How yield farming works
A typical farming strategy has three layers:
- Base yield — earned from the primary protocol activity: trading fees on an LP position, lending interest on a deposit, staking rewards on a validator.
- Token emissions — protocols incentivize capital with their own governance tokens. UNI, CRV, SUSHI, CAKE, and hundreds of others started as farming rewards.
- Compounding / vault wrappers — services like Yearn, Beefy, and Gro auto-compound the emissions back into the position, turning nominal APR into realized APY.
Farmers rotate capital as opportunities change: when a new protocol launches with high emissions, farmers migrate in; when emissions dilute or the token price drops, they leave. Rotating positions every few weeks was standard practice during DeFi’s early years.
Current yield categories
- Stablecoin farming — Curve 3pool + Convex, Morpho stablecoin vaults, Pendle fixed-yield wrappers. Typical: 5-15% APY on USDC/USDT with relatively low IL risk.
- ETH farming — stETH/ETH pairs, Ethena USDe, restaking yields on EigenLayer. Typical: 4-15% APY with staking + protocol fees.
- Airdrop farming — using protocols speculatively to qualify for future token drops. LayerZero, EigenLayer, zkSync, and Starknet all rewarded early users with significant airdrops.
- Leveraged yield — looping stETH into Aave, borrowing more ETH, restaking. Amplifies yield but introduces liquidation risk.
Risks and considerations
The yields are real but the risks are specific: (1) smart-contract exploits, where a single bug drains the protocol; (2) stablecoin depegs — UST, USDC during SVB, and several algorithmic stables have all lost their peg; (3) liquidity exits, where emissions drop and TVL flees, leaving the pool illiquid and token prices crashing; (4) impermanent loss on volatile LP pairs that eats more than the fee income.
Treat farming APYs with skepticism — a 200% APY often means a 200% token emission that dilutes holders, or an unsustainable subsidy that disappears in weeks. Favor protocols with audited contracts, meaningful TVL, and mechanisms where the yield has a real economic source (fees, lending demand) rather than pure token emissions.