Yield farming, also known as liquidity mining, is a technique of generating returns in the form of additional cryptocurrency. It involves locking up a certain amount of cryptocurrencies and receiving interest in proportion to the amount. Since its boom in 2020, yield farming has evolved to become a popular method for cryptocurrency holders to boost the returns of their digital assets.
Examples of decentralised finance (DeFi) protocols for yield farming include Uniswap, Aave, PancakeSwap, and Crypto.com. The main types of yield farming include providing liquidity, lending, borrowing, and staking.
Providing liquidity works by allowing liquidity providers (LPs) to contribute their tokens to a liquidity pool through a decentralised app (dapp). In return for providing their tokens for liquidity on a decentralised exchange (DEX), the LPs earn a portion of the fees paid by users on the DeFi platform. Additionally, coin or token holders can lend their cryptocurrencies to borrowers using a smart contract, earning interest on the loan.
Borrowing requires the yield farmer to lock up their initial tokens as collateral and receive a loan of another token instantly. The farmer can then earn interest with this token through lending or contributing it to a liquidity pool. This way, the farmer gets to keep their initial tokens while earning yield on their borrowed assets.
Staking involves pledging tokens to a Proof of Stake (PoS) blockchain. In exchange for locking up the tokens, the network rewards the user with a certain amount of cryptocurrencies once a block is added to the blockchain.
