What is a Yield Farm?
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Written by Trader Joe
Updated over a week ago

WTF is a Yield Farm?

If decentralised exchanges are the hearts of every #DeFi ecosystem, then liquidity is the blood. To make sure there is no lack of liquidity, many protocols use 'yield farms' to attract potential liquidity providers. But WTF exactly is yield farming?

DEXes and other protocols, such as lending markets, rely on having large TVL to function properly. More assets in the liquidity pool mean better pricing for traders, which in turn drives more volume, fees and revenue.

To incentivise liquidity provision, projects often share all or a portion of revenue with those providing liquidity to them. They might also offer additional rewards in the form of token emissions in a process known as liquidity mining.

When supplying assets on a #DEX, users receive a portion of fees from each swap in return for the service they provide. For some pairs, they might also stake their liquidity in a farming contract and receive incentives in one or more tokens on top of fees.

Projects often provide double or even triple-digit APRs as part of their liquidity mining campaigns, even in bear markets. This makes it a good way to earn some yield while helping protocols grow and capture market share.

The #RealYield generated from fees is often smaller than mining rewards. It is however, considerably safer as it doesn't rely on emissions, making it perfect for those looking for a more stable income.

Despite everything, yield farming remains one of the easiest ways to earn #passiveincome in crypto. With Liquidity Book's Surge Pricing mechanism users can even earn fees while being compensated for the Impermanent Loss.


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