A DeFi strategy in which users lend or stake crypto assets in protocols to earn rewards, often in the form of additional tokens.
Yield farmers deposit cryptocurrency into DeFi protocols, for example by providing tokens to a liquidity pool on a decentralized exchange or lending them on a lending platform. In return, they earn a share of trading fees, interest, and sometimes extra governance tokens that protocols issue to attract liquidity.
Advertised returns can look high, but they often fluctuate quickly and may depend on the price of reward tokens. Risks include smart contract bugs and hacks, impermanent loss when the prices of pooled tokens diverge, sudden drops in token value, and outright scams where developers abandon a project with investors' funds. Yield farming is complex and speculative, and participants should understand each protocol's mechanics before committing funds.
Decentralized Finance: financial services such as lending, borrowing, and trading built on blockchains using smart contracts.
LiquidityHow quickly and easily an asset can be bought or sold, or converted into cash, without significantly affecting its price.
Smart ContractA program stored on a blockchain that automatically executes predefined actions when its conditions are met.
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