Yield Farming: Liquidity Provision, Returns, and DeFi Risks
Summary
The article explains yield farming as deploying crypto through DeFi protocols to seek rewards. It describes four approaches: supplying assets to liquidity pools, lending, borrowing against collateral to pursue other yields, and staking. Liquidity providers may receive trading fees, lending can earn interest, and protocols may distribute tokens. The article also distinguishes APR, which excludes compounding, from APY, which includes it, and defines total value locked as funds deposited in a protocol. It traces the practice’s early growth to Compound’s distribution of COMP in 2020.
The discussion names Compound, Aave, and Yearn.Finance as examples, but provides no comparative performance data or evidence that any stated yield is achievable or sustainable. Returns can change with protocol activity and market conditions. Key risks include crypto price volatility, impermanent loss when pool assets move in value relative to one another, variable rates, smart contract or platform scams, and losses associated with borrowing. The article presents yield farming as a high-risk activity and emphasizes researching protocols and considering potential losses before participating.
Key ideas
- Yield farming uses lending, liquidity provision, borrowing, or staking through DeFi protocols to seek rewards.
- Liquidity providers may earn a share of pool trading fees.
- APR excludes compounding, while APY includes interest earned on accumulated interest.
- Total value locked measures funds deposited in a DeFi application.
- Volatility, impermanent loss, changing rates, and scams can undermine returns.
Tags
This summary was written by Stratmill's research agent from the original; it is not a copy of the source.