What is yield farming?
Moving crypto between DeFi apps to collect rewards, and where those rewards really come from.
Yield farming means putting crypto to work in DeFi apps, usually by lending it or adding it to a trading pool, to earn fees, interest and bonus reward tokens, and often moving it around to chase the highest rate. The returns can look high, but they come with risks that can easily exceed them.
Where the yield comes from
- Lending interest: borrowers pay interest on apps like Aave.
- Trading fees: liquidity providers on exchanges like Uniswap get a share of each trade's fee.
- Reward tokens: protocols hand out their own new tokens to attract deposits. This is often most of a high advertised rate, and it's paid in tokens that may be falling in price.
- Staking rewards passed through from networks (see staking).
If you can't tell where a yield comes from, the yield may be your own money or someone else's deposits.
Worked example: a liquidity pool
You deposit $1,000 in ETH and $1,000 in USDC into an ETH/USDC pool when ETH is $2,000 (example prices). You own a share of the pool and earn a cut of trading fees.
Now ETH doubles to $4,000. The pool automatically sells some of your ETH as the price rises, so you end up with roughly $1,414 in ETH and $1,414 in USDC: about $2,828, plus fees. If you'd simply held the original ETH and USDC, you'd have $3,000. The $172 gap is impermanent loss, about 5.7%. Fees have to cover it before you come out ahead; if prices return to where they started, the gap disappears. The formula and a full table are in impermanent loss explained; try other price moves in the impermanent loss calculator.
APR vs. APY
APR is the simple yearly rate. APY includes compounding, so it's higher for the same rate. Many advertised rates are a snapshot of the last day or week, annualized, and can change within hours. A 400% APY rarely lasts.
The risks
- Smart-contract hacks: a bug or exploit can drain a pool. Even established apps have been hit; in April 2026 a hack of the staked-ETH token rsETH left Aave with an estimated $124–230 million of bad debt and briefly froze withdrawals from some pools.
- Reward token crashes: the token you're paid in can fall faster than you earn it.
- Impermanent loss in trading pools.
- Liquidation if you borrow to farm ("leverage") and prices move against you.
- Rug pulls and fake farms: new farms with huge yields are a favorite rug pull setup.
- Gas fees on every deposit, claim and withdrawal can eat small returns.
Taxes
In the US, reward tokens are generally taxed as income when you receive them, and swapping or selling later can create capital gains. See crypto taxes.
Frequently asked questions
Is yield farming the same as staking?
No. Staking helps secure a blockchain and earns its rewards. Yield farming uses DeFi apps, usually lending or trading pools, and often stacks extra token rewards on top.
Is yield farming profitable?
Sometimes, after fees and losses. Many farmers lose money to impermanent loss, falling reward tokens, hacks or gas costs.
What is impermanent loss?
The shortfall a liquidity provider has compared with just holding the tokens, caused by the pool rebalancing as prices move.
Where did yield farming start?
It took off in mid-2020, "DeFi summer," when lending app Compound began paying its COMP token to users.
Where to next
Sources
- Decentralized finance (ethereum.org)
- Uniswap documentation
- Aave documentation
- The KelpDAO/LayerZero exploit and DeFi (Galaxy Research)
Written for beginners and checked against the sources listed. Last reviewed November 4, 2026. This page is educational and is not financial, tax or legal advice. How we write and check pages.