Definition
Yield Farming — a strategy for maximizing returns from crypto assets by depositing them in various DeFi protocols: liquidity pools, lending platforms, staking.
How It Works
Your assets (ETH + USDC)
↓
Liquidity pool (Uniswap)
↓
Trading fees + protocol tokens
↓
Additional staking of rewards
↓
Maximum yield
Main Farming Methods
1. Providing Liquidity
Add a token pair to a DEX:
- Earn fees from trades
- Often + protocol tokens (LP rewards)
- Risk: impermanent loss
2. Lending
Lend your crypto:
- Aave, Compound, Venus
- Earn interest from borrowers
- Low risk for stablecoins
3. LP Token Staking
Double yield:
ETH/USDC in Uniswap → LP tokens
↓
LP tokens in staking → additional rewards
↓
Total: fees + rewards + tokens
Yield Metrics
| Metric | Meaning |
|---|---|
| APR | Annual Percentage Rate (no compounding) |
| APY | Annual Percentage Yield (with compounding) |
| TVL | Total Value Locked |
100% APR without compounding = 2x per year
100% APY with compounding = 2.71x per year (e^1)
Farming Risks
Smart Contract Risks
- Code vulnerabilities
- Protocol hacks
- Solution: use audited protocols
Impermanent Loss
- Losses from price changes in the pair
- Learn more
Reward Token Risk
- Protocol token may lose value
- High emission = inflation
Liquidation Risks
- When using leverage
- Sharp drop in collateral
Strategies by Risk Level
Low Risk (5-15% APY)
- Stablecoin lending (USDC, USDT)
- ETH staking via Lido
- Large audited protocols
Medium Risk (15-50% APY)
- Stablecoin liquidity pools
- Major crypto lending
- Insurance via Nexus Mutual
High Risk (50-500%+ APY)
- New protocols
- Volatile pairs
- Leverage
Farming and DCA
DCA strategy and farming can complement each other:
- DCA for accumulation — regular BTC, ETH purchases
- Farming for yield — portion of assets in stable pools
- Reinvestment — rewards back into DCA
Important: Farming requires active management and understanding of risks. For most investors, DCA + simple staking is a safer choice.
