Yield Farming in DeFi
Strategy of lending or staking digital assets in DeFi protocols to earn rewards, often compounded.
What is Yield Farming in DeFi?
Yield farming involves depositing assets into pools on platforms like Aave or Compound, earning APYs from fees and tokens—e.g., 10% on USDC yields $1,000 yearly on $10,000 stake. Farmers optimize via aggregators like Yearn.finance, auto-shifting to 20%+ pools across chains.
LP farming on Uniswap generates 5-50% from 0.3% swaps, but impermanent loss offsets 20% in volatile pairs; stablecoin farms like Curve yield 2-8% with $20 billion TVL. Leveraged strategies borrow to amplify (e.g., 3x on $10k = 30% effective).
$100 billion DeFi TVL in 2025 hides risks: $4 billion hacks, rug pulls, and liquidation cascades, yet it democratizes 15% average returns versus 0.5% savings accounts.
Related Terms
Fixed Income Security
Debt instruments providing regular interest and principal repayment, like bonds.
Loan-to-Value Ratio (LTV)
The ratio of a loan’s value to the value of its collateral in DeFi lending.
Sequencer of Layer 2
A program or node in a Layer 2 or Rollup blockchain network that orders transactions before they are processed or submitted to the Layer 1 blockchain.
Liquidity Fragmentation
The dispersion of liquidity across multiple pools, chains, or exchanges, leading to inefficient pricing and higher costs.
Margin
The collateral or initial investment required to open and maintain a leveraged trading position in digital asset markets, amplifying potential profits and losses.
NAV
Net Asset Value - the per-share value of an investment fund's assets minus liabilities, calculated daily to determine share prices.