What Is Crypto Yield Farming?

What Is Cryptocurrency Yield Farming?

Crypto yield farming, also known as liquidity mining, is a lucrative practice in the decentralised finance (DeFi) space that allows investors to earn rewards in the form of tokens, interest, or fees by providing liquidity to DeFi platforms, such as decentralised exchanges (DEXes) and lending protocols.

Yield farming has become an attractive way for crypto investors to generate passive income on their cryptocurrency holdings and increase their returns.

With the potential for high returns, yield farming has become increasingly popular in the crypto space.

How Does Crypto Yield Farming Work?

Yield farming on DeFi platforms is a way for users to earn rewards by providing liquidity to decentralised finance (DeFi) applications.

By depositing tokens and cryptocurrencies into liquidity pools, users can take part in activities like lending, borrowing, and trading on the platform.

In return for providing liquidity, users are rewarded with a range of benefits such as:

1. Transaction Fees

Earn a share of the trading fees generated by the platform with transaction fees!

Proportional to your contribution to the liquidity pool, users can now benefit from the fees generated by the platform.

Take advantage of this opportunity to increase your earnings and get a share of the platform’s trading fees.

If you chose a popular platform that has volume and a good reputation you may be able to generate a nice passive ROI.

2. Interest

In lending protocols, users providing liquidity can not only benefit from the security of their deposits, but also earn interest on them as borrowers repay their loans with interest.

This is a great way to reap the rewards of being a lender and helping to facilitate the flow of capital in the economy.

3. Governance Tokens

Governance tokens are becoming increasingly popular in the DeFi space, as many platforms have introduced their own native tokens to incentivise users.

By providing liquidity, users can earn these tokens as rewards, and they can also be used to exercise voting rights in the platform’s governance decisions.

These tokens provide a great way to get involved and benefit from a platform’s growth, while also having a say in how it’s run.

How Much Money Can You Make Yield Farming?

Yield farming was ludicrously profitable (5000% per Month) between 2020 and 2021, and then nearly all platforms died a death, and investors late to the party lost money. It was obvious these high returns were not sustainable. Experienced investors that invested early and hoped in and out of the top farms made fortunes.

In 2023 yield farming services are offered by niche farm platforms and also some well-known crypto exchanges. You can even yield farm your stablecoins. A sustainable farm pays out around 5-8% APY.

How Complex Is Crypto Yield Farming?

Yield farming can be a complex endeavour, requiring strategies to maximise returns and maximise profits.

To optimise their positions, many users farm multiple tokens simultaneously, leverage their positions, or continually switch between different protocols to capture the highest yields.

This has given rise to yield farming aggregators—platforms that automate the process of identifying and switching between the most profitable yield farming opportunities.

With these aggregators, users can quickly and easily find the most lucrative yield farming strategies in the market.

What Are The Risks Involved In Yield Farming?

In 2020-2021 when yield farming was at its peak, many new crypto investors jumped in and lost money.

It was an extremely complex procedure using DEX changes and wallets, and one mistake and you could lose all your crypto.

Many yield farming platforms popped up to ride this trend and then disappeared and closed their platform. Investor’s crypto was locked up on these platforms, so they lost everything.

The main risks are:

1. Loss

Providing liquidity to a DEX can lead to impermanent loss, a temporary dip in value caused by changes in the relative prices of the assets in the liquidity pool.

This type of loss can be significant, so it’s important to understand the risks involved when providing liquidity to a DEX.

Knowing the potential for impermanent loss can help users make informed decisions and manage their assets more effectively.

2. Market Volatility

The value of tokens or cryptocurrencies used for yield farming can be subject to market volatility, meaning that the returns you can get from yield farming may be affected by changes in the market.

To help protect yourself against this risk, it is important to diversify your investments and monitor the market regularly.

Doing so can help you identify potential opportunities and minimise your losses in the event of a sudden market downturn.

3. Regulatory Risks

Regulatory risks are a significant concern for DeFi platforms and yield farming activities.

As the industry continues to evolve, it is possible that these activities may be subject to future regulatory scrutiny which could have a significant impact on the entire DeFi ecosystem.

It is thus essential for DeFi platforms and yield farming activities to remain compliant with applicable regulations to minimise any potential regulatory risks.

Some countries may also ban their citizens from investing in such a risky niche.

We advise being very careful when looking at yield farming and learning as much as possible before you even consider investing in this crypto niche.

Where Can You Find A List Of Crypto Yield Farms To Invest In?

We have created a free list of crypto yield farming platforms here.

If you would like to look at safer (other) options for earning a passive crypto income, take a look at our free crypto resource directory section called investing crypto.