DeFi Deep Dive
Yield Farming
AMMs, lending, yield, impermanent loss, and self-custodial finance.
In this lesson
- What yield farming is
- Why high APYs signal risk
Key takeaways
- 1Yield farming supplies capital to DeFi for rewards
- 2Rewards may come from emissions, not real revenue
- 3The highest APYs usually carry the highest risk
Lesson summary
Yield farming means supplying assets to DeFi strategies in return for fees, interest, or token rewards.
Mental model
Yield Farming, without the jargon
Yield farming means supplying assets to DeFi strategies in return for fees, interest, or token rewards. The yield is only meaningful if you know who pays it.
- What yield farming is
- Why high APYs signal risk
Mechanics
How to reason about yield farming
Real yield may come from trading fees, borrowing interest, or protocol revenue.
Incentive yield may come from new token emissions.
APY changes as liquidity, demand, token price, and risk change.
- Yield farming supplies capital to DeFi for rewards
- Rewards may come from emissions, not real revenue
- The highest APYs usually carry the highest risk
Example
Yield Farming, applied
A pool paying 80% APY in reward tokens can become unattractive if the token price falls faster than rewards accrue.
Common mistakes
Common mistakes with yield farming
Chasing the highest APY without identifying the source of yield is one of the fastest ways to take hidden principal risk.
Risk notes
Before you rely on yield farming
Smart-contract loss, reward token collapse, impermanent loss, oracle failure, and liquidity flight can erase yield.
- Separate fee yield from emissions.
- Check contract and oracle risk.
- Estimate exit liquidity.
Practice
Practise yield farming before moving on
- Separate fee yield from emissions.
- Check contract and oracle risk.
- Estimate exit liquidity.
Review
Key terms
- DeFi
- Decentralized Finance — permissionless, composable financial services built on smart contracts.
- Impermanent Loss
- The loss a liquidity provider faces when pooled asset prices diverge versus simply holding them.
- Liquidity
- How easily an asset can be bought or sold without moving its price much.
- Oracle
- A service that feeds real-world data (like prices) to smart contracts on-chain.
- Smart Contract
- Self-executing code on a blockchain that runs exactly as written when conditions are met.
Source notes
Editorial references
These references are starting points for verifying the mechanisms, risk checks, and product context behind this lesson.
Before you continue
Can you do these?
- Separate fee yield from emissions.
- Check contract and oracle risk.
- Estimate exit liquidity.
Related learning
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Checkpoint
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Answer every question correctly to complete the lesson.
Yield farming generally means…