When you put your money in a traditional savings account, the bank pays you interest. In the world of cryptocurrency, there’s a similar way to earn returns — it’s called yield farming.
What is yield farming in crypto?
Yield farming in crypto is a way to earn rewards by putting your cryptocurrency to work on a DeFi platform rather than leaving it sitting idle in a crypto wallet.
In practice, this can happen in several ways. You might offer your crypto to help support a blockchain network, lend it to other users through a decentralized platform, or deposit it into a liquidity pool that helps power trading.
In return for contributing your crypto, the platform may reward you with a share of transaction fees paid by traders or with newly issued coins. In many cases, the rewards you earn are proportional to the size of your contribution. Yield farmers often chase higher returns by frequently moving funds between different DeFi platforms or pools.
Yield farming glossary: Key terms to know
Yield: The return you earn on an investment, generally shown as a percentage. When it comes to your digital assets, yield refers to the rewards, fees, or interest you could get from specific crypto-related activities.
Blockchain: A public digital ledger that records all crypto transactions across a network of computers. Blockchains provide the infrastructure that makes cryptocurrencies and DeFi applications possible.
DeFi: Short for “decentralized finance”, DeFi is a broad term for financial services built on blockchain networks. Instead of relying on banks, brokers, or other intermediaries, DeFi uses software to handle crypto-related activities automatically.
Smart contract: A self-executing program stored on a blockchain. It automatically carries out instructions when certain conditions are met. In DeFi, smart contracts can help manage deposits, withdrawals, trades, loans, and reward payments without human intervention.
Liquidity: How easy or difficult it is to buy, sell, swap, lend, or borrow assets without causing large price changes. If it’s easy, liquidity is high; if it’s…
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