what is yield farming yield farming was the hottest topic of the 2020 DeFi summer
fast forward two years in 2022 the total value locked of liquidity pools continues to reach
new highs so what exactly is yield farming how does it work and where can you yield a farm
yield farming is the practice of staking or lending crypto assets in order to generate high
returns or rewards in the form of additional cryptocurrency this innovative yet risky and
volatile application of decentralized finance has skyrocketed in popularity recently thanks
to further innovations like liquidity mining yield farming is currently the biggest growth
driver of the still nascent defy sector helping it to balloon from a market cap of 500 million
dollars to 10 billion dollars in 2020. at first most yield farmers staked well-known stablecoins
usdt dai and usdc however the most popular DeFi protocols now operate on the ethereum network
and offer governance tokens for so-called liquidity mining tokens are farmed in these
liquidity pools in exchange for providing liquidity to decentralized exchanges
liquidity mining occurs when a yield farming participant earns token rewards as additional
compensation and came to prominence after compound started issuing the skyrocketing comp
its governance token to platform users most yield farming protocols now reward liquidity providers
with governance tokens which can usually be traded on both centralized exchanges like binance
and decentralized exchanges such as uniswap what is apy in yield farming yield farmers and most
protocols and platforms calculate the estimated returns in terms of annual percentage yield
apy is the rate of return gained over the course of a year on a specific investment compounding
interest which is computed on a regular basis and applied to the amount is factored into
the apy since the DeFi summer of 2020 yield farmers have been chasing eye opening thousand
percent apys however these protocols and coins may be highly risky and susceptible to rug pulls
furthermore the yield is earned in the form of protocol tokens and is subject to highly volatile
price swings yield farming for bitcoin while there are no DeFi yield farming protocols for bitcoin
wrapped bitcoin wbtc effectively brings bitcoin into the ethereum blockchain and defy applications
by learning how to wrap bitcoin holders of bitcoin can earn a few percent of yield while lending it
out on protocols such as compound the risks of yield farming yield farming can be incredibly
complex and carries significant financial risk for both borrowers and lenders it is usually subject
to high ethereum gas fees and only worthwhile if thousands of dollars are provided as capital
users also run further risks of impairment loss and price slippage when markets are volatile most
notably though yield farming is susceptible to hacks and fraud due to possible vulnerabilities
in the protocol's smart contracts these coding bugs can happen due to the fierce competition
between protocols where time is of the essence and new contracts and features are often unaudited or
even copied from predecessors or competitors DeFi protocols are permissionless and dependent on
several applications in order to function seamlessly if any of these underlying applications
are exploited or don't work as intended it may impact this whole ecosystem of applications and
result in the permanent loss of investor funds there has been a rise in risky protocols that
issue so-called meme tokens with names based on animals and fruit offering apy returns in
the thousands it's advised to tread carefully with these protocols as their code is largely
unaudited and returns are whim to risks of sudden liquidation due to price volatility many of these
liquidity pools are convoluted scams which result in rug pulling where the developers withdraw all
liquidity from the pool and abscond with funds as blockchain is immutable by nature most often defy
losses are permanent and cannot be undone it is therefore advised that users really familiarize
themselves with the risks of yield farming and conduct their own research so stay safe and happy
yield farming this has been another coin market cap explainer video if you have any questions