Yield farming is the practice of deploying cryptocurrency across DeFi protocols to maximise returns – actively moving funds between protocols to chase the highest available APY (Annual Percentage Yield). Yield farmers earn from multiple sources simultaneously: trading fees (as liquidity providers), lending interest (on deposit platforms), governance token rewards (liquidity mining incentives), and compounding returns by reinvesting earned tokens. DeFi Summer 2020 popularised yield farming when Compound launched COMP token distribution to lenders and borrowers – briefly pushing yields to 100%+ APY. Yield farming strategies range from simple single-asset staking to complex multi-step loops: borrow against deposited collateral, deploy borrowed funds elsewhere, reinvest rewards. Risks include smart contract bugs (a hack drains the pool), rug pulls (developers withdraw liquidity), token inflation (reward tokens become worthless), impermanent loss, and gas costs eating returns on small positions. Yield aggregators like Yearn Finance automate strategy execution, regularly harvesting and compounding rewards across multiple protocols to maximise net APY.
Example: Example: In August 2020 (DeFi Summer), providing USDC on Compound earned 4% interest plus COMP token rewards worth 100%+ APY. Yield farmers deposited USDC, borrowed DAI against it, deposited DAI to earn COMP on the borrowing side, then sold COMP for more USDC – a leveraged yield loop generating triple-digit returns until COMP prices normalised.
Learn more: Binance Academy – Yield Farming
