What is yield farming?
Yield farming (also called liquidity mining) is the strategy of putting your crypto assets to work in DeFi protocols to generate returns. Instead of holding idle assets, you deploy them into protocols that pay you for providing liquidity, lending capital, or staking tokens.
How yield farming works
- You deposit assets (e.g. USDT) into a DeFi protocol
- The protocol uses your assets to facilitate trading, lending, or other financial services
- You earn a share of the fees or interest generated
- Returns are paid in the deposited asset, the protocol's token, or both
Types of yield farming
| Strategy | How it earns | Risk level |
|---|---|---|
| Liquidity provision | Trading fees from DEX swaps | Medium (impermanent loss) |
| Lending | Interest from borrowers | Low-Medium |
| Fixed-yield protocols | Pre-set return from fee pools | Low |
| Token staking | Inflation rewards | Medium |
APY vs flat ROI
Most yield farming returns are quoted as APY (Annual Percentage Yield) — a projected annualised rate. Some protocols like TurboLoop offer flat ROI — a fixed percentage for a fixed period, with no compounding assumptions.
Risks in yield farming
- Impermanent loss — providing liquidity to volatile pairs can result in less value than simply holding
- Smart contract risk — bugs in the protocol code
- Token inflation — reward tokens can lose value
- Rug pulls — malicious developers draining protocol funds