yield farming

What is yield farming?

Yield farming, also known as liquidity mining, is a decentralized finance (DeFi) strategy where cryptocurrency holders lend or stake their assets in various DeFi protocols to earn rewards. These rewards often come in the form of additional tokens, interest or a share of transaction fees generated by the platform. 

In the yield farming ecosystem, individuals known as liquidity providers (LPs) supply their assets to liquidity pools, smart contracts that facilitate trading, lending or borrowing on DeFi platforms.

By contributing to these pools, LPs enable the smooth operation of decentralized exchanges (DEXs) and lending platforms. In return for their participation, LPs earn rewards, which may include:

• Transaction fees: A portion of the fees generated from trades or transactions within the pool.
• Interest payments: Earnings from lending assets to borrowers.
• Governance tokens: Native tokens of the platform that often grant voting rights on protocol decisions and can appreciate in value.

Key components of yield farming

• Liquidity pools: These are collections of funds locked in smart contracts that provide liquidity for decentralized trading, lending or other financial services. Users deposit their assets into these pools, enabling various DeFi functions.
• Automated market makers (AMMs): AMMs are protocols that use algorithms to price assets within liquidity pools, allowing for automated and permissionless trading without the need for a traditional order book.
• Governance tokens: Tokens distributed to users as rewards for participating in the protocol. These tokens often grant holders the right to vote on changes to the protocol, influencing its future direction.

Yield farming vs. traditional financial yield mechanisms

Yield farming in DeFi differs significantly from traditional financial yield mechanisms:

• Accessibility: DeFi platforms are typically open to anyone with an internet connection, removing barriers associated with traditional banking systems.
• Potential returns: While traditional savings accounts offer relatively low interest rates, yield farming can provide substantially higher returns. However, these higher yields come with increased risks, including market volatility and smart contract vulnerabilities.
• Intermediaries: Traditional finance relies on centralized institutions to manage funds and transactions. In contrast, DeFi operates on decentralized protocols, reducing the need for intermediaries and allowing users to retain control over their assets.

Is yield farming profitable in 2025?

As of February 2025, yield farming remains a profitable strategy, though it is less lucrative than in previous years due to reduced token incentives and heightened competition among liquidity providers. 

That being said, the DeFi sector continues to expand rapidly, with the total value locked (TVL) reaching $129 billion in January 2025, reflecting a 137% year-over-year increase.

Projections suggest that this figure could escalate to over $200 billion by the end of 2025, driven by advancements in liquid staking, decentralized lending and stablecoins.

This growth, fueled by innovations in liquid staking, decentralized lending and stablecoins, is creating new and potentially lucrative yield farming opportunities.

Moreover, the macroeconomic environment plays a