Yield Farming: What Is It and How Does It Work?

Yield farming is one of the most popular yield-generating opportunities in the global DeFi markets, enabling you to potentially earn above-average yields by depositing crypto in yield farming protocols.Yield farming refers to depositing tokens into a liquidity pool on a DeFi protocol to earn rewards, typically paid out in the protocol’s governance token.

Yield farming rewards are expressed as APY. These tokens are locked in a smart contract, which programmatically rewards users with tokens as they fulfill certain conditions.Choose a yield farming protocol. Let’s go with an automated market maker like PancakeSwap for this example. Many DeFi protocols reward yield farmers with governance tokens, which can be used to vote on decisions related to that platform and can also be traded on exchanges.. However, the potentially high returns also come with substantial risk. Let’s take a look at the benefits and risks of yield farming.Rather than just holding, users can put their holdings to work and earn rewards in the form of additional tokens and fee income without actively trading.

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