What is Yield Farming? Complete Guide
📋 En bref (TL;DR)
- Definition: yield farming involves depositing cryptocurrencies in DeFi protocols to generate returns in the form of interest or tokens
- How it works: users provide liquidity to pools and receive rewards proportional to their contribution
- Returns: APYs can range from a few percent to several hundred, depending on protocols and risks
- Risks: impermanent loss, smart contract vulnerabilities, reward token volatility
- Key takeaway: potentially lucrative strategy but reserved for experienced investors who understand DeFi mechanisms
What is yield farming?
Yield farming (or “liquidity mining”) is a decentralized finance (DeFi) investment strategy that involves depositing your cryptocurrencies in protocols to generate returns. Users “farm” rewards by providing their assets to liquidity pools or lending protocols.
Unlike a simple bank deposit, yield farming often involves moving funds between different protocols to maximize returns. This practice has become a cornerstone of the DeFi ecosystem since the summer of 2020, dubbed the “DeFi Summer.”
Yield farming plays a crucial role in how decentralized protocols function: by incentivizing users to deposit their assets, it ensures the liquidity needed for trading and lending on these platforms.
How does yield farming work?
Yield farming relies on three main mechanisms: liquidity provision, lending, and staking of governance tokens. Each method offers different returns and risks.
Liquidity Providing
The most common method involves depositing token pairs into a liquidity pool on a DEX (decentralized exchange) like Uniswap or Curve. In return, you receive LP tokens that represent your share of the pool.
Liquidity providers (LPs) earn a portion of the trading fees generated by the pool. On Uniswap V3, these fees are typically 0.3% per trade, redistributed to LPs proportionally to their contribution.
Cryptocurrency Lending
Lending protocols like Aave or Compound allow you to lend your crypto to other users in exchange for interest. Rates vary according to supply and demand: stablecoins generally offer between 2% and 10% APY.
Advantage of lending: no impermanent loss since you only deposit a single asset. However, returns are often more modest than liquidity providing.
Governance Token Staking
Many protocols distribute governance tokens to their users. These tokens can be staked to generate additional returns or participate in protocol decisions.
Example: on Curve Finance, CRV holders can lock it as veCRV to boost their rewards up to 2.5x and vote on emission allocations.
Yield farming strategies
Yield farmers use various strategies to maximize their returns, from simple liquidity provision to advanced techniques involving multiple protocols.
Basic strategy: single-asset staking
The simplest strategy involves depositing a single asset on a lending protocol. Minimal risk, moderate returns (2-10% APY for stablecoins).
Liquidity providing on DEX
Depositing a token pair (e.g., ETH/USDC) on a DEX generates trading fees. Returns can reach 20-50% APY on popular pairs, but impermanent loss can reduce gains.
Yield aggregators
Protocols like Yearn Finance or Beefy automate yield farming strategies. They move your funds between different protocols to optimize returns and automatically reinvest rewards (auto-compounding).
Leveraged yield farming
Advanced strategy involving borrowing funds to increase your yield farming position. On Alpaca Finance, for example, you can multiply your exposure up to 6x. Warning: the risk of liquidation is high.
Yield farming risks
Yield farming is not without danger. Several types of risks can impact your investments, sometimes leading to total loss of funds.
Impermanent loss
Impermanent loss occurs when the price ratio between the two tokens in a pool changes. The greater the divergence, the higher the loss. On a volatile pair like ETH/USDC, a 50% price change in ETH results in approximately 5.7% impermanent loss.
Smart contract risk
DeFi protocols rely on smart contracts that may contain vulnerabilities. Even audited protocols are not immune: in 2023, several major hacks caused losses of hundreds of millions of dollars.
Reward token risk
High yields are often paid in the protocol’s native tokens. If the value of these tokens drops (which happens frequently), your actual gains may be far below the displayed APY.
Rug pulls and malicious protocols
Some projects are created solely to attract funds and then disappear. Favor established protocols with significant TVL and a security track record.
Main yield farming platforms
Several categories of protocols enable yield farming, each with its own specificities.
Lending protocols: Aave and Compound
Aave and Compound are the leaders in DeFi lending. They offer stable returns on deposits and allow borrowing against collateral. Aave dominates with over $10 billion in TVL.
DEX and AMM: Uniswap, Curve, Balancer
These AMMs (Automated Market Makers) allow you to provide liquidity and earn trading fees. Curve specializes in stablecoins with optimized returns and minimal impermanent loss.
Yield aggregators: Yearn, Beefy, Convex
These protocols automate yield farming strategies. Yearn Finance is the pioneer, while Convex specifically optimizes returns on Curve.
Liquid staking: Lido, Rocket Pool
Liquid staking allows you to stake ETH while keeping a liquid token (stETH, rETH) usable in DeFi for additional yield farming.
Practical yield farming example
Let’s take a practical example to illustrate a yield farming strategy on Curve Finance.
Step 1: Choose a pool
You decide to deposit 10,000 USDC in Curve’s “3pool” (USDC/USDT/DAI). This stablecoin pool minimizes impermanent loss.
Step 2: Deposit and receive LP tokens
After depositing, you receive 3CRV tokens representing your share of the pool. The base yield is approximately 2% APY from trading fees.
Step 3: Stake LP tokens
You stake your 3CRV in the Curve gauge to receive CRV tokens as rewards. With maximum boost, the total yield can reach 8-15% APY.
Step 4: Optimize with Convex
Alternatively, you deposit your 3CRV on Convex Finance, which automatically optimizes your CRV rewards and adds CVX tokens. The final yield can exceed 10% APY.
Return calculation
With $10,000 deposited at 10% APY compounded monthly, you would get approximately $1,047 in gains after one year (excluding reward token price fluctuations).
📚 Glossary
- AMM (Automated Market Maker) : protocol using algorithms to determine asset prices in a liquidity pool, without a traditional order book.
- APY (Annual Percentage Yield) : annual return including the effect of compound interest. A 10% APY means your investment grows by 10% in one year.
- Auto-compounding : automatic reinvestment of rewards to benefit from compound interest without manual intervention.
- Collateral : asset deposited as security to obtain a loan. In DeFi, loans are typically over-collateralized.
- DeFi (Decentralized Finance) : ecosystem of financial services operating on blockchain without centralized intermediaries.
- DEX (Decentralized Exchange) : cryptocurrency exchange platform operating in a decentralized manner via smart contracts.
- Impermanent Loss : temporary loss suffered by liquidity providers when the price ratio of tokens in a pool changes from the time of deposit.
- Lending : lending cryptocurrencies to other users or protocols in exchange for interest.
- Liquidity : availability of assets allowing trades to be executed without significant price impact.
- Liquidation : forced sale of collateral when its value becomes insufficient to guarantee a loan.
- Liquid Staking : mechanism allowing you to stake crypto while receiving a liquid token representing the deposit.
- LP Token : token representing a liquidity provider’s share in a pool. Can be used to claim your share or generate additional returns.
- Liquidity Pool : reserve of assets supplied by users and used to facilitate trades on a DEX.
- Smart Contract : self-executing program deployed on a blockchain that automatically executes actions according to predefined conditions.
- Stablecoin : cryptocurrency whose value is pegged to a fiat currency (usually the dollar).
- Staking : locking cryptocurrencies to participate in the operation of a network or protocol and receive rewards.
- Governance Token : token giving its holder the right to vote on decisions of a decentralized protocol.
- TVL (Total Value Locked) : total value of assets deposited in a DeFi protocol. Indicator of the size and trust placed in a protocol.
Frequently Asked Questions
What is yield farming?
Yield farming is a DeFi strategy involving depositing cryptocurrencies in decentralized protocols to generate returns in the form of interest, trading fees, or reward tokens.
Is yield farming profitable?
Profitability depends on the strategies used, market conditions, and risks taken. Displayed returns (APY) can be high, but impermanent loss, reward token price drops, or hacks can reduce or even eliminate gains.
What are the risks of yield farming?
The main risks are: impermanent loss, smart contract vulnerabilities, reward token volatility, rug pulls, and the complexity of advanced strategies that can lead to costly mistakes.
How much do I need to start yield farming?
Technically, there is no minimum. However, gas fees on Ethereum can make small amounts unprofitable. On networks like Polygon or Arbitrum, you can start with a few hundred dollars.
What is the difference between staking and yield farming?
Staking involves locking tokens to secure a blockchain network and receive fixed rewards. Yield farming is more active and often involves moving funds between protocols to maximize returns.
What platforms should I use for yield farming?
Established protocols include Aave and Compound (lending), Uniswap and Curve (DEX), Yearn and Beefy (yield aggregators). Favor protocols with significant TVL and a security track record.
Do I need to report yield farming gains for taxes?
Yes, in most jurisdictions, income generated by yield farming is taxable. It may be considered as capital gains or income depending on your situation. Consult a crypto-specialized tax advisor.
📰 Sources
This article is based on the following sources:
Comment citer cet article : Fibo Crypto. (2026). What is Yield Farming? Complete Guide. Consulté le 7 February 2026 sur https://fibo-crypto.fr/en/blog/what-is-yield-farming
