Yield farming means deploying crypto assets into decentralized finance strategies to seek returns. A farmer might supply a lending pool, provide exchange liquidity, or deposit into a vault that manages several positions. Returns can come from borrower interest, trading fees, and incentive tokens; these sources have different economic foundations.
How a farming strategy works
A participant deposits assets, receives a position or receipt token, and earns rewards under the protocol's rules. Some strategies require a separate deposit of that receipt into an incentive contract. Harvesting collects rewards; reinvesting them can compound returns. Automated vaults can perform these steps, but introduce their own contracts and management arrangements.
Liquidity mining is a particular incentive mechanism within the broader practice of yield farming. A strategy can earn yield without distributing a new token.
Measuring the actual result
Displayed annual rates may change with participation, borrowing demand, and reward prices. Net results depend on transaction costs, protocol fees, asset price changes, and any borrowing expense. Liquidity positions can underperform simply holding their assets, while leveraged strategies can face liquidation. Automation does not remove underlying protocol risks or guarantee that rewards exceed losses.