Yield Farming
Definition
The practice of moving crypto assets between DeFi protocols to maximize returns through trading fees, lending interest, and bonus token rewards (liquidity mining).
Yield farming (also called liquidity mining) is the DeFi strategy of deploying crypto assets across various protocols to earn the highest possible return. Farmers might provide liquidity on Uniswap, stake LP tokens on a farm for bonus rewards, borrow against their position on Aave, and reinvest the borrowed funds — all to stack multiple sources of yield.
The "DeFi Summer" of 2020 popularized yield farming when protocols like Compound began distributing governance tokens (COMP) to users as incentives. Users could earn 100%+ APY by lending and borrowing on the platform and receiving COMP tokens. This attracted billions in capital and launched hundreds of copycat projects.
Modern yield farming is more sophisticated and sustainable. Common yield sources include: trading fees from liquidity provision (2-20% APY), lending interest on protocols like Aave (1-10% APY), staking rewards (3-8% APY), and protocol-specific token incentives (highly variable).
The risks are substantial: smart contract bugs can result in total loss of funds, token incentive programs end (collapsing yields and token prices), impermanent loss can exceed fees earned, protocol governance can change the rules, and the complexity of multi-protocol strategies multiplies risk exposure.
For tax purposes, yield farming is a nightmare of taxable events. Each token swap, liquidity provision/removal, reward claim, and reinvestment may be a separate taxable event. Accurate tracking across multiple protocols and chains is essential and extremely difficult without specialized tools.
Where this appears in Clarity
Clarity automatically tracks and calculates these concepts across your connected accounts.
Related Terms
Frequently Asked Questions
Is yield farming still profitable?
Yields have normalized significantly from the 1000%+ APY of early DeFi. Sustainable yields now range from 3-15% on major protocols. Higher yields exist but typically come with higher risk (new protocols, volatile tokens, complex strategies). The easy money phase has passed.
How are yield farming rewards taxed?
In the US, yield farming rewards are generally taxed as ordinary income at fair market value when received. Each claim, harvest, or auto-compounding event may be a separate taxable event. The complexity of tracking makes crypto tax software essential for yield farmers.