Yield farming

Yield farmers deposit tokens into lending markets, liquidity pools or vaults and collect the returns those protocols pay. Part of the yield comes from real activity, such as borrowers' interest or traders' fees, and part often comes from new tokens the protocol issues to attract capital, a practice known as liquidity mining.

The trend took off in mid-2020, when Compound began distributing its COMP governance token to users, starting the period known as DeFi summer. Since then, farmers have chased the highest advertised returns, often stacking positions across several protocols or using borrowed funds to multiply them.

High headline yields usually carry high risk. Reward tokens can fall sharply in value as farmers sell them, smart contracts can be exploited, liquidity providers face impermanent loss and leveraged positions can be liquidated. Yields that depend mostly on token emissions tend to shrink once incentives end.