Yield farming
Yield farming: Yield farming is the practice of putting crypto into decentralised finance protocols to earn rewards, most often by providing liquidity or depositing into lending markets. Rewards may be paid in trading fees, interest or the protocol’s own token. The headline percentage can look high, and the risks, including smart contract failure and token price drops, are real.
How yield farming works
A user deposits tokens into a DeFi dapp, often a liquidity pool on a decentralised exchange or a lending market. In return they receive pool tokens or a balance that accrues rewards. Ethereum’s DeFi overview groups these apps under decentralised finance: lending, trading and similar services running through smart contracts rather than a single bank or broker.
Where the yield comes from
Some yield is fee income, such as a share of swap fees paid to liquidity providers. Some is interest paid by borrowers. Some is new protocol tokens issued as an incentive, which can dilute holders if emissions stay high. When the reward token falls in price, a large advertised APY can shrink quickly in dollar terms. Always separate fee yield from incentive yield when you read a dashboard.
Main risks
Smart contracts can be exploited. Liquidity providers can face impermanent loss when token prices diverge. Incentive tokens can lose value. Approving a malicious or buggy contract can put other wallet balances at risk. Complex farms that route through several protocols stack those risks. High advertised yields are not a measure of safety.
How to think about it as an investor
Yield farming is active risk-taking in DeFi, not a savings account. Compare the source of yield, audit history, who controls upgrades and how easily you can exit. Our research team treats farm APYs as temporary market incentives until proven otherwise by fee income alone. For Australian tax, rewards can be assessable when you receive them. This is general information, not tax or financial advice.
Frequently asked questions
Is yield farming the same as staking?
Not usually. Staking typically locks coins to help secure a proof of stake network. Yield farming usually means depositing into DeFi apps for fees or incentive tokens. Some products blur the labels, so read the mechanism.
What is impermanent loss?
It is the difference between holding two tokens in a liquidity pool versus simply holding them in your wallet when prices change. The loss is realised when you withdraw and prices have diverged.
Are high APYs sustainable?
Often not when most of the yield is a new token being emitted. Fee-based yield can be more durable, but it still depends on trading volume and can fall.