Yield farming is one of the hottest trends in decentralized finance. There is also a high chance you may have already heard about the lucrative returns that some yield farmers have made. But, how exactly do you pick up yield farming, and where do you begin?

Here, we will be covering:

  • What is yield farming?

  • How does yield farming work?

  • What are some of the examples?

  • What are the risks of yield farming?

Yield farming is a process where you stake or lend your crypto assets to generate high rewards in the form of additional cryptocurrencies.

In general, yield farming rewards are given to users who engage in beneficial actions to the protocol. This includes:

  1. Pooling liquidity into a contract to provide markets

  2. Adding liquidity to be a more significant market maker or get a discount

  3. Pooling votes

  4. Locking up specific assets

The yield generated can be in the form of a percentage of the transaction fees generated by the underlying DeFi platforms, interest from lenders, or governance tokens.


How Does Yield Farming Work?

Here’s a diagram of how liquidity pools work.

As a liquidity provider, you first deposit your crypto assets into liquidity pools. Liquidity pools are pools of tokens locked into a smart contract that facilitates asset trading while allowing investors