What is Yield Farming in DeFi?
Yield farming, also known as liquidity mining, is a decentralized finance (DeFi) strategy that allows cryptocurrency holders to earn rewards by providing liquidity to decentralized exchanges (DEXs) or lending platforms. The main concept revolves around locking or staking their assets in a smart contract to facilitate trading or borrowing activities, thereby generating passive income.
Participants, often referred to as yield farmers, deposit their tokens in liquidity pools. In return, they receive tokens representing their share of the pool, such as LP (liquidity provider) tokens. These tokens can be further utilized in various DeFi protocols, thus enhancing returns. The rewards amassed from yield farming typically come in the form of additional cryptocurrency or fees generated from the trading volume on the exchanges.
The appeal of yield farming lies in its potential for high returns, often surpassing those of traditional savings accounts. However, it carries inherent risks, including impermanent loss, smart contract vulnerabilities, and fluctuations in asset prices. Yield farmers should perform thorough research and assess risks before participating in these DeFi projects.