Glossary
What is yield farming?
In one sentence
Yield farming means moving crypto between DeFi protocols chasing the highest returns. The advertised rates and the realised ones often differ sharply.
Yield farming involves supplying assets to DeFi protocols — providing liquidity, lending, staking — in pursuit of returns, and moving between them as rates change.
Understanding where the yield comes from is essential, because there are only a few possibilities. It may be genuine fees paid by users of the protocol, which is sustainable. It may be interest from borrowers, also real. Or it may be newly minted governance tokens, which is not income so much as dilution — and if everyone farming sells those tokens, their price falls and the headline rate evaporates.
The advertised APY frequently assumes continuous compounding at current rates, which almost never persists. Against it you must set gas costs, impermanent loss if you supplied a liquidity pair, smart contract risk, and the price risk of the reward token itself.
A yield far above what the rest of the market offers is not a discovery. It is compensation for a risk you have not identified yet.
For example
A 400% APY paid in a token that falls 95% is not a 400% return.