Yield farming is the act of trying to get the largest return (or yield) on your cryptocurrency assets through smart contracts. This return is generally earned through lending out your cryptocurrency or joining a liquidity pool to earn interest on your initial assets.
Many decentralized finance protocols issue their own governance tokens which they offer as a reward for yield farming on their platform.
Due to the competitive nature of the industry, yield farmers are often on the lookout for the newest protocols offering the highest yields.
Is yield farming risky?
Yield farming can be quite risky. Many protocols are new and untested and as such, vulnerable to smart contract bugs which others will look to exploit or hack to steal funds. Participants are also vulnerable to extreme price fluctuations in unproven assets such as governance tokens. In some cases, protocol creators have been known to ‘rug-pull’ or run off with the liquidity provided by participants.
That being said there are legitimate protocols offering yield farming but it is vital that you do your own research and verify the legitimacy of a protocol before sending cryptocurrency to it. Even if you have done your own research it is recommended to not put all of your assets into one smart contract platform for yield farming.
Is yield farming lucrative?
Yield farming can be lucrative if you know what you are doing. That being said, a general rule of thumb is that unnaturally high yields correspond with significantly more risk.
What is APY in yield farming?
APY stands for annual percentage yield. It is a metric to measure what percentage of your initial investment is returned in yield each year. For example, a 10% APY on $1000 in crypto would equal $100 in yield per year.