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What Is Yield Farming?

Definition

Yield farming is the practice of depositing tokens into DeFi protocols to earn rewards — typically by providing liquidity, staking tokens, or lending assets in exchange for interest or bonus tokens.

Yield farming (also called liquidity mining) is a DeFi strategy where users deposit tokens into protocols and earn rewards. The rewards come from trading fees (for liquidity providers), interest (for lenders), or protocol token emissions (incentive rewards).

  • LP farming — deposit tokens into a DEX liquidity pool, earn trading fees + bonus protocol tokens
  • Single-asset staking — deposit one token, earn rewards (often paid in the same token or a governance token)
  • Lending — deposit tokens into a lending protocol (Aave, Compound), earn interest from borrowers
  • Recursive farming — borrow against deposits to re-deposit, amplifying yield (high risk)

For token creators, yield farming is a distribution mechanism: you can incentivize users to provide liquidity for your token by offering farming rewards. This bootstraps the initial liquidity pool and creates trading activity.

Risks include impermanent loss, smart contract exploits, and rug pulls on farming protocols. Always verify the protocol is audited before depositing.

Related Guides

How to Create a TokenHow to Add LiquidityHow to Burn Tokens

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Related Terms

DeFi (Decentralized Finance)
DeFi is a category of blockchain-based financial services that operate without banks or intermediaries — including lending, borrowing, trading, and earning yield through smart contracts.
Liquidity Pool
A liquidity pool is a pair of tokens locked in a smart contract that enables decentralized trading on automated market makers (AMMs) like Raydium and Uniswap.
Staking
Staking is the process of locking cryptocurrency tokens in a smart contract to secure a blockchain network or earn rewards, typically in the form of more tokens.
Impermanent Loss
Impermanent loss is the difference in value between holding tokens in a liquidity pool versus simply holding them in your wallet, caused by price divergence between the paired assets.