If you’re wondering what is yield farming in crypto, it describes committing digital assets to lending markets or liquidity pools to earn outsized rewards paid in additional cryptocurrency. This fast‑evolving area of decentralized finance is both innovative and volatile, boosted by techniques such as liquidity mining. It has been a prime catalyst for the DeFi ecosystem, which expanded from roughly $500 million to about $10 billion in 2020.
At its core, these programs motivate liquidity providers to stake or lock tokens inside smart contract–based pools. Incentives commonly include a share of transaction fees, interest from borrowers, or distribution of a governance token. Returns are often quoted as annual percentage yield, and as more capital flows into a pool, the yield typically compresses.
Early participants mostly deposited stablecoins like Tether, Dai, and USD Coin. Today, many leading DeFi protocols run on Ethereum and issue governance assets through liquidity mining. Users “farm” new tokens by providing liquidity to decentralized exchanges through pooled markets.
Yield Farming vs. Staking: What’s the Difference?
Staking generally means locking a cryptocurrency into a proof-of-stake network (or delegating it to a validator) to help secure the blockchain and earn staking rewards. The yield is typically paid in the same asset being staked (or in a closely related reward token), and the primary risks tend to revolve around price volatility, validator performance, and any lockup or unbonding rules.
Yield farming, by contrast, is usually about supplying tokens to a DeFi protocol—such as lending them to borrowers or depositing them into a liquidity pool—so you can earn fees, borrowing interest, and sometimes extra incentive rewards. The trade-off is that the strategy often adds moving parts, including smart contract risk and changing incentives, and your results can depend heavily on pool composition and token prices.
Examples of staking include staking Ether on Ethereum through a validator or a staking provider. Examples of yield farming include depositing stablecoins into a lending market like Aave or providing liquidity to a Uniswap pool to earn trading fees and incentives.
Liquidity mining refers to a specific type of yield farming where a protocol distributes extra incentive tokens to borrowers, lenders, or liquidity providers on top of any base fees or interest. Yield farming is the broader umbrella that can include fee-only strategies (earning just swap fees, for example) as well as incentive-driven programs. The model came to prominence when Compound began granting its governance token to users of the protocol, and similar incentive campaigns have been used across platforms such as Uniswap, Curve Finance, SushiSwap, Balancer, and Aave.
Most platforms now compensate liquidity providers with governance tokens that can be traded on centralized venues such as Binance as well as decentralized exchanges like Uniswap.
Annual Percentage Yield in DeFi: How Compounding Shapes Returns
Protocols and dashboards generally present expected performance using annual percentage yield. Annual percentage yield reflects the rate of return over a year, factoring in compounding—interest that is periodically added to the principal so subsequent earnings accrue on a growing base.
During the so‑called DeFi summer of 2020, some pools advertised four‑digit yields. Such opportunities can be extremely risky, and the payouts often arrive in volatile protocol tokens whose prices can swing dramatically.
How Are Yield-Farming Returns Calculated?
Returns are typically expressed as either an annual percentage rate (a simple annualized rate that does not assume compounding) or an annual percentage yield (an annualized figure that assumes compounding). The gap between the two depends on how frequently you compound and whether your rewards are automatically reinvested or require manual harvesting.
Your realized results can vary from what a dashboard shows because yields are dynamic and are affected by factors such as how much liquidity is in the pool, how much trading activity (and fee generation) the pool sees, how fast incentive rewards are emitted, and the market price of any reward token you earn.
For a simple example, suppose a pool effectively pays an 8% annual percentage rate and you compound weekly. The approximate annual percentage yield would be ( .08/52)^52 − 1, which is about 8.3%. If the reward token’s price falls while you earn it, the real-world return can end up much lower than the quoted annualized figure.
Is DeFi Yield Farming Still Profitable?
It can be profitable, but outcomes tend to be more competitive than they were in the earliest phases of DeFi. As strategies become widely known and more capital crowds into the same pools, annualized yields often compress, and short-term spikes in rewards can fade quickly once incentive programs change or opportunistic liquidity moves elsewhere.
In more established lending markets and mature liquidity pools, annualized returns are often in the low single digits to the low double digits, especially when rewards come mainly from fees or borrowing demand. Higher numbers can still appear during promotional incentive periods, but those yields are frequently difficult to sustain and may be offset by dilution from token emissions or by price declines in the reward token.
The Ten Most Popular Protocols for On-Chain Yield
To optimize passive income, a yield farmer may rotate between several DeFi platforms that offer variations on borrowing, lending, and liquidity incentives. Here are several of the most widely used options:
| Platform | Type | Key Features | Total Value Locked (2026) | Typical Annualized Yield | Governance Token |
|---|---|---|---|---|---|
| Aave | Lending and borrowing | Open-source, non-custodial money market with variable rates | Exceeding $21 billion | Up to about 15% annual percentage rate on certain markets | Aave governance token |
| Compound | Lending and borrowing | Algorithmic money market with floating rates and incentive rewards | Above $16 billion supplied | Annual percentage yields commonly around 0.21% to 3% | Compound governance token |
| Curve Finance | Decentralized exchange | Stablecoin-focused swaps designed for low fees and low slippage | More than $9.7 billion | Base yields around 10%; bonus rewards can exceed 40% | Curve governance token |
| Uniswap | Decentralized exchange | Automated market maker for swapping Ethereum tokens via pooled liquidity | About $5 billion (v2) and over $2 billion (v3) | Trading-fee share varies by pool and configuration | Uniswap governance token |
| Instadapp | Strategy management | Tools to build, automate, and manage positions across multiple protocols | More than $9.4 billion | Strategy-dependent | Instadapp governance token |
| SushiSwap | Decentralized exchange | Multi-chain DeFi suite with swaps and additional on-chain products | Near $3.55 billion | Varies by pool and incentives | SushiSwap governance token |
| PancakeSwap | Decentralized exchange | Binance Smart Chain exchange with gamified features and farming incentives | Over $4.9 billion | Certain farms have posted yields above 400% | PancakeSwap governance token |
| Venus Protocol | Lending and synthetic assets | Collateralized lending plus over-collateralized synthetic stablecoin minting | Exceeds $3.3 billion | Varies by market and incentives | Venus governance token |
| Balancer | Automated portfolio management | Customizable liquidity pools with flexible token weights | More than $1.8 billion | Varies by pool design and incentives | Balancer governance token |
| Yield aggregation | Automated strategies that route and rebalance across protocols | Around $3.4 billion | Users have seen yields up to roughly 80% | Yearn governance token |
How Do You Get Started With DeFi Yield Farming?
Start by setting up a self-custody wallet that supports the chain you plan to use, then fund it with the assets you intend to deploy and enough native currency to cover transaction fees. Next, choose a well-known protocol and a straightforward product (such as a basic lending market or a large, liquid pool) so you can learn the mechanics before trying more complex strategies.
Before depositing funds, review the protocol’s documentation, check whether the smart contracts have a strong security track record, and confirm you are interacting with the correct application interface. Begin with a small amount, monitor how rewards accrue and how withdrawals work, and keep clear records of deposits, withdrawals, and any token swaps you perform.
Earning Yield With Bitcoin: Using Wrapped BTC
Many ask whether Bitcoin itself can participate in DeFi yields. While native Bitcoin lacks such protocols, Wrapped Bitcoin brings BTC onto Ethereum so it can be used in smart contracts and liquidity pools. By learning how to wrap Bitcoin, holders can lend or provide liquidity on platforms like Compound and earn a modest percentage return.
CoinMarketCap Rankings for DeFi Yield Pools
To compare opportunities across platforms, CoinMarketCap tracks liquidity pools from protocols including Venus, Curve, Sushi, Synthetix, Yearn, PancakeSwap, and others. The rankings surface details such as the crypto pair, total value locked, reward type, and current annual percentage yield.
Risks to Consider Before You Chase DeFi Yields
Participating in these strategies can be complex and carries material financial risk.
DeFi yields can change quickly, and the same mechanisms that boost returns can also amplify losses when markets move against you.
- High Ethereum gas costs
- Impermanent loss
- Price slippage
- Smart contract bugs and design flaws
- Exploits, hacks, and fraudulent schemes
- Protocol dependency and cascading failures
- Meme-token scams and rug pulls
- Irrecoverable losses due to blockchain immutability
Is Yield Farming Taxable?
Tax treatment depends on where you live, but yield-farming activity often creates taxable events. In many jurisdictions, receiving reward tokens can be treated as income at the time you gain control of them, and later selling or swapping those tokens may trigger capital gains or losses.
Other potentially taxable moments can include swapping assets to enter or exit a position, moving between tokens while rebalancing a strategy, and unwinding liquidity positions when you withdraw your funds. Because rules vary widely and can be nuanced, consider consulting a local tax professional and keeping detailed transaction records.
