Yield farming

Yield farming is the practice of moving crypto between DeFi protocols to earn the highest possible returns, typically by lending tokens, supplying liquidity to trading pools or staking, and collecting interest, trading fees and reward tokens.

It took off in mid-2020, during what was called "DeFi summer", when protocols such as Compound started distributing governance tokens to users, a practice also known as liquidity mining. Advertised annual yields sometimes reached hundreds or thousands of percent, mostly paid in newly created tokens whose price later collapsed.

Yield farming carries several layered risks: smart-contract bugs and hacks, impermanent loss for liquidity providers, falling reward-token prices, liquidation of borrowed positions, and rug pulls by anonymous teams. High yields almost always mean high risk. Ask where the yield actually comes from: real borrowing demand or trading fees are more sustainable than freshly printed tokens.