What is DeFi Yield Farming?

DeFi Yield Farming is a strategy where tokens are deposited into a DeFi protocol to earn returns, typically in the form of the protocol's governance token.

The strategy usually involves providing liquidity to decentralized lending or trading pools by depositing crypto assets. The liquidity providers, also known as yield farmers, earn a certain annual percentage yield (APY), usually paid out in real-time.

How Does Yield Farming Work?

Yield Farming works by liquidity providers depositing tokens into a DeFi application. In return, they earn rewards, typically paid out in the protocol's token. These rewards are often represented as APY.

For example, a user could choose an automated market maker (AMM) protocol like PancakeSwap, deposit assets into a liquidity pool, and receive an LP token. This LP token can then be deposited in a yield farm to earn rewards.

The benefits of Yield Farming include:

• Passive income: Instead of simply holding their assets, users can earn additional tokens and fee income without active trading.

• Liquidity provision: Yield farming improves trading efficiency and reduces slippage on decentralized exchanges (DEXs). By providing liquidity, users contribute significantly to the DeFi ecosystem.

• High yields: Certain DeFi projects offer attractive yields that can exceed those of traditional financial instruments.