What is Yield Farming?
Last reviewed 2026-05-03
Yield farming is rotating capital across DeFi protocols to maximize token-incentive returns. Peaked during 2020 DeFi Summer; modern variants include points farming (Eigen, Blast, Ethena, ether.fi) and Pendle PT/YT yield trading.
How it works
A farmer deposits assets into a protocol that pays incentives — typically by supplying a lending market or pairing two tokens into an AMM liquidity pool. The protocol issues a receipt token (an LP token or interest-bearing deposit token) representing the position and its share of the base yield from swap fees or borrower interest.
That receipt is then staked into the farm's rewards contract — a gauge or staking pool. The contract streams reward tokens block by block, split among stakers pro rata to their share, so the position now earns base yield plus incentive emissions on top. The farmer periodically harvests, then either sells the rewards or compounds them back into the position; auto-compounding vaults automate this loop.
Returns decay as more capital enters — the same emissions divided across more shares — and as reward tokens fall in price, so farmers rotate toward fresher incentives. The offsetting costs are impermanent loss on volatile pairs, gas on every hop, and smart-contract risk at each stacked layer.
Why it matters
Yield farming kickstarted DeFi user growth (2020 Compound) and remains the dominant user-acquisition lever (2024-2025 points programs).
Real-world examples
2020 Compound COMP launch, 2024 Eigenlayer points, 2024 ether.fi loyalty points, 2025 Pendle PT/YT yield trading.
Related terms
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Browse GlossaryFrequently asked questions
What is yield farming in DeFi?
Yield farming is rotating capital across DeFi protocols to maximize token-incentive returns, peaking during 2020 DeFi Summer.
What are modern variants of yield farming?
Modern variants include points farming (Eigen, Blast, Ethena, ether.fi) and Pendle PT/YT yield trading.
What costs offset yield farming returns?
Offsetting costs are impermanent loss on volatile pairs, gas on every hop, and smart-contract risk at each stacked layer.