What is Yield Farming? (Meaning & Definition)

Yield farming is a strategy in decentralized finance (DeFi) where cryptocurrency holders lend or stake their assets in a protocol to earn rewards, typically in the form of additional tokens. It works by using smart contracts on blockchains like Ethereum. Users deposit their crypto assets (like stablecoins or governance tokens) into a liquidity pool, which is then used to facilitate trading, lending, or other financial services on the platform. In return for providing this liquidity, users earn a portion of the fees generated by the protocol, plus often additional rewards from the project itself. Think of it like earning interest from a high-yield savings account, but instead of a bank, the process is automated by code, and the returns are generated from the activity on the decentralized platform.

Key Takeaways

• Yield farming is a core activity in DeFi for generating returns on idle crypto assets.
• Rewards usually come from trading fees and newly minted protocol tokens.
• It involves higher risk than traditional savings due to smart contract vulnerabilities and market volatility.

Example / Use Case

A user deposits equal values of ETH and the stablecoin DAI into a decentralized exchange’s liquidity pool. This pool allows other traders to swap between these two assets. For every trade, a small fee (e.g., 0.3%) is charged. That fee is distributed proportionally to all liquidity providers, like the user, as their yield or reward. To dive deeper into crypto strategies, read our guide on Beyond the APY: The Hidden Risks of DeFi Yield Farming You Need to Know.