What is yield farming?
Yield farming, also known as liquidity mining, is a decentralized finance (DeFi) strategy where cryptocurrency holders lend or stake their assets in various DeFi protocols to earn rewards. These rewards often come in the form of additional tokens, interest or a share of transaction fees generated by the platform.
In the yield farming ecosystem, individuals known as liquidity providers (LPs) supply their assets to liquidity pools, smart contracts that facilitate trading, lending or borrowing on DeFi platforms.
By contributing to these pools, LPs enable the smooth operation of decentralized exchanges (DEXs) and lending platforms. In return for their participation, LPs earn rewards, which may include:
Transaction fees: A portion of the fees generated from trades or transactions within the pool.Interest payments: Earnings from lending assets to borrowers.Governance tokens: Native tokens of the platform that often grant voting rights on protocol decisions