Understanding crypto yield farming: a beginner’s guide
Yield farming is the practice of putting your cryptocurrency into DeFi
What is DeFi?DeFi stands for Decentralized Finance. It refers to a collection of applications and platforms built on blockchain that allow people to transact without banks.Keep learning platforms to earn rewards. Usually, this means supplying coins to liquidity pools, which are the backbone of decentralized
What is Decentralization?Decentralization is the distribution of control and decision-making across a network instead of a single central authority.Keep learning exchanges and lending platforms. In return, you receive interest, fees, or tokens.
How it works
- You deposit crypto into a liquidity pool.
- Other users trade, borrow, or lend using that pool.
- As a reward for providing liquidity, you earn a share of the fees plus extra tokens from the platform.
A simple analogy
Imagine you own a café and put some money into the tip jar at the counter to encourage others to use it. When customers add their tips, you not only get back your initial money but also share a portion of the extra tips. Yield farming works in a similar way, but with digital assets.
Why people use it
- High Earning Potential: Some pools offer very high returns, especially in the early stages.
- Multiple Rewards: Farmers can earn trading fees, interest, and platform tokens.
- Flexibility: You can often move funds between pools to chase the best yields.
Risks to consider
- Impermanent Loss: The value of coins in the pool may change compared to simply holding them.
- Smart Contract Risk: Bugs in the code can lead to loss of funds.
- Volatility: Returns may be high, but token prices can drop quickly.
Popular platforms for yield farming
- Uniswap and SushiSwap: Decentralized exchanges that reward liquidity providers.
- Aave and Compound: Lending platforms where you earn interest on deposited coins.
- Yearn Finance: Automates yield farming by moving funds to the best opportunities.
Tag System
The tags found in our glossary are there to help you better understand presented definitions. They showcase how certain concepts integrate and interact within the ecosystem.
Rectangular tags signal a concept related to Blockchain
What is a Blockchain?Think of blockchain as a public notebook that everyone owns a copy of. Whatever gets written in it is permanent and visible to all.Keep learning as a technology. Whereas rounded tags represent Cryptocurrency
What is Cryptocurrency?Cryptocurrency, often called “crypto,” is a form of digital currency that uses cryptography (advanced math and code) to keep it secure.Keep learning in more of a financial aspect. You’ll also see rectangular dashed tags for Web3
What is Web3?Web3 is the idea of a decentralized internet powered by blockchain.Keep learning and rounded dashed tags for DeFiWhat is DeFi?DeFi stands for Decentralized Finance. It refers to a collection of applications and platforms built on blockchain that allow people to transact without banks.Keep learning specifically.
Learn more about the relationship between all the tags and their respective concept with our Interactive Mind Map.
More DeFi fundamentals
Lending and Borrowing Protocols
Lending and borrowing protocols are DeFi platforms where users supply crypto to earn interest or borrow assets by providing collateral.
Keep learning
What is DeFi?
DeFi stands for Decentralized Finance. It refers to a collection of applications and platforms built on blockchain that allow people to transact without banks.
Keep learning
Crypto-backed Loans
Crypto-backed loans are loans where borrowers use cryptocurrency as collateral to receive fiat or stablecoin funds without selling their assets.
Keep learning
What is Liquidity Mining?
Liquidity mining is the process of providing tokens to a DeFi platform’s liquidity pool in exchange for rewards.
Keep learning