operating frequently with small amounts can cost more in fees than the position earns. Round-trip costs and lock-up periods belong in the same view as the yield.
Watch out for
- · High advertised yields are projections resting on the reward token's price holding up
- · Newer protocols have thinner audit and operating histories, and more exploits
- · In Japan you are responsible for working out how received tokens are taxed