What is yield farming and how does it work?

If you’re new to crypto, there’s a long list of complicated concepts and terminology that you need to wrap your head around—and one of the most important is yield farming. Yield farming lets you use your crypto to earn rewards. But how does yield farming work, how much can you earn, and what are the risks involved? Keep reading to find out.

What is yield farming?

This type of farming has nothing to do with tractors, livestock or crops. Also known as liquidity mining, yield farming is when you lend your crypto assets to DeFi protocols for others to use. In return you are rewarded with more crypto tokens.

Yield farming is a way for cryptocurrency investors to earn income from digital assets that would otherwise be sitting idle. By moving their crypto across DeFi platforms to find the highest yields, investors can maximize their returns. It’s kind of like taking advantage of promo interest rate offers on savings accounts, hopping from one bank to the next once the promo period ends—but with a much higher level of risk.

The yield farming process is similar to staking as it involves depositing cryptocurrency holdings. However, while staking uses cryptocurrency tokens to power a blockchain or protocol, yield farming uses cryptocurrencies as liquidity for other investors or traders.

Those that take part in yield farming and provide liquidity to DeFi platforms are known as liquidity providers (LPs). The liquidity is often used for decentralized

exchanges, trading or loans.

As of October 2025, the total value locked (TVL) in DeFi protocols by liquidity providers is over US$152 billion.

How does yield farming work?

Yield farming is made possible by liquidity pools and automated market makers, which are used to power decentralized exchanges or lending platforms.

Liquidity pools

If you want to earn rewards from your crypto holdings, you can deposit your funds into a liquidity pool and become a liquidity provider. A liquidity pool is a pot of cryptocurrencies that can be used for token swaps or loans. Most feature a pair of cryptocurrencies, but some liquidity pools include multiple crypto assets.

In return you receive LP tokens that represent your share of the liquidity pool. So if you deposit $1,000 worth of tokens into a $100,000 pool, you would receive 1% of the LP tokens. Then when traders use the funds in the pool for token exchanges, for which they pay a fee, you receive a portion of those fees based on the liquidity you provided.

Automated market makers

Automated market makers are algorithms (a series of smart contracts) that calculate the exchange prices and interest rates on a DeFi platform based on the available liquidity held within pools.

As the automated market maker calculates interest rates using supply and demand, yields can vary daily. To maximize your returns, you may need to move your tokens to a different liquidity pool on the same platform or change platforms altogether.

And that’s why it’s called yield farming. It’s not a set-and-forget strategy, but an approach designed to hunt down the best possible returns. You can do this manually by regularly monitoring DeFi platforms for the best deals, or it can be automated with the use of yield farming aggregators that employ smart contracts.

Example: Yield farming in action

Let’s say you want to become a liquidity provider on the Uniswap decentralized exchange. You own ETH and USDT tokens, and you want to use your holdings to earn rewards.

From the “Pool” tab on the Uniswap website, you can connect your wallet and choose the ETH/USDT pool. Then it’s a matter of completing the following steps:

1. Click “Add liquidity” and then deposit equal-value amounts of ETH and USDT.
2. Receive Uniswap liquidity tokens.
3. Traders who use the ETH/USDT pool for token swaps will pay a fee.
4. You receive a portion of the fees based on the proportion of liquidity tokens you hold for that pool.

Yield farming rewards

The rewards you receive from yield farming vary depending on the DeFi protocol. For example, if your tokens are used to provide crypto loans, you could receive interest payments from borrowers. If your tokens are used to provide liquidity for a decentralized exchange, you could receive a portion of the trading fees paid by exchange users.

In some cases, your rewards could be paid out in a stablecoin such as Tether or USDC. Alternatively, you could receive rewards in the form of the DeFi protocol’s native governance token. You could hold these tokens as an investment, cash them in, or use the voting power the tokens provide to have your say on the future development of the DeFi protocol.

How much can I earn from yield farming?

Yield farming rewards are usually expressed as an annual percentage yield (APY). The APY you can get depends on the crypto assets used, the DeFi platform, trading volume, the platform’s fees and the state of the crypto market.

APYs quoted on DeFi platforms can range anywhere from 5% – 15% on stablecoins like Tether and USDC, while more volatile (and risky) cryptocurrencies can offer higher yields, sometimes up to and over 100%.

Benefits of yield farming

There are several reasons why yield farming could be an attractive option for you:

• Earn passive income.

Instead of simply holding crypto in your wallet and waiting for it to (hopefully) increase in value, yield farming allows you to put your tokens to work to earn passive income.

• Potential for high returns.

DeFi yield farming has the potential to provide higher returns than traditional options like savings accounts and GICs.

• Create a diversified crypto portfolio.

Earning tokens across a range of DeFi protocols allows you to build a diversified portfolio of crypto assets.

• Fast access to funds.

You can typically withdraw your crypto tokens from a liquidity pool at any time, allowing you quick access to your funds whenever you need.

Yield farming risks

Before you start yield farming, make sure you’re aware of the risks involved:

• Impermanent loss.

Cryptocurrencies are notoriously volatile, and impermanent loss occurs when the value of crypto assets changes after you’ve deposited them into a liquidity pool. If one token experiences a sharp increase or decrease in price, when you withdraw you could end up with tokens that are worth less than if you had simply held them in your wallet and avoided yield farming altogether.

• Smart contracts.

Smart contracts are crucial to DeFi protocols and allow for many yield farming opportunities. However, smart contracts are programmed by humans, so errors can occur. There are systems in place to mitigate this risk, but if a smart contract does malfunction, it could mean that a user’s liquidity deposit is lost in the DeFi ecosystem.

• Composability.

Smart contracts increase the composability of DeFi protocols. Composability refers to the interaction of different protocols within the DeFi ecosystem (think of different mobile apps all working together for a seamless experience). This is one of DeFi’s greatest strengths, but it can also be considered a risk as it can amplify any issues within a smart contract system, potentially leading to a domino effect if one DeFi protocol fails.

• Hacks.

The decentralized applications that front DeFi protocols are connected via the internet. Like anything connected to the internet, there is always a risk of a security breach from hackers. Hackers also look for cracks in smart contract code that they can use to their advantage.

• Rug pull scams.

Rug pulls are a risk primarily associated with decentralized exchanges (DEX). Due to the open-source nature of the blockchain, anyone can create a new cryptocurrency token. On a DEX, scammers can then create a new liquidity pool and pair the worthless token with a valuable one, such as ETH. Once enough liquidity enters the fraudulent liquidity pool, the owners pull the pool and leave with the valuable ETH, leaving little to no trace. Learn more in our guide to common crypto scams.

• Tax implications.

You’ll need to be aware of any tax implications that apply to the rewards you earn in order to make sure that you can meet all your CRA reporting requirements.

• No protection.

While there are similarities between yield farming and depositing fiat currency in a savings account, yield farmers don’t get the added protection of CDIC insurance for extra peace of mind.

How to start yield farming

If you’re ready to start yield farming, here’s what you need to do.

Step 1: Buy cryptocurrency

If you’re here reading up on yield farming, we’re going to assume that you already have a crypto wallet set up and understand how to buy assets on a crypto exchange. If not, check out our guide to crypto wallets and our rundown of the best crypto exchanges in Canada for help getting started.

If you don’t already hold any crypto tokens you can use, you’ll need to buy some. Most liquidity pools require you to deposit two tokens, so research popular trading pairs with attractive yields before deciding which cryptos you want to buy.

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{"userFilters":[{"config":{},"dataSelector":{"recordType":"product","fieldCode":"GENERAL.PROVIDER_ID"},"dataType":"UUID","label":"Provider","order":100},{"config":{"MULTISELECT":true,"VALUES":"Paper wallet, Mobile wallet, Hardware wallet, Seed backup device, Desktop wallet, Web browser wallet, Web3 wallet, Wallet hardware (perkakasan), Wallet desktop, Wallet penyemak imbas laman sesawang, Portefeuille mobile, Portefeuille physique, Portefeuille de bureau, Portefeuille de navigateur, Portefeuille navigateur, Portefeuille papier, Hardware-Wallet, Webbrowser-Wallet, Papier-Wallet, Desktop-Wallet"},"dataSelector":{"recordType":"product","fieldCode":"DETAILS.TYPE"},"dataType":"TEXT","label":"Wallet type","order":null}],"niche":{"currencySymbol":"$","decimalPoint":".","decimalPlaces":"2","thousandsSeparator":",","filterBoundsMap":{"product.GENERAL.PROVIDER_ID":null,"product.DETAILS.TYPE":null}},"prefilled":false,"experimental":false}

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Step 2: Choose a yield farming platform

Next, choose a DeFi protocol that offers high yields on the tokens you own. Not only will you want to find competitive APYs and low fees, but you’ll also need to look into the reputation of the platform and check whether it undergoes regular security audits.

You’ll also need to connect your wallet to the platform. This is typically easy to do by clicking “Connect wallet”, choosing your wallet provider and verifying the connection through your wallet.

Step 3: Deposit tokens and earn rewards

Now it’s time to deposit your tokens to the liquidity pool. Simply search for the liquidity pool you want, and then deposit a pair of tokens into the pool. You will receive LP tokens in return, and generate returns based on the proportion of LP tokens you hold.

Alternatively, if you’re using a yield farming aggregator, you’ll need to select the farming strategy that suits your needs before depositing tokens.

Step 4: Find the highest yields

If you’re yield farming manually, you’ll need to monitor DeFi protocols to find the highest available yields and move your crypto tokens where they need to be to generate the highest returns.

But if you’re using a yield farming aggregator that uses smart contracts to find the highest yield, you can take more of a hands-off approach. That said, you’ll still need to track your progress regularly to make sure your automated strategy is delivering the results you want.

Bottom line

Yield farming can be simple or complex, but it provides crypto investors with a way to earn passive income from otherwise idle investments. But with the potential for high returns comes plenty of risk, so research any DeFi protocol thoroughly before deciding if it’s right for you.

Frequently asked questions about yield farming

• Yield farming vs staking—what's the difference?

  Answer text, add whatever content you need. Built to show links, standard formatting, symbols etc.

  Yield farming and staking both allow you to use your crypto holdings to generate passive income. But while yield farming involves providing liquidity to decentralized finance (DeFi) protocols in exchange for rewards, staking involves locking your cryptocurrency in order to validate transactions and secure a blockchain network, then receive rewards in return.

• What is the main benefit of yield farming compared to staking?

  The main benefit of yield farming over staking is that it offers the potential for higher returns. However, it’s also more complicated and comes with a higher level of risk.

• Is yield farming still profitable?

  Yes, yield farming can still be profitable in 2025, but it's a little different from how it was in the early days of DeFi. As the sector has evolved, the very high risk and high APY options that were on offer are no longer available, with yield farming APYs now reduced.

• Is crypto yield farming safe?

  There are several risks you need to be aware of before you start yield farming. Smart contract errors, rug pull scams, hacks and the price volatility of cryptocurrencies are all risks that you will need to consider. You’ll also need to research DeFi protocols thoroughly to be sure of dealing with a legit platform.

Written by

Tim Falk

Writer

Tim Falk is a freelance writer for Finder. Over the course of his 15-year writing career, he has reported on a wide range of personal finance topics. Whether you're investing in stocks and ETFs, comparing savings accounts or choosing a credit card, Tim wants to make it easier for you to understand. When he’s not staring at his computer, you can usually find him exploring the great outdoors. See full bio

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