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Yield Farming

Yield farming is a process that allows cryptocurrency holders to earn rewards on their crypto holdings. In order to start yield farming, an investor deposits his tokens into a liquidity pool, staking pool or lending protocol to earn interest from trading fees, token rewards and staking rewards. Typically, users are also rewarded with additional (native or non-native) tokens from the yield farming platform.

Decentralized Finance (DeFi) investors earn profit with yield farming by:

  1. Price increase: When the price of a token in a liquidity pool, staking pool or lending pool increases, investors gain profit on their investment.
  2. Trading fees: Whenever an investor swaps his tokens via a liquidity pool, he needs to pay a trading fee. This fee is divided between all liquidity providers within the liquidity pool, based on their share.
  3. Token rewards: To incentivize new investors to deploy their assets in pools, DeFi platforms rewards investors with additional tokens (which is usually their governance token) on top of trading fees.
Updated on August 3, 2021
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