Yield Farming Introduction

Yield farming is the practice of maximizing returns by providing liquidity to DeFi protocols.

What is Yield Farming?

Depositing crypto into protocols

Earning rewards (interest + tokens)

Moving funds for best rates

"Farming" protocol incentives

Add token pairs to DEX pools

Earn trading fees (0.3% typical)

Receive LP tokens as receipt

Stake LP tokens for extra rewards

Deposit into lending protocol

Borrow against deposit

Deposit borrowed funds

Compound the yield

New protocols offer token rewards

High APY to attract users

First movers get best rates

APY decreases over time

Simple interest rate

Doesn't include compounding

Includes compounding effects

What you actually earn

**Impermanent Loss**: Value loss from price changes

**Smart Contract Risk**: Bugs and exploits

**Rug Pulls**: Malicious projects

**Token Inflation**: Rewards lose value