Attempting to maximize returns generated from the use of decentralized finance protocols
Yield farming is a strategy DeFi protocol users leverage to attempt to generate maximum returns when interacting with decentralized applications. Many ຄໍາຮ້ອງສະຫມັກ DeFi provide passive income-generating opportunities to their users. Taking advantage of them is known as liquidity mining. An early example of a protocol incentivizing participation with user rewards is Synthetix. Subsequent DeFi apps have since borrowed the model.
The terms yield farming and liquidity mining are often used interchangeably. However, technically speaking, yield farming is a more advanced form of liquidity mining.
Yield farming involves combining different liquidity mining opportunities across multiple protocols to generate an even higher annualized percentage yield. The most successful early yield farming strategies often provided APYs of several thousand percent. By contrast, the APY of a standard bank account rarely exceeds one or two percent.
The bumper yields on offer were a major driving force behind DeFi’s rapid adoption throughout 2020 and beyond. However, as more users attempt to take advantage of a strategy, its profitability drops and forces yield farmers to adopt new strategies.
Although finding a new yield-farming strategy can be very lucrative, it is not risk-free. ການສູນເສຍທີ່ບໍ່ສົມບູນແບບ, protocol exploits and sudden cryptocurrency price volatility can harm or even entirely wipe out a farmer’s profits.
Source: https://www.okx.com/academy/en/what-is-yield-farming