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What is yield farming?
Yield farming is depositing crypto into DeFi protocols, such as lending markets or liquidity pools, to earn interest, fees or reward tokens. Some tools move deposits automatically between protocols in search of the highest yield.
What it means for you
Each extra protocol adds another set of smart contracts that can fail, and rewards are often paid in a token whose price can drop faster than you earn it. A high advertised yield says nothing about where it comes from. Check what pays the yield and what you are approving before depositing.
A common mistake: “A high advertised APY means the farm makes money.”
In fact: A yield paid in a reward token is only worth what that token sells for. If its price falls faster than rewards accrue, or a contract is exploited, the result in dollars can be a loss despite the quoted rate.
How it works
The yield comes from a few sources: interest paid by borrowers in lending pools, a share of trading fees in liquidity pools, and extra tokens a protocol hands out to attract deposits; the ECB notes governance tokens are distributed to users through airdrops or as interest payments. Because DeFi is composable, a receipt token from one deposit can be deposited again elsewhere, stacking both yield and risk. Yield aggregators automate this, moving deposits to the pools paying the most under preset risk settings. The ECB notes the same re-use can make total deposits look larger than they are.
Sources: ECB Macroprudential Bulletin: Decentralised finance, ethereum.org: Decentralized finance (DeFi) · checked 4 October 2026
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Educational content, not financial advice. Written by hand and checked against the source named above. Something wrong? Tell us and we reply within two business days.