Also known as:
Definition
Yield farming is a practice in decentralized finance (DeFi) where users provide liquidity to a protocol in exchange for rewards. This typically involves locking up cryptocurrencies in a smart contract to earn interest or additional tokens.
Why it matters
- Yield farming incentivizes liquidity provision in DeFi platforms.
- It allows users to earn passive income on their cryptocurrency holdings.
- The practice contributes to the overall growth and efficiency of decentralized finance ecosystems.
- It can enhance the utility of tokens by creating demand for liquidity.
Risks & Pitfalls
- Yield farming can expose users to smart contract vulnerabilities.
- Market volatility can lead to significant losses.
- Impermanent loss may occur when providing liquidity to volatile trading pairs.
Examples
- Users may lock their assets in a liquidity pool to earn a share of transaction fees.
- A user might stake tokens in a protocol to receive governance tokens as rewards.
Related
- Tokens:
- Chains:
- Terms: