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Author: Admin | 2025-04-27
Table of ContentsWhat is yield farming?How does yield farming work?How are yield farming returns calculated?Can yield farming be profitable?What are the risks of yield farming?Popular yield farming protocolsStart yield farming with MoonPayDecentralized Finance (DeFi) has been key in leading technological innovations in the Web3 space. Between February 2021 and 2022, the DeFi market grew by over 47% with total value locked (TVL) surpassing $230 billion. As of December 2023, however, DeFi TVL sits at about $47 billion. For DeFi users, yield farming can be used to generate additional revenues while also helping contribute to an active DeFi ecosystem. But what is yield farming and how does it work?This article explains the benefits and risks of yield farming so you can determine if yield farming is right for you as a way to start generating revenue from your tokens. Disclaimer: Yield farming may also introduce additional risk so you should consider whether yield farming is appropriate for you before taking any action. The following is for informational purposes only and should not be construed as financial advice. Yield farming is the process in which crypto token holders can earn rewards by providing liquidity to DeFi platforms. By locking their crypto tokens in yield farming protocols, yield farmers can generate additional revenue from their principal investment.Yield farming are processes by which crypto token holders earn rewards by committing tokens (providing liquidity) to DeFi platforms (Image source)How does yield farming work?Though it may sound complicated, yield farming works by liquidity providers depositing tokens into a liquidity pool.Supplying liquidityA yield farmer can earn rewards by providing liquidity to a decentralized application (dApp), such as a decentralized exchange (DEX).When liquidity providers deposit equal amounts of tokens into a decentralized exchange liquidity pool, they get a proportionate amount of liquidity provider (LP) tokens. Liquidity provider tokens entitle liquidity providers to a portion of transaction fees that decentralized crypto exchanges charge for trading against a liquidity pool. What can yield farmers do with LP tokens? Liquidity providers can stake their acquired LP tokens to earn additional rewards, participate in certain initial DEX offerings (IDOs), and even lend their digital tokens to borrowers and generate revenue through smart contract-enabled lending-borrowing platforms.How are yield farming returns calculated?Yield farmers calculate their estimated returns from yield farming with two market metrics: Annual Percentage Yield (APY) and Annual Percentage Rate (APR).APY factors in compounding interest, thereby calculating profit reinvestment that generates more returns. APR, however, does not.That being said, APY and APR merely help in making projections that may not always correspond with actual returns. Moreover, they are remnants of legacy finance metrics that calculate annualized returns over the course of a year. The highest APY rates of token pairs on PancakeSwap (Image source)Given the speed of innovations in decentralized finance, APY and APR have become outdated for calculating returns. Perhaps it is time for the DeFi sector to design a unique metric that can better predict daily or weekly returns.Can yield farming be profitable?Yield farming can be very rewarding for investors
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