This year, one-fifth of Americans will have traded, invested, or been involved in cryptocurrency transactions in one form or another. Compared to the years before, digital currency and decentralized finance (DeFi) are growing in popularity, especially in terms of inflation.

The good news is that DeFi surpasses hyperinflationary nominal yields, offers more sustainable sourcing mechanisms, and secures liquidity. The world of DeFi is complex but introduces new possibilities and opportunities for users.

There are several ways to earn yields while owning crypto tokens. Some are simple, even for beginners, while others require proficient knowledge of DeFi protocols and platforms. By locking up your crypto tokens to stake or lend, you can earn up to 20% APY rewards or more, depending on the cryptocurrency, platform, protocol, or method. For example, DeFi yield farming makes your crypto tokens work for you.

Simple enough, right? Well, not so fast. Let's dot all our i's and find out how to earn more with your crypto.

What is yield farming? Yield farming is one of the best ways to earn interest on your cryptocurrency. It's similar to putting money in a savings account, but with DeFi yields, you can get x10 compared to traditional banking interest.

Similar to bank deposits, yield farming requires locking up your tokens for a certain period of time in exchange for rewards or interest. So instead of having your crypto sitting in a crypto wallet, you can lend it out and generate returns.

Since there is no controlling entity within DeFi, yield farming is facilitated by smart contracts that allow for crypto assets to be traded automatically by using liquidity pools instead of the traditional buyer and seller markets. DeFi yield is a win-win for both yield farmers and dApp owners.

The locked crypto tokens provide the liquidity required for a decentralized exchange (DEX) to enable trading and fulfilling buy and sell orders. Yield farmers can also earn passive income through transactional fees. Some DEXs offer other liquidity incentives like governance tokens or farming tokens in addition to trading fees.

The returns you can earn with crypto yield farming are called annual percentage yield (APY) and annual percentage rate (APR). APY and APR show the possible rate of return you can earn for an entire year. APR doesn't include reinvesting gains, but APY does.

For example, the APY offers 10%. So if you deposit $10,000 in crypto, so can expect a return of $1,000. As a rule, returns are paid in crypto tokens.

Note that this measurement is only a projection and estimate. It's difficult to forecast with 100% accuracy. Why? DeFi and yield farms are fast-paced industries with rapidly changing incentives. Due to DeFi's rate of change, it's better to rely on daily or weekly expected returns.

DeFi farming explained and its types Staking. It's probably the most widely known method of earning passive income with crypto coins. Yield farming staking comes in two forms. Within proof-of-stake blockchains, users are paid interest for pledging their tokens to the network and providing security. The second way is locking up your tokens or any other crypto assets in a liquidity pool to facilitate ‘buy and sell’ orders at a DEX.

Lending. In this case, crypto owners can lend out their tokens with the help of a smart contract and earn yields from the interest paid on a loan.

Borrowing. Crypto users can lock up their tokens as collateral and receive a loan for other tokens. Then, users can use the borrowed coins for crypto farming. In this case, farmers don't lose their collateral coins that may increase in value but also earn a yield on borrowed coins.

Liquidity provider. DeFi farmers can provide liquidity to a variety of different protocols and get rewards from those who take advantage of their liquidity. For example, you can deposit your two coins into a DEX and provide trading liquidity. Then, the DEX charges a fee to swap these two coins and pays a part of it to the liquidity providers.

Is crypto yield farming profitable? Ah, the returns. Though yield farming comes with its own risks, it can bring solid returns. Otherwise, no one would attempt it. The returns you can get with farming crypto vary depending on market conditions and the number of crypto tokens that you're ready to stake.

Yield farming is a very dynamic activity. Without vigilance and an in-depth understanding of DeFi platforms, protocols, and investment chains, you won't be able to flesh out the best possible strategies for hitting your goals.

If you're looking to earn some passive income but aren’t ready to invest all your coins, you can start exploring how to yield farm crypto by putting some of your tokens into a trusted platform like Venus Protocol or a liquidity pool and just see how much it delivers. Once you've collected enough basic knowledge on what yield farming means for DeFi, you can try building more complex yield farming strategies to up the ante.

Before making any digital investment, ensure that you know how the protocol and platform work, and how to yield farm. With this knowledge, you can compile a strategy that hits your yield goals while making your coins work for you.

Risks of Yield Farming For inexperienced users, DeFi crypto yield farming may seem like the easiest way to earn passive income with crypto tokens. Nevertheless, DeFi farming isn't completely risk-free.

Understanding these risks can help you build up a better investment strategy for farming cryptocurrency and protecting yourself.

Volatility The newer a crypto asset is, the more extreme its price fluctuations will be. On the one hand, volatility can be a good thing, but on the other, it can lead to massive investment losses. Since cryptocurrency farming requires locking up your tokens in liquidity pools – their price could surge or crash.

Fraud Yield farmers can be lured by high APYs and unwittingly put their assets into fraudulent schemes that make off with every asset. However, with regulations and new protocols, scamming has been on the decline and is projected to vanish in the coming years.

Rug pulls Rug pulls are a scram where someone creates a new crypto token, finds buyers, and abandons the project without returning funds to the buyers. According to a CipherTrace report, 99% of scams are rug pulls and exit scams. For a vast majority of cases, these scams involve people holding tons of tokens and putting them into liquidity pools, draining out liquidity — making these tokens worthless.

Drying up of liquidity pools There are a number of different users who supply liquidity pools. However, they can pull their assets from the pool at any time, resulting in a number of liquidity changes. Low liquidity not only leads to lower returns but to higher slippage. However, most DEXs allow users to protect their investments by setting slippage tolerances. Though there may be scenarios in which liquidity isn't enough for exchanging tokens since yield farming involves locking tokens for a set period, meaning that they cannot be sold.

Impairment loss Since the crypto market is highly volatile, the value of your crypto tokens can rise or fall while locked. This can create unrealized gains or losses. In other words, you may get better returns if you'd kept your coins open for trading since the loss can be greater than the interest you earned with yield farming.

Regulatory risks The field of DeFi and cryptocurrencies still have many unregulated regulatory issues. Governments and regulatory organizations have only just begun to explore the field and are still working out regulation and compliance laws.

There are always risks with decentralized apps and cryptocurrency. But when you know all of them, you can prepare and develop more familiarity with them. It's better to look into the team behind a project, how transparent they are, and don't forget to check their whitepapers.

Yield farming is still paving its way into the DeFi industry. DEXs, yield farming, and automated money makers are now at the cutting edge of finance. DeFi has already started changing the world of the brick-and-mortar banking sphere by creating a more open and accessible financial system for anyone with an internet connection. 

Yield farming is a lucrative way to make your crypto assets work for your well-being, but isn't completely free of risk. Now you know the answers to “What is yield farming?” as well as its pros and cons, and can make a well-informed decision when looking to get involved. Just remember, this article isn’t considered investment advice, and you should do your own research to assess all the risks associated with DeFi yield farming. 

Want more educational content like this? Subscribe and get information on the latest trends earlier than everyone else. 

This year, one-fifth of Americans will have traded, invested, or been involved in cryptocurrency transactions in one form or another. Compared to the years before, digital currency and decentralized finance (DeFi) are growing in popularity, especially in terms of inflation.

The good news is that DeFi surpasses hyperinflationary nominal yields, offers more sustainable sourcing mechanisms, and secures liquidity. The world of DeFi is complex but introduces new possibilities and opportunities for users.

There are several ways to earn yields while owning crypto tokens. Some are simple, even for beginners, while others require proficient knowledge of DeFi protocols and platforms. By locking up your crypto tokens to stake or lend, you can earn up to 20% APY rewards or more, depending on the cryptocurrency, platform, protocol, or method. For example, DeFi yield farming makes your crypto tokens work for you.

Simple enough, right? Well, not so fast. Let's dot all our i's and find out how to earn more with your crypto.

What is yield farming? Yield farming is one of the best ways to earn interest on your cryptocurrency. It's similar to putting money in a savings account, but with DeFi yields, you can get x10 compared to traditional banking interest.

Similar to bank deposits, yield farming requires locking up your tokens for a certain period of time in exchange for rewards or interest. So instead of having your crypto sitting in a crypto wallet, you can lend it out and generate returns.

Since there is no controlling entity within DeFi, yield farming is facilitated by smart contracts that allow for crypto assets to be traded automatically by using liquidity pools instead of the traditional buyer and seller markets. DeFi yield is a win-win for both yield farmers and dApp owners.

The locked crypto tokens provide the liquidity required for a decentralized exchange (DEX) to enable trading and fulfilling buy and sell orders. Yield farmers can also earn passive income through transactional fees. Some DEXs offer other liquidity incentives like governance tokens or farming tokens in addition to trading fees.

The returns you can earn with crypto yield farming are called annual percentage yield (APY) and annual percentage rate (APR). APY and APR show the possible rate of return you can earn for an entire year. APR doesn't include reinvesting gains, but APY does.

For example, the APY offers 10%. So if you deposit $10,000 in crypto, so can expect a return of $1,000. As a rule, returns are paid in crypto tokens.

Note that this measurement is only a projection and estimate. It's difficult to forecast with 100% accuracy. Why? DeFi and yield farms are fast-paced industries with rapidly changing incentives. Due to DeFi's rate of change, it's better to rely on daily or weekly expected returns.

DeFi farming explained and its types Staking. It's probably the most widely known method of earning passive income with crypto coins. Yield farming staking comes in two forms. Within proof-of-stake blockchains, users are paid interest for pledging their tokens to the network and providing security. The second way is locking up your tokens or any other crypto assets in a liquidity pool to facilitate ‘buy and sell’ orders at a DEX.

Lending. In this case, crypto owners can lend out their tokens with the help of a smart contract and earn yields from the interest paid on a loan.

Borrowing. Crypto users can lock up their tokens as collateral and receive a loan for other tokens. Then, users can use the borrowed coins for crypto farming. In this case, farmers don't lose their collateral coins that may increase in value but also earn a yield on borrowed coins.

Liquidity provider. DeFi farmers can provide liquidity to a variety of different protocols and get rewards from those who take advantage of their liquidity. For example, you can deposit your two coins into a DEX and provide trading liquidity. Then, the DEX charges a fee to swap these two coins and pays a part of it to the liquidity providers.

Is crypto yield farming profitable? Ah, the returns. Though yield farming comes with its own risks, it can bring solid returns. Otherwise, no one would attempt it. The returns you can get with farming crypto vary depending on market conditions and the number of crypto tokens that you're ready to stake.

Yield farming is a very dynamic activity. Without vigilance and an in-depth understanding of DeFi platforms, protocols, and investment chains, you won't be able to flesh out the best possible strategies for hitting your goals.

If you're looking to earn some passive income but aren’t ready to invest all your coins, you can start exploring how to yield farm crypto by putting some of your tokens into a trusted platform like Venus Protocol or a liquidity pool and just see how much it delivers. Once you've collected enough basic knowledge on what yield farming means for DeFi, you can try building more complex yield farming strategies to up the ante.

Before making any digital investment, ensure that you know how the protocol and platform work, and how to yield farm. With this knowledge, you can compile a strategy that hits your yield goals while making your coins work for you.

Risks of Yield Farming For inexperienced users, DeFi crypto yield farming may seem like the easiest way to earn passive income with crypto tokens. Nevertheless, DeFi farming isn't completely risk-free.

Understanding these risks can help you build up a better investment strategy for farming cryptocurrency and protecting yourself.

Volatility The newer a crypto asset is, the more extreme its price fluctuations will be. On the one hand, volatility can be a good thing, but on the other, it can lead to massive investment losses. Since cryptocurrency farming requires locking up your tokens in liquidity pools – their price could surge or crash.

Fraud Yield farmers can be lured by high APYs and unwittingly put their assets into fraudulent schemes that make off with every asset. However, with regulations and new protocols, scamming has been on the decline and is projected to vanish in the coming years.

Rug pulls Rug pulls are a scram where someone creates a new crypto token, finds buyers, and abandons the project without returning funds to the buyers. According to a CipherTrace report, 99% of scams are rug pulls and exit scams. For a vast majority of cases, these scams involve people holding tons of tokens and putting them into liquidity pools, draining out liquidity — making these tokens worthless.

Drying up of liquidity pools There are a number of different users who supply liquidity pools. However, they can pull their assets from the pool at any time, resulting in a number of liquidity changes. Low liquidity not only leads to lower returns but to higher slippage. However, most DEXs allow users to protect their investments by setting slippage tolerances. Though there may be scenarios in which liquidity isn't enough for exchanging tokens since yield farming involves locking tokens for a set period, meaning that they cannot be sold.

Impairment loss Since the crypto market is highly volatile, the value of your crypto tokens can rise or fall while locked. This can create unrealized gains or losses. In other words, you may get better returns if you'd kept your coins open for trading since the loss can be greater than the interest you earned with yield farming.

Regulatory risks The field of DeFi and cryptocurrencies still have many unregulated regulatory issues. Governments and regulatory organizations have only just begun to explore the field and are still working out regulation and compliance laws.

There are always risks with decentralized apps and cryptocurrency. But when you know all of them, you can prepare and develop more familiarity with them. It's better to look into the team behind a project, how transparent they are, and don't forget to check their whitepapers.

Yield farming is still paving its way into the DeFi industry. DEXs, yield farming, and automated money makers are now at the cutting edge of finance. DeFi has already started changing the world of the brick-and-mortar banking sphere by creating a more open and accessible financial system for anyone with an internet connection. 

Yield farming is a lucrative way to make your crypto assets work for your well-being, but isn't completely free of risk. Now you know the answers to “What is yield farming?” as well as its pros and cons, and can make a well-informed decision when looking to get involved. Just remember, this article isn’t considered investment advice, and you should do your own research to assess all the risks associated with DeFi yield farming. 

Want more educational content like this? Subscribe and get information on the latest trends earlier than everyone else.