What is DeFi yield farming, and is it worth it?

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Decentralized finance brings many innovations and new ways to generate income, and some people have figured out how to “mine” crypto returns.

Many decentralized finance (DeFi) applications offer passive income, or “yield,” in exchange for a deposit cryptocurrencies in their protocols, and people who develop strategies to move crypto across DeFi protocols to maximize their returns are called “yield producers.” DeFi returns fluctuate constantly, so it makes sense to “rotate” deposits between protocols to seek the highest returns. It requires highly sophisticated strategies and advanced knowledge of DeFi to operate, which are jealously guarded to maintain profitability.


One of DeFi’s biggest innovations has been the lending and borrowing app, which allows users to deposit crypto into a pool and lend it to other users in exchange for interest payments or to lock it as collateral to take out a loan in another cryptocurrency. . The DeFi protocols are all interoperable via blockchain smart contracts, allowing developers to chain multiple actions across multiple DeFi applications to build new financial services. Also, newly launched protocols will offer high rewards for people willing to risk depositing their crypto in exchange for high rewards, but there is also a very high risk that the protocol will become insolvent, collapse, or turn out to be a crypto rug. . scam.

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Binance Academy explains that yield farming is very complex due to DeFi protocols having varying APY rewards, and maximizing yields often involves “crop rotation” on the highest paying protocols. Yield farming strategies are sophisticated and watched very closely because yield farming strategies become less profitable when more people use the same strategy. Yield farming typically relies on “liquidity pools,” which are large pools of cryptocurrency used to facilitate financial services, which is how decentralized exchanges (DEXs) work. Liquidity pools must provide rewards to their Liquidity Providers (LPs), where yield farming rewards come from.

Yield farming is difficult and risky

Digital graphic of golden barn and silo with COMP logos in green fields

Getting into yield farming isn’t easy, and it’s not always safe to nurture it. Higher APYs are almost always associated with a higher risk of loss. Newer DeFi protocols with shallow pools of liquidity are more prone to high volatility and the possibility of collapse. Yield farmers need to actively manage risk and reward while keeping an eye out for DeFi protocols that offer higher returns to move their tokens to the next highest paying pool. Yield farmers who keep their crypto in a high APY pool for too long risk the mistake of getting shipwrecked and losing some or all of their crypto.

Yield farming is a well-known term in cryptocurrency, but it is also difficult to get into and can lead to losses if the yield farmer is not careful with their strategy. Yield farming is very sophisticated and usually requires knowledge of developing smart contracts and connecting multiple DeFi protocols to maximize yields. Yield producers must also rely on blockchain bots and oracles to know when it’s time to pivot their crypto crops, and they must use risk management and hedging strategies to mitigate their crypto losses. -change.

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Source: Binance Academy