What is yield farming in decentralized finance (DeFi)?

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Coin Telegraph 1d ago

What is yield farming in decentralized finance (DeFi)? - Coin Telegraph

Quick Summary:

These rewards often come in the form of additional tokens, interest or a share of transaction fees generated by the platform. In the yield farming ecosystem, individuals known as liquidity providers (LPs) supply their assets to liquidity pools, smart contracts that facilitate trading, lending or borrowing on DeFi platforms.

Understanding impermanent loss in yield farming Impermanent loss occurs when the value of assets deposited into a liquidity pool changes compared to their value if held outside the pool. This phenomenon arises due to price fluctuations between paired assets, leading to a potential shortfall in returns for LPs.

As of February 2025, yield farming remains a profitable strategy, though it is less lucrative than in previous years due to reduced token incentives and heightened competition among liquidity providers. That being said, the DeFi sector continues to expand rapidly, with the total value locked (TVL) reaching $129 billion in January 2025, reflecting a 137% year-over-year increase.