What is Yield Farming?

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Yield farming refers to the practice of depositing cryptocurrencies in a decentralized finance (DeFi) platform to earn rewards called “yield.” There are several ways of doing this.

First, by providing liquidity to a “liquidity pool” (LP) on a decentralized exchange (DEX). DEXs don’t have order books, instead, they rely on users to deposit crypto into “pools” that allow people to trade token pairs. People who provide liquidity to these pools earn yield through trading fees and bonus rewards from the protocol.

Second, users can lend out their crypto assets and receive yield from the interest collected. Or they can take out a loan using their crypto as collateral. A popular yield farming strategy involves taking out a loan against, say, Ethereum and using the loan to farm yield somewhere else. This way, the user maintains their exposure to Ethereum while also earning LP fees.

Finally, users can stake their crypto and receive yield. Often, this process refers to Proof-of-Stake blockchains that require network validators to pledge an amount of crypto that is kept for security reasons. As part of the network, validators receive crypto rewards.

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Yield farming is considered an advanced strategy as users need to have a good understanding of DeFi protocols and the risks involved to be successful. However, successful yield farmers can enjoy a high percentage return on their capital.

Bybit has some of the safest liquidity pools on the market, check out Bybit Earn here

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